Qatar’s Withdrawal from OPEC not a Good Sign

 

As Qatar’s withdrawal from OPEC takes effect today, the geopolitics of energy is changing. Each major energy producer is trying to take more shares in the world energy market. Political tensions between major oil and gas producers would affect regional and world energy markets. As the world’s largest exporter of LNG, Qatar gets the most revenue from it.

U.S. sanctions against Iran give an opportunity to Saudi Arabia which can use its producing capacity to produce and export more oil in the region in an attempt to weaken Iran’s position in OPEC.

A high oil price is not good for major oil consumers. The world oil market has been worrying about U.S.’sanctions against Iran.Regional tensions are one of the factors affecting members of the international organization. The tensions between Qatar and Saudi Arabia, which began in June 2017, would prevent Qatar from withdrawing from Saudi Arabia’s shadow even in an organization like OPEC. Qatar with production of 0.6 million bpd is not a major actor among OPEC members.

 

After a sharp rise in the price of crude oil to more than 100 U.S. dollars between 2011 and 2012, the price of crude oil gradually shrank in 2016 and reached a low of less than 40 dollars. The organization was unable to find a solution for the crisis, which had a huge impact on its member states.

Oil producers were able to cut crude prices to 70 dollars a barrel in mid-2018 with a drop in supply. But once again the policy of the largest oil producer Saudi Arabia, along with the White House’s political and economic measures and the gap in the queue of supporters for a reduction in production, led to a sharp drop in crude oil to about 50 dollars.

In a situation where the future of oil demand is not clear in the long run, the market management method and the call for Russia to counterbalance the U.S. are also challenges to OPEC.

South Pars Gas field (North Dome) shared by Iran and Qatar is a major source of Qatar LNG production. It is the largest gas field in the world. Qatar has made it clear that by 2024 it would have used South Pars to produce 110 million tons per year.

At present, Qatar produces 77 million tons per year. Qatar’s withdrawal from OPEC is a good opportunity to increase its production from this shared filed, Iran is unable to attract more foreign technology and financial investment and Qatar’s oil production in South Pars is more than that of Iran.

According to Reuters in November, Australia grabbed the world’s biggest LNG exporter crown from Qatar in November. According to statistics, Australia produced 6.8 million tons of LNG in November, out of which 0.6 million tons were exported from Qatar.

Australia’s LNG exports rose by 19 percent in November compared to October while Qatar’s exports dropped 3 percent in November compared to the previous month, the country’s fourth consecutive decline for the year in exports.

It is not the first time that an OPEC member has withdrawn from the organization. The main point is that OPEC’s decisions are not followed by major oil suppliers and Qatar’s withdrawal is certainly not good for OPEC. As Qatar is not a major oil producer among OPEC members, it cannot cause any major changes in the oil price.

The major factor in the oil market is demand and supply. At present, the oil market is faced with oversupply which leads to a low oil price. Qatar’s withdrawal from OPEC is not a good sign for its future. If OPEC is interested in playing an important role in the world oil market, it needs cooperation and coherence among all members.

If major members continue to be inefficient in OPEC decision-making, there will not be a promising future for the organization. OPEC’s weak position favors major energy consumers. Obviously, OPEC does not have the same influence on oil prices as it used to be. Its strength has slowly weakened due to the growth of producers such as the United States and Russia.

 

https://news.cgtn.com

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The geopolitics of US sanctions against Iran’s energy sector

Analysis: Sanctions against Iran provides the US with a sizeable number of consumers in need of alternative suppliers, perfectly placing it ready to pick up the slack.

US energy policy has rarely been inseparable from foreign policy, yet many energy security analysts have argued that if the Trump government wishes to have a more active foreign policy, then it has missed a trick in fully exploiting the country’s energy profile in its calculations.

Recent developments in US energy have had a direct impact on the changing outlooks of both energy-producer and consumers. Any crisis that has a direct impact on the production and supply of oil and gas, not to mention their transit to the market, is bound to shift the shape of regional and global alliances, given how critical security of supply is to every major actor in international affairs.

US exports of domestic energy still need to find a place on the market, with promises of LNG supplies only now beginning to have an impact.

Sanctions against Iran and Venezuela have provided the United States with a sizeable number of consumers in need of alternative suppliers, perfectly placing it ready to pick up the slack.

Moves towards further Saudi-Russian co-operation in boosting oil production in response to the second round of sanctions against Iran indicates the joint US-Russian-Saudi benefits that can be reaped from keeping Iran out of the market.

New sanctions against Iran’s oil industry, aimed at achieving zero oil exports, are still expected to bring a major shock to the oil market nonetheless.

New sanctions against Iran’s oil industry, aimed at achieving zero oil exports, are still expected to bring a major shock to the oil market nonetheless

 

The changing face of US energy relations

The Obama Administration had two  major goals in its boycott of Iran which aimed to bring pressure against the country’s nuclear programme. Obama hoped to reduce Iran’s exports of grain and prevent the transfer of Iranian oil money through the international financial system.

The Obama Administration was the first to limit Iran’s use of the Swift payment system. Later, it became clear that limiting Iran’s transfer of oil money through Swift had a greater impact than sanctions on Iran’s oil industry alone, as no matter how much the country managed to export in the face of sanctions, it could not receive any direct revenue.

Iran seeks to increase its political influence in the region by exchanging oil, gas and petrochemical products.

Over the course of the Obama Administration, Iran’s fledgling LNG sector suddenly had the plug pulled on it with the eventual evacuation of all international energy companies from the country. Although the effect of this was devastating for Iran, a more major shift in the international energy market came with the advent of US shale gas over the same period.

In 2011, America’s “blue print for secure future energy” relied significantly on increased shale production, claiming that the development of this energy source would help the United States provide its own future energy.

Before Obama’s presidency, US energy security strategy had already signalled that reduced gasoline consumption and diversification of fuel types would be beneficial to the country, but had not seemed to envision a situation in which the US could become a supplier herself.

Even before the onset of Obama’s sanctions, Iran lacked the means and investment to develop its energy productivity – even to meet its own domestic consumption. Most of Iran’s oil wells are in the second half of their lives and their annual production capacity is slowly decimating.

Iran seeks to increase its political influence in the region by exchanging oil, gas and petrochemical products

Despite the window provided in the years following the Nuclear Deal in 2015, not much headway was made before the Trump Administration sought to reestablish sanctions, thereby further delaying the Iranian energy industry’s ability to attain the capital and expertise it desperately seeks to make headway in production and its much-desired LNG facilities.

Also, due to the current saturation of the LNG market, partly thanks to the massive headway made by the United States, Iran has little chance of active participation even if it can magic up the funds required.

Trump sanctions

Although opposed to the nuclear deal, one of Trump’s goals in imposing new sanctions on Iran is undoubtedly to provide the necessary conditions for more energy exports and help boost the US energy industry. The hunt for new markets for US LNG exports can easily be cut short by leaving consumer markets with a deficit in supplies lost by their custom with Iran.

In 2018, the United States exported more than three million barrels of oil and condensate per day. Obama could not export LNG to South Korea, but by forbidding allies trade with Iran, the US is ready to take up the mantle of LNG exports to South Korea, and will likely attempt to do so with long-standing deals.

It should be kept in mind that the chemical specifications of Iranian crude oil are different from US crude oil, however, and thus US crude oil may only serve partly as an alternative to Iranian stock.

In 2018, the United States exported more than three million barrels of oil and condensate per day. Obama could not export LNG to South Korea, but by forbidding allies trade with Iran, the US is ready to take up the mantle of LNG exports to South Korea, and will likely attempt to do so with long-standing deals

he stability of the world oil market is currently in the favour of the US. Any increase in the oil market will directly affect the energy security in the US. The US government has often declared its intention to reduce Iran oil export to zero to fully capitalise on this position, yet in the short term it will not be as easy as hoped.

Iran’s role in world oil market may decrease, but Iran will be determined to maintain its share in regional market at least. Iran needs to play active energy diplomacy if it means to ensure this as current forecasts suggest a 50 percent decrease in sales since the period following the nuclear deal.

For a better understanding geopolitics of US sanctions against Iran energy sector one must also look to the outlooks of other major energy producers, Russia and Saudi Arabia, as a counterpart in the world energy market.

Iran needs to play active energy diplomacy if it means to ensure this as current forecasts suggest a 50% decrease in sales since the period following the nuclear deal

Russian double play

Russia, as one of the largest producer of gas and gas in the world and thus a beneficiary of Iranian sanctions, has, nonetheless invested in the Iranian fields as recently as 2017, specifically the Aban and Far Aban fields with the help of Zarobzhanga.

The purpose of the contract was to increase the production and Russian companies have pledged to invest $50 billion in oil and gas fields. This move is purely a diplomatic gesture, as Russia invests in fields that do not threaten its share of production.

China

China is one of Iran’s main clients in terms of oil. In 2017, China imported around 780,000 barrels per day from Iran daily. The growing Chinese economy relies on reliable sources and Chinese companies have enjoyed a major presence in Iran’s energy sector in line with its strategic interests.

Given the importance of energy security for China’s economy and foreign policy, the country will tend to continue to import oil from Iran, but this does not been it will not seek other alternatives so as not to antagonise the United States.

Chinese energy firms have agreed to stay in Iran despite sanctions, taking over from Total, who have abandoned intentions to develop Phase 11 of the South Pars Field.

China firms have, however, been known to delay projects to no end in Iran, whilst moving considerably more proactively on neighbouring projects. Also, it is questionable as to how financially and technologically capable Chinese firms are in aiding Iran.

In recent years, China has made it possible for Iran to give its oil and gas to China in exchange for yuan to help channel away from the US-sanctioned SWIFT system.

In recent years, China has made it possible for Iran to give its oil and gas to China in exchange for yuan to help channel away from the US-sanctioned SWIFT system

The EU bind

The EU’s energy security has been of fundamental importance over the last decade. The United States, as an ally of the union, has always supported the policy of diversification on the continent to reduce its dependence on Russian energy sources.

 

On average, European countries imported 500,000 barrels of gas a day from Iran before the Obama administration’s sanctions. And despite EU enthusiasm for the nuclear deal as a means of pathing the way for further diversification, companies have once more been excluded for seizing the opportunity diplomatic ties allow for.

The European Union has faced difficulties in finding a member state that is willing to host a new financial channel to protect trade with Iran against US sanctions and may have to settle for merely helping Iran to continue to sell oil indirectly.

Indian exemption

India is the second largest oil customer of Iranian resources and has continued to import oil from Iran. Between April and August, India imported 658,000 barrels of oil per day from Iran.

In September, India shipped 528,000 barrels of crude per day, thus showing the result of US pressure despite a limited exemption offered by the US. In addition to importing oil from Iran, India is also interested in participating in Iran’s oil and gas projects.

India is interested in investing in the Farzad Field, and, in 2017, offered $11 billion in investment, one of the best offers given to Iran in recent years, despite lack of progress due to international factors.

Between April and August, India imported 658,000 barrels of oil per day from Iran

Saudi Arabia has an active diplomacy in the Indian energy market too, and will use its investment capacity to influence India’s foreign policy to reduce reliance on Iran.

By early 2018, Saudi Arabia had 50 percent of shares worth up to $44 billion in refineries and the capacity to refine 60 million tons of crude oil. India imports oil from the United States too, with imports averaging to 228,000 barrels per day in June, compared to 98,000 per day in September 2017.

The United States is trying to reduce India’s share of Iran by exporting oil to the South Asian country. The US energy minister said American oil exports to India will increase in the future. The two countries also signed a 20-year contract for US LNG exports to India to increase US oil and LNG share in India’s energy basket and sustainability.

Sanctions will reduce Iran’s oil exports to India inevitably, despite Iran’s offer of discounts and to deliver using Iranian tankers, thereby lowering oil tankers insurance costs for India. This is likely to help maintain Iran’s share in the Indian market in the mid-term.

Economic and political benefits for the US

The shale gas revolution has transformed the United States into an oil, natural gas and LNG exporter. The flaring gas has turned not only into the American economic prosperity, but also as an effective tool in US foreign policy.

In the short term, the United States will not need to import oil from the Middle East while increasing its oil exports. Shale oil production in the mid-term has led to a serious excess of supplies.

Sanctions against Iran, matched in intensity with diplomatic moves to divert the custom of client states, simultaneously has a devastating impact in terms of leveraging US economic might over Iran.

Sanctions against Iran’s energy industry have not only reduced Iran’s oil and gas production capacity, but also reduced Iran’s share of the global energy market.

The rising lack of investment in the Iranian oil and gas industry is one particularly immediate result of the renewed sanctions.

Sanctions are one political instrument which will help the US to gain an immediately higher share of the world energy market and more economic and political benefits

In fact, Iran must now choose between its short-term and long-term interests: either the price of oil will go up so that foreign exchange earnings remain untapped or encourage other sellers to increase production and lower prices, so that US crude oil does not replace fossil fuels.

OPEC member states may prefer to maintain market stability. The strategic purpose of the Iranian oil and gas industry in the next two decades can be summed up as to “gain a greater share of global energy demand”.

This means maximising the benefits of international energy markets and increasing other countries’ dependency on Iranian oil and finding a strategic position for Iran in the global energy market. Maximising oil income requires the adoption of coordinated measures, increasing export volume and stability, or increasing the price of oil.

Under sanctions, Iran has little chance of earning capital and foreign technology, to the detriment of its share in the energy market, not to mention the shape of its economy in general.

Energy will continue to play an important role in US foreign policy, with implications not only on relations with designated rivals but also allies across the world. Sanctions are one political instrument which will help the US to gain an immediately higher share of the world energy market and more economic and political benefits.

Sanctions against major oil and gas producers would help the US to export more energy. Iran, for its part, needs to engage in more active energy diplomacy and adapt its foreign policy in the region if it hopes to mitigate the effects of US sanctions against its energy sector.

www.alaraby.co.uk

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The Reason Why Iran Won’t Become an Energy Superpower

Tehran has a high domestic natural gas consumption and needs more foreign technology and financial capital.

In recent years, the Turkmen government has refused to toe the line of the United States and Europe, continuing gas sales to Iran, despite misunderstandings over costs affecting the economic relations of both countries. These issues must be ironed out once and for all if any increase in ties is to be realized at a time when Iran desperately needs allies in the region.

According to 2017 figures, the volume of trade between Iran and Turkmenistan has already grown to a value of $1.7 billion. Mahmoud Vazei, the Iranian president’s chief of staff, has set out the goal of pushing this to an overall value of $60 billion. The roadmap to achieve this goal requires boosting ties across every industry, improving trade, transport and engineering service links. Oil products, petrochemicals, electricity, textile products and light industry are the most important export items Turkmenistan is equipped to provide to Iran. Thus, Turkmenistan is Iran’s strongest partner in Central Asia and the Caucasus, despite a decline in trade over recent years.

The cooperation between the two countries involves gas swaps, the development of banking cooperation and technical and engineering services, with further progress expected on the Sarkhas Bridge, which will allow for road and rail links to become operational within a short time.

Gas Dispute

According to an agreement signed in 1997, Turkmenistan exports gas to Iran, but almost every year during the winter months, short-term price hikes are experienced. In 2006, the country stopped exporting gas to Iran and demanded an increase of nine times the price, which Iran accepted for a brief time. The same action was taken by Turkmenistan in the winter of 2016, but this time Iran refused to comply.

Referring to Iran’s plan to sue Turkmenistan’s Turkmen Gas company for the quality of the gas supplied, the Iranian Minister of Oil stated, “We have another complaint the International Arbitration Court in order to reconsider the price of its export gas, because we believe the prices are too high and should be reduced.”

The gas dispute between Iran and Turkmenistan, which has only been inflamed since the beginning of 2017 when the country once more cut off gas exports to Iran, has come to no compromise despite periodic negotiations. It is most likely that the dispute will be referred to the International Arbitration Tribunal. The threat of cutting gas exports to Iran is a tool that Turkmenistan has used many times over the past few years. Indeed, in recent years, given the need of the northern and northeastern regions of Iran to pump extra gas from Turkmenistan, Tehran often folded to demands. However, due to the increase in gas production in South Pars and entering of the eleventh stage of the gas transmission network, the latest threats and ultimate cuts were far less effective. Therefore, after Turkmen gas was cut off in January 2017, Iran announced that ultimately it would be Turkmenistan who missed out from the action.

While Turkmenistan has demanded between $1.5 billion to $1.8 billion from Iran for gas exports in 2006–2007, Iran has not accepted the figure on principle, and calls for referral to international arbitration. In January of 2007, when the cold of the winter peaked and more than twenty provinces of the country suffered freezing temperatures, Turkmenistan took advantage of the situation and announced that it would raise its export gas prices to Iran by nine times the price. Forty dollars per thousand cubic meters was thus risen to 360 dollars, and the extent of this hike marks the crux of Iranian policymakers’ anger.

Furthermore, with sanctions making it difficult to carry out the banking transactions required to make payments, the ability of Iran to make such payments has fallen into question, which may lead to the subject being shelved for the time being.

Gas Swap

The gas transmission capacity of this pipeline is 14.5 billion cubic meters per year. Iran imported about nine billion cubic meters of gas from Turkmenistan in 2015, but in the winter of 2016, Turkmenistan cut gas exports to the Iran due to Iran’s $ 1.8 billion debt. Thus, Iran only received around six billion cubic meters of gas.

Since the beginning of 2018, Turkmenistan has continued to withhold gas exports to Iran due to what it calls the “nine-year delay in Tehran’s $ 1.8 billion debt settlement.” Despite this export restriction, a gas swap has continued. Since October last year, Iran has received Turkmen gas under the so-called Swap Agreement, delivering the same amount of gas to the Republic of Azerbaijan.

One month after the cutting of Turkmen gas supplies to Iran, officials of the Islamic Republic claimed Turkmen gas was still being swapped regardless. The Ministry of Oil has expressed to Turkmenistan its willingness to engage in a long-term cooperation in the energy sector as well as joint exports to India, Pakistan and the Gulf states.

New talks regarding a potential gas swap between Turkmenistan and two Indian companies, Gil and Indian Ocean, were discussed in Tehran. The talks resulted in a contract agreement to supply India with gas through a maritime pipeline. Turkmenistan, on the other hand, wants to export gas to India in a more affordable and secure manner, which can only be achieved through joint bilateral negotiations between Turkmenistan, Iran, and India. Turkmenistan has welcomed plans to launch the construction of a pipeline and called for its gas to once more funnel through Iranian pipes.

The increase of production in joint fields is a priority for Iran, which is missing out due to vastly better investments in fields along its borders with Iraq and Gulf states. Investments in fields shared with Turkmenistan have a strong chance of yielding fruitful results. The priority is to exploit common gas fields in the north and northeast part of the country where it can be immediately consumed at minimal transit costs. According to Bijan Zanganeh, “The joint fields of Iran and Turkmenistan are Iran’s priority, this is now an Iranian exploration project, and Iran hopes that the results of these studies will be sent to the Central Oil Company.” The policies of the Ministry of Oil include joint projects in the fields of oil, gas and petrochemicals with neighboring countries. Therefore, Iran is ready to carry out design, construction of oil and gas transmission lines, pressure-boosting stations, refining and separating liquids from gas and converting them to other petrochemical products, and to negotiate with Turkmenistan in the same way.

With new sanctions back in place, Iran now has no opportunity to increase its swap capacity with Turkmenistan. Additionally, it cannot expect to have great amounts of investment opportunities to explore. India was interested in importing Turkmen gas via Iran’s infrastructure, but now it seems intent to wait until Iran’s problems with the United States are resolved. Iran can, on the one hand, rely on its political, cultural, and economic capacities to provide a stronger basis for its economic relations with its neighbors. But that means Iran has to know when to pay attention. Turkmenistan’s foreign-policy priority focuses on cooperation with its neighbors, including Iran, which Turkmenistan’s president has signaled on various occasions. On the other hand, Iran must seek solutions for more reliable contracts than those based on oil or limited gas transfers to Turkmenistan. Long-term contracts with a clear and workable system of pricing would go a good way towards achieving this.

Under normal circumstances, Iran’s energy infrastructure could transfer oil and gas from the Caspian Sea to consumer markets across the globe. As it is, the country is struggling under sanctions. It now relies on production from the South Pars and other gas fields which, despite being sufficient to fuel current domestic demands, may fall behind and once again make imports from Turkmenistan necessary. Iran has a high domestic natural gas consumption and needs more foreign technology and financial capital. Easing tensions with the international community is the best—and perhaps the only—tool for Iran to achieve its own interests. In sum, despite existing cooperation, there are still many areas in the energy sector that can be used to promote bilateral relations in the interests of both neighbors, but the expansion of cooperation depends on solving the challenges and making the most of the opportunities that come.

Omid Shokri Kalehsar is a Washington-based senior energy security analyst, and Ph.D. Candidate in International Relations at Yalova University, Turkey.

www.nationalinterest.org

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Iranian-Indian Energy Relations Under Sanctions

Since it has huge oil and gas reserves and is geographically quite close, Iran is ideally placed to provide energy to India, and thus the country is Iran’s second largest oil market after China. Even at the height of the U.S. sanctions on Iran’s energy sector, India continued to import oil from the country. The relationship between Iran and India has expanded rapidly in recent years. After the 2015 nuclear deal, with the lifting of sanctions in various fields, especially energy, economic and commercial links between Iran and India expanded dramatically.

With new sanctions on the horizon, Iran provided significant discounts to Indian importers last summer. Thus, the volume of August imports was 56 percent higher than the previous August. So far, India is one of the countries exempted from secondary sanctions that the Trump administration is imposing on states doing business with Iran. But oil prices are expected to rise nevertheless, which will adversely affect India as the third largest oil importer in the world.

Although sanctions on banking prevented New Delhi from transferring money from the sale of oil to Iran in time, links were preserved thanks to strategies established during the previous round of sanctions. At that time, 55 percent of the proceeds from the sale of Iranian oil to India were deposited in euros and 45 percent in rupee in UCO Bank, an Indian financial institution, after which most of the money was transferred to Iran. This time around, UCO Bank is reluctant to serve as the conduit for funds, and India has opted to pay Iran in rupees through the Mumbai branch of an Iranian bank.

India has launched a major effort to invest in petrochemicals, chemical fertilizer, and the other upstream industries of its own oil industry. The country’s Oil and Gas Minister Dharmendra Pradhan has announced plans to invest $20 billion in Iranian oil and gas infrastructure. Iran, aiming to gain a competitive edge over other suppliers, has delivered oil at reduced prices to India, offered a longer period of credit to pay for oil purchases, and is transporting the oil almost for free. In addition, many Indian refineries are equipped to match Iranian refineries, so they cannot easily rely on other suppliers. Iran has also offered to cover the insurance for tankers that carry Iranian oil to India in lieu of an exemption from international financial institutions.

The port of Chabahar is the best, the closest, and the least costly route for Iran to reach global markets and promote the development of neighboring countries. India has committed to invest $500 million to develop Chabahar port. Iran and Afghanistan, meanwhile, want to establish an international freight corridor through this port, and several Indian wheat shipments have already gone to Afghanistan through Chabahar. New sanctions against Iran, however, threaten the success of the Chabahar project by not only preventing countries and companies from trading with Iran but also by threatening sanctions on financial institutions that engage with Iran. These sanctions will reduce the flow of capital and business to the port.

On November 7, the United States announced that it would waive sanctions on certain parts of the Chabahar port, along with the Chabahar-Afghanistan railway project and Iranian petroleum exports to Afghanistan. Since Islamabad is not allowing India to use Pakistani territory for direct business with Afghanistan, Chabahar is important for Indian access not only to Iran but to Afghanistan and beyond. The diversification of energy resources is a key pillar of Indian energy policy. If sanctions continue to punish the Iranian energy sector after the U.S. waivers expire, India will reduce oil imports from Iran and increase imports from Iraq and Saudi Arabia.

Indian oil imports from Iran were expected to grow by 31 percent year-on-year, reaching 500,000 barrels per day in the fiscal year beginning April 1, 2018. Iran understands India’s problems in dealing with an unpredictable energy market and will do everything it can to ensure the security of India’s energy supply. India’s relations with Iran are also complicated by the impasse over Indian investment into developing Iran’s Farzad B gas field.

China has been one of the strongest drivers of closer relations between Iran and India. An economic corridor between China and Pakistan and the former’s investments into the port of Gwadar is a common geopolitical challenge for both India and Iran. The economic corridor is designed to limit Indian operations in the western regions of the Indian Ocean and the Oman Sea. An expanded Gwadar port, meanwhile, undermines the potential of the Chabahar port and allows Pakistan to challenge its regional rival, India, in the area of Afghanistan.

www.lobelog.com

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The Future of Iran-Pakistan Energy Relations Seems Dim

With the re-imposition of sanctions on Iran, it is not just the Islamic Republic’s global, but regional energy links which have been shaken, spelling bad tidings for future economic and political cooperation. Alternatives to Iran’s drastically under invested energy sector abound for those countries which, like Pakistan, are undertaking serious efforts to make up for their own deficits. What can the current state of relations between Pakistan and Iran tell us about the future of regional energy relations?

 

With a population of almost 200 million, Pakistan ranks as the twenty-sixth largest economy in the world. This demographic advantage brings with it greater urgency in matters regarding energy. According to the U.S. Energy Information Administration, 62% of Pakistan’s population is dependent on biofuels, such as wood, for cooking and heating. Given this high rate of dependency, the extent to which whole swaths of the country are lacking in electricity and gas becomes clear.

 

Recognizing the needs of the population, the Pakistani government has proposed a plan to increase domestic energy production and hydrocarbon exploration, increase natural gas imports, diversify the combined capacity of installed electricity production, improve domestic standards for energy efficiency, and gradually eliminate natural gas subsidies.

 

Iran shares land and maritime borders with several countries, such as Turkmenistan and Qatar, which are rich in gas resources. Others in close proximity, such as Afghanistan, Pakistan, and Armenia, as well as the UAE, Kuwait, and Oman, are still in need of natural gas suppliers. In addition, Iran is home to a wide network of pipelines which (with the exception of 90 to 100 days during the winter when domestic demand peaks) has the capacity to transport gas to countries in need of additional sources of gas for much of the year.

 

Thus, in many ways, Iran is ideally positioned to benefit from both transportation and swap deals, provided there is active cooperation through diplomacy and allowing the energy industry representation in regional initiatives. The realization of this potential, however, is evidently being held back by the unfavorable international conditions to which Iran has fallen victim, not to mention its own weak attempts at energy diplomacy initiatives and active participation in energy transmission projects.

 

In 1990, Pakistan began negotiations with Iran for gas exports. At the same time, India’s growing energy demands led to joint support for what was termed the Peace Pipeline, which signaled a new chapter in India and Pakistan’s relations under which the two rivals would come together to enjoy the mutual benefits of Iranian resources. In 2011, however, due to U.S. pressure, India withdrew its support for the Peace Pipeline, an unfortunate development for Iran which had hoped the pipeline would serve to develop and expand its friendship and cooperation in the region.

 

According to the initial agreement, Iran would have transported natural gas via a 2700-kilometer pipeline through Pakistan to India. It was anticipated that in the event of a final agreement, 1100 kilometers of the pipeline would be constructed in Iran, 1000 kilometers in Pakistan, and 600 kilometers in India. The plans projected that 150 million cubic meters of gas would be exported daily to the subcontinent: 90 million cubic meters for India, and 60 million cubic meters for Pakistan.

 

Iran completed its own extension of the pipeline to deliver natural gas from South Pars to the Iran-Pakistan border by December 2014, long before the deadline. However, Islamabad has still not taken steps to comply with its own obligations, and no practical steps towards the construction of the project in Pakistan’s territory have been undertaken.

 

Diversification of energy resources represents a major pillar of Pakistan’s national energy policy. At present, Pakistan is planning to import natural gas and liquefied natural gas (LNG) from new sources, as well as importing electricity from Turkmenistan. Renewable energy will also play an important role in Pakistan’s energy basket in the coming years.

 

Running Rings Around Iran: The TAPI Project

 

One of Pakistan’s alternatives in diversifying its energy resources comes in the form of the TAPI project, which was designed to deliver Turkmen natural gas to India via Afghanistan and Pakistan. The project was first conceived with U.S. support in 1990 as a means of boosting regional links while circumventing Iran.The cost of the project is estimated to range from $7 billion – $9 billion. TAPI is projected to transfer 90 million cubic meters of gas per day along the route of Turkmenistan–Afghanistan–Pakistan–India.

The Asian Development Bank is the project’s primary sponsor, along with the World Bank, the United States, and India. In political terms, the United States and its allies, including NATO, are the most important political supporters of this pipeline.Washington’s approach to the pipeline is based on its long-term strategic goals in the region.

 

Through this economic project, the geopolitics of the region may be bolstered in the US’s favor and pave the way for the establishment of permanent bases in Afghanistan, and thus a higher presence along the borders of Iran. By removing Iran from the thriving and growing energy market of the region, the United States will cause irreparable damage to the Iranian economy and political influence in the region.

 

LNG and The Post-Pipeline Future

 

Natural gas and LNG now form 50% of Pakistan’s total energy basket, and this will increase in the coming years due to Pakistan’s new agreements with LNG suppliers. At present, Pakistan imports LNG from Qatar since a $21 billion deal was signed in February 2015 to buy liquefied natural gas from Doha. Under the agreement, Pakistan will receive 500 million cubic feet of LNG per day. The Pakistani energy crisis will likely be alleviated by imports of Qatari gas, but those imports will not resolve the problem completely.

 

Meanwhile, the shale gas revolution that the U.S. experienced in the early 2000s has provided an opportunity for the country to transition from energy importer to energy exporter – cementing its role with increasing success since 2017. 3.166 million cubic feet of these U.S. exports are planned for Pakistan. U.S. natural gas is key to diversifying the nation’s energy supplies while expanding trade relations.

 

The U.S.’s reliance on the shale gas revolution and increasing LNG exports to expand and develop relations with neighbors and allies provide Pakistan with an enthusiastic alternative supplier also looking to divert Iranian gas interests. The shale gas revolution and LNG exports provide a new tool for the U.S. to wean allied nations off of Iranian oil and gas. In 2018, Pakistan has imported 13 billion cubic feet (Bcf) of LNG from the U.S. — a huge increase compared to the previous year’s figure of 3.2 Bcf.Seeking new, more robust opportunities afforded by sea channels, Russian energy giant Gazprom is considering the possibility of supplying 5-7 million tons of LNG annually to Pakistan. In July 2014, Pakistan and Gazprom signed an agreement to construct three LNG terminals, with the first shipment arriving on July 2015. Currently, as noted above, Pakistan is increasing its LNG imports from Qatar, and hopes to do the same with Gazprom’s gas authorities; work is on-going to find ways of boosting Russian LNG exports to Pakistan.

 

In 2016, Pakistan and Azerbaijan agreed to sign deals in various fields including those that would allow Azerbaijan to supply the country with electricity, crude oil and refined petroleum products, liquefied petroleum gas (LPG), and LNG. Pakistan is increasing its LNG intake amid increasing demand for gas and decline in production. In 2017, the State Oil Company of Azerbaijan Republic (SOCAR) won a tender to supply Pakistan with two LNG cargoes to be delivered in October according to Pakistan LNG. SOCAR began delivering LNG to Pakistan in October. The LNG was delivered in two cargoes, each carrying 140,000 cubic meters.

 

Natural Gas Price, Electricity Generation

 

The cost of Iranian natural gas is of major concern to Pakistan, as the latter needs Iranian natural gas to generate electricity. At present, Pakistan’s demand outstrips its supply by between 4000-7000 megawatts. However, the cost of Iran’s gas as proposed by the IP project is too expensive for use in power plants. The electricity generated from Pakistan’s power plants, mainly located in the Baluchistan province, costs $3.5 per one million units, while the cost for Iran’s gas is $12.

 

Thanks to the China-Pakistan economic corridor, Islamabad will soon be able to generate electricity from coal-fired power plants. The goal of the China-Pakistan Economic Corridor project is to turn the Gwadar Port into an energy hub in the region. Islamabad is also trying to address its electricity shortage in part through other projects such as the Casa 1000 project. The Casa 1000 is one of the most important infrastructures in the regional energy market, with a capacity of 1300 megawatts from Kyrgyzstan and Tajikistan providing a very good platform for the purchase and sale of energy in the region. By transferring electricity from Central Asia to South Asia via Afghanistan, the economic benefits of Central Asia and South Asia will be met in a mutually advantageous regional arrangement.

 

Last September, Turkmenistan completed an upgrade of its largest electric power plant, which it is hoped will help boost exports and eventually allow supplies to Pakistan. In 2018, Calik Holding signed a memorandum of understating with Turkmenistan and Pakistan to invest $1.6 billion over the Turkmenistan-Afghanistan-Pakistan transmission line. Afghanistan and Pakistan will receive 1000 megawatts of electricity annually from the project, thereby leaving Iranian energy firms in the dark.

 

What is on the Horizon?

 

Iran needs to redefine the role energy exports play in its foreign policy, especially in relation to its neighbors. Iran holds the potential to use active regional energy diplomacy to maintain a share in neighboring markets, provided it succeeds in reducing tensions and thus paving the way for advanced economic benefits.

 

Pakistan is investing in renewable and planning to increase this portion of its energy basket with the construction of a hybrid solar-wind energy system to bring energy to rural areas.

U.S. sanctions against Iran are clearly another factor that will drive Pakistan toward other energy partners. Iran may well lose Pakistan as an electricity importer, especially with the progress being made in electricity deals with Turkmenistan. If Iran intends to be present in the Pakistani energy market, it first ought to offer reasonable prices which can compete with Al-Anjali as well as Turkmen gas, as worked in the case of retaining Indian business.

 

If Iran can break the deadlock with the U.S., it may finally benefit from the financial capabilities and technology needed to produce more oil and gas to export to its neighbors. If the oil and gas pipeline projects which connect Iran to its neighbors function at their highest capacities, then the links forged through the deals which result could be a key to bringing peace and stability in the region — with the added bonus of making it much harder to impose effective sanctions on Iran after such links have been cemented.

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Challenges and Opportunities for Russia-Iranian Energy Relations in the Post Sanctions Era

Given several large Russian companies find themselves facing US sanctions they no longer face any further fall-out from working reliably in Iran. Indeed, Russian companies may continue their business in Iran’s oil, gas, and nuclear sectors unimpeded having already adapted to whatever curtailments have been inflicted upon them by US measures.

The purchase of Iranian oil by Russia is a significant aspect of the oil co-operation agreement struck between the two countries. At a meeting convened between Iran’s Oil Minister Bijan Zanganeh and Russia’s Energy Minister, Alexander Novak in late December 2016, Iran agreed that a Russian company would sell Iranian oil, with 50% of profits handed to Russia in cash in Iran, and another 50% spent on purchasing goods and services from Russia to be put into operation in Iran.

Russia evidently desires a place in Iran’s oil industry. As the presidential aide, Yuri Ushakov recently stated, the country’s oil and gas companies are looking to invest in as much as a total of $50 billion to develop Iranian oil and gas fields. In his view, energy is the most promising area for cooperation between Russia and Iran; with leading Russian oil and gas companies such as Gazprom, Gazprom Oil, Rosneft, Zarubenzabad and Tatneft all having shown an active interest.

 

Russian firms’ withdrawal from Iran considering US withdrawal from JCPOA

 

Lukoil has joined others to halt activities in Iran since the departure of the US. The company had signed a mutually agreed partnership for the development of the Ab-Teymor oil field with Denmark’s Mersec, and the Indonesian Petrogas Vitamin Corporation.Regarding the company’s plans for the Iranian gas industry, the Deputy Chairman Gazprom, Alexander Medvedev, stated that “Gazprom is interested in cooperating with Iran from the beginning to the end of the gas value chain and plans to help in exploration, production, gas, LNG production, and gas supply through various pipelines, including those leading to India.”

After the nuclear agreement, Russia’s Zarubzhanov Corporation (with an 80% share), along with Dana Energy (with a 20% shareholding), signed a $742 million contract for the sustainable development of the West and Aban Oil Fields in Ilam province in partnership with the National Iranian Oil Company. The contract is set to stand for 10 years and can be renewed for up to 20. The combined production of these two fields is expected to increase by 67 million barrels over the next 10 years.

While Ali Akbar Velayati , an advisor to the Supreme Leader of the Islamic Republic, has said that Russian companies are ready to invest in the Iranian oil and gas industry by as much as $50 billion, one Kremlin spokesman has denied these statements, and the Russian Energy Minister has claimed that purchasing Iranian oil may have a negative consequence on Russian industries. At present, trade volume between Iran and Russia values just $2.2 billion, however, both countries hold a potential to increase their trade volume. Iran and Russia are both interested in increasing trade to $10 billion dollars in the short term. The question remains, none-the-less, as to whether Russia’s overtures in Iran amount to nothing short of investment.

Oil for food trade

During the last sanctions regime, both countries signed an agreement to sell Iranian oil to Russia in return for goods and technology. By importing 500 000 barrels of oil a day from Iran, Russian not only parted with no money, but were able to sell more of their goods to Iran. Also, since Iran’s oil is not compatible with oil refineries in Europe – or even most within Russia – this oil was most likely transferred from Russia to China, Iran’s largest oil market, other countries in the South or East Asia. In this way, Russia was thus able to expand its own oil relations.

Iran’s strategy of signing contracts for oil development with Russia is not unwise given the absence of any other serious player. Rouhani’s government has been weak in the development of oil fields over the past five years. It is true that his cause should be sought through foreign policy and an attempt to ease the pressure of the United States, but, in any case, its outcome has been detrimental. Russian companies have the technology needed to increase the recovery rate of Iranian oil reservoirs. The Oil Ministry is keen to allow oil companies in Europe, Russia, China, Asia, and even the Americas (Americans are currently barred) to get involved in the development of Iranian oil fields.

Oil exports are the result of production, minus domestic consumption, however, oil production in Iran is gradually decreasing as a result of the decline in the production of the reservoir. The drop in the production of Iranian oil reserves is currently around 8%. The biggest issue regarding Chinese and Russian investment in the Iranian energy industry after the lifting of sanctions would be the terms of the contracts concluded – namely, the duration of these contracts, and the amount of contracts and technology used in these oil and gas fields, not to mention conditions which increase the likelihood of companies to bow to US pressures To abandon Iranian projects.

Considering developments in the energy market more broadly, and the effect US sanctions will have upon it, attracting foreign investment and technology to the Iranian energy industry will be much harder to achieve. Achieving the goals of Iran’s sixth development plan and vision document is possible only through foreign investment, which requires a reduction of political risk in the country through a more engaging foreign policy and greater consideration of legal mechanisms to assure foreign investors.

For the foreseeable future, however, it looks as though talks will remain at the macro level until a deal has been signed. Although details of the $50 billion investment of Russian oil and gas companies in Iran have yet to be determined, this would provide a sigh of relief for the country’s industry. Many insist that such an investment would not equate to dependency on Russia. One expert has stated that “The Iranian oil and gas facilities and resources are so broad that even if $50 billion of capital is from companies Iran’s oil industry is not looking for a mere dependence on a country. The Russians will be brought to Iran; but there will be plenty of work remaining that will capture technology and foreign capital from other countries.

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Iran and Azerbaijan share oil fields, so what’s stopping Tehran from drilling?

Iranian-Azerbaijani energy relations go back to the 1990s collapse of the Soviet Union. Both countries hold large reserves of oil and gas, and Azerbaijan has used an active energy and foreign policy to carve itself a place on the world energy market.

 

The Baku-Tblisi-Ceyhan pipeline project was the first major step for Azerbaijan in this endeavor. Both countries are interested in developing successful bilateral relations based on energy. Iran hopes to use the infrastructure of Azerbaijan, particularly the Baku-Tbilisi-Ceyhan pipeline to export its oil.

 

Iran also hopes to join the Trans-Anatolian Gas Pipeline project in the future. However, at present, Iran has not enough natural gas to export to the EU or other countries.

 

Azerbaijan has also called on Iran to use its natural gas storage for use in times of increased consumption.

 

Shared fields in the Caspian Sea represent a potential basis for future cooperation. Azerbaijan has also invested in Iranian renewables as another potential platform for partnerships.

Iran is the only state in the Caspian Sea area which has no oil and gas activities in that region. This is due partly to the fact that the majority of Iranian oil and gas fields are located in its southern half and offshore in the Gulf.

 

Shared fields in the Caspian Sea here represent

a potential basis for future cooperation

 

The ability to harness the Caspian’s reserves is not just an issue of procurement but also about distribution pipelines, thus meaning further efforts are needed in conjunction with other nations.

 

Iran’s Caspian field, Sardar-e Jangal, was discovered in 2001. According to initial estimates, this field holds 50bcm of natural gas and 2bb of oil – of which Iran could expect to obtain 500 million barrels. After the signing of the nuclear agreement, Iran offered four projects in the Caspian Sea, blocks 24, 26 and 29, as well as the Sardar-e Jangal oil field, to foreign companies for exploration and development.

 

The development plan for the deep-water Sardar-e Jangal oil field is said to cost in the range of $7-10 billion, with Iran open to foreign investment for the project. Similarly, Iran has also invited foreign companies to invest in other fields. Iran is ready to attract foreign investment, and has frequently assured foreign companies with guarantees of the security of their investments – though such guarantees are constantly weighed up by investors vis-à-vis international developments in Iran’s foreign policy.

 

After the nuclear agreement was signed, Iran invited foreign companies to invest in its oil fields, with NIOC and Norway’s ORG signing a memorandum to study feasibility, as well as in three exploration blocks in the Caspian Sea. However, this agreement has so far resulted in little by way of actual progress.In a visit to Tehran by Azerbaijani President Ilham Aliyev in April 2018, leaders of both countries signed a Memorandum of Understanding on the “Joint Development of Relevant Blocks of the Caspian Sea”.

 

This followed a visit to Baku by President Rouhani in March, during which both sides signed a protocol in agreeing that Iran’s state-run NIOC and Azerbaijan’s SOCAR would recover oil on a 50-50 basis. The Khazar Exploration and Production Company (KEPCO) was tasked by the NIOC to improve Iran’s share of oil and gas fields in the Caspian Sea.

 

According to the document, a joint oil company would be established between the two countries, with the Alborz and Alvand fields identified as common areas in which Iran and Azerbaijan could enjoy an equal share.Iran has divided its exploration area in the Caspian into 46 blocks, eight of which have been given priority. Two blocks are shared with Azerbaijan.

 

Iran, between 2003 and 2005, carried out seismic tests across more than 4,000 square kilometres of the Caspian Sea at blocks 6, 7, 8 and 21. According to Mohsen Delvaz, CEO of KEPCO, Iran still need more exploration in order to have a clear estimate of how much capital will be required to launch extraction operations.

 

However, preliminary estimates indicate that at least $10 billion will be needed for the joint Iranian-Azeri oil field and between $7 and $10 billion for the Sardar-e Jangal field.

 

Iran is, again, open to foreign investment for the development in order to meet these heavy costs. But foreign companies remain wary, given the re-imposition of US sanctions on Iran.

One energy expert has pointed out that the Alborz and Alvand fields mark the first successful step towards stabilising Iran’s energy rights in the Caspian Sea, but the recent agreement has also been a cause for uncertainty.The challenges for Iran in extracting hydrocarbon resources from the Caspian Sea mainly draw from concerns about the depth of its waters and the land-locked nature of the sea. This results in a lack of connection with open water, operational restrictions related to transportation of equipment, the changing climate, the very difficult and complex nature of providing support due to distance from the coast, as well as the cost and risk of exploration operations, a lack of background in fleet maintenance and offshore services, and technological sanctions.

 

Iran has a lot of experience in the development and production of hydrocarbon fields

in the offshore sector

 

Of course, Iran has a lot of experience in the development and production of hydrocarbon fields in the offshore sector in general, but these experiences are of a completely different nature in the southern parts of the country and in the Gulf.

The Caspian Sea, due to its depth, requires special conditions at all stages of drilling, development, production and transfer.

 

The sanctions regime represents the over-riding issue in these challenges. It is possible for Iran to sign agreements with Chinese and Russian energy firms to invest in joint fields in the Caspian Sea, yet deals with China have so far failed to materialise.

 

Azerbaijan is far more active than Iran in the Caspian Sea. This is to expected, since the US withdrawal from the JCPOA allowed Azerbaijan to attract foreign technology and capital for extraction from a joint field with Iran, playing an important role in the regional energy market at Iran’s expense.

 

Furthermore, Azerbaijan can bolster EU energy security via the TANAP and TAP projects – of which Iran is not yet a part.Geological and financial problems will continue to plague Iranian efforts, yet an active regional foreign and energy diplomacy could yet lead to breakthroughs.

 

Chinese companies would not be the best option for Iran in terms of the Caspian, due to financial requirements and insufficient experience in deep water.The crucial issue is to resolve the tension with the west – and this requires engagement with the US. Without foreign financial capabilities and technology, Iran will face serious problems in playing a key role in the regional energy market and producing more oil and gas from joint fields, let alone those over which it has full sovereignty.

 

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Tanker Insurance Cancellations threaten Iranian energy sector

The US’ withdrawal from the JCPOA and declaration of a new set of sanctions has been hard to swallow for those planning Iran’s energy sector, as they had been relying on the deal as a means of revivifying Iran’s oil and gas production capacity. These new sanctions are set to be implemented against Iran’s oil and gas sector on November 4. This is likely to have ahuge impact on Iran’s coffers, with insurers reportedly already halting coverage for shipments.

Following the announcement of a resumption of sanctions against Iran, owners of oil tankers were some of the first to start refusing trade with the country. When the previous round of sanctions against Iran was first established, tanker insurance was considered one of the main barriers to Iranian oil exports, as, given that most ship-owners carrying Iranian oil were not able to secure insurance, a number of Asian trading partners were forced to concede to government-sponsored security coverings.

When sanctions were imposed in 2012, the European Union prevented the International Group Corporation in London from providing any cover for Iran-bound cargo, which led to the de facto deployment of Iran’s tanker fleet, as foreign ships seeking to carry Iranian oil would henceforth be excluded from operating in the mainstream oil tanker market. This time, however, it remains unclear as to whether the EU will back US-led sanctions with such gusto.

Iranian companies have announced that they will continue to insure oil tankers, although this is somewhat difficult to do without connecting the Iranian banking system to international banks.

An Iranian supertanker called Happiness, which docked at a terminal operated by Iran’s national oil company on Kharg Island, for instance, currently has on board 2m barrels of oil. It was set to head for Asian markets at the beginning of September, although with Iran’s return to pariah status, its fate is now unclear. Iran’s own insurance companies are not recognized in international insurance circles. Additionally, these companies are facing their own domestic problems due to a lack of credit among financial and credit institutions in the country.

As one of Iran’s biggest export markets, firms and refineries in India in particularare very concerned about the insurance for tankers going between the two countries. Some refineries have already cut back on purchases of oil from Iran. Reuters reports that two major Indian refineries, Indian Petroleum and Bharat Petroleum, will reduce their purchases from Iran due to insurance concerns specifically. In response, Iran is planning to insure tankers transiting oil to India and to give special discount to Indian buyers.

Iran will not want to lose its share of the Indian energy market. According to Business India Online, The Indian government has allowed two Iranian insurance companies to pay a one-billion-dollar insurance coverage for Iranian oil tankers. This effort from New Delhi may have China, as the other largest consumer of Iranian oil, in mind. Custom from these major importers, however, are unlikely to mitigate the effects of US sanctions sufficiently by November if Iran is cut off from the global oil market.

EU buyers are also concerned about Tanker insurance. Coverage for the vast majority of ship leasing contracts is provided by IG Insurance Services Inc., if damage occurs, all actors in the tanker supply chain are aware that the group presides over billions of dollars in order to compensate. Even if both public and private insurance companies accept the risk of providing insurance for Iranian oil tankers, since no Iranian insurance company is a member of the International Syndicate of Oil Insurance, Iran’s insurance policy is essentially uncertifiable.

If Iran green lights such shipments regardless, it would be possible for Iranian tankers to be detained in international waters, leading to very severe legal consequences for Iran. The fact that both China and India have asked Iran to bear the cost of transporting and insuring their oil products shows that these Iranian oil customers want to put all liabilities on Iran as the seller.

To sum up, the hope of being able to by-pass tanker insurance with Iranian insurance is an overly optimistic move and may lead to an even greater conundrum of problems for Iran.

 

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Rethinking future Iran-Iraq energy relations

Iraq is perhaps Iran’s most important neighbour, sharing the country’s longest border and deep demographic, religious and ideological ties – not-to-mention vast reserves of natural resources, which may provide the basis of a convergence of geopolitical interests to the benefit of both.

Given the recent history of these two former warring nations, the two countries today enjoy surprisingly good political relations. With huge oil reserves, both Iran and Iraq are members of OPEC and have enjoyed a long presence on the world oil markets.

They share a number of fields, with the majority of Iraqi oil fields located inland and thus easy to extract, and the majority of Iranian oil and gas fields located offshore and therefore much tougher and costlier to exploit.

There is no doubt that the establishment of security and political stability are important in ensuring the success of efforts to expand the production capacity of both suppliers. Iran has frequently stated that is ready to develop oil and gas in cooperation with Iraq. Iranian energy firms are equally interested in Iraq’s energy infrastructure and fields.

Thus, the future holds much in the way of regional cooperation, with possible areas for this outlined below. Events and developments in other areas may, however, hold sway over their realisation.

 

Iran-Iraq Natural Gas pipeline 


In 2013, Iran signed an agreement to export gas to Iraq. Iranian gas is exported to Iraq to supply the country’s power plants. With seven million cubic metres of gas being pumped to Baghdad daily, Iraq has become the second-largest export destination for Iranian gas.

Iran has agreed to export 40-65mcm to Baghdad and Basra every day for the next six years, both countries having invested around $2.3 billion in the construction of a shared pipeline.

When the pipeline was launched in 2017, Iran began to export 14mcm to Iraq daily, a figure it looks forward to increasing. The project is a short-term one which involves exploration in gas-rich areas of Iraqi Kurdistan. Iraq is also interested in using Iranian capital and technology and experience in the LPG sector.

Iraq is planning to use LPG in cars and housing. Iran and Iraq have signed an agreement allowing Iranian companies to assist in the construction of Iraqi LPG facilities. This cooperation comes in various forms, including distribution, provision of vehicles, and the construction of hospital and residential complexes. The volume of gas exports to Iraq are set to increase to 35 million cubic metres per day with the launching of a sixth natural gas pipeline.


Oil swap


Iran is transporting Kirkuk Oil to the consumer market. In past years, Iran has used Turkey’s Ceyhan port to transit oil to markets. In December 2017, both countries signed a trade agreement promising to swap a daily amount of 60,000 barrels of Iraqi oil from Kirkuk.

This gives Iran the opportunity to have a greater sphere of influence in Iraq, with all the economic benefits this ensures, providing an opportunity for the central government in Iraq to exert greater control over Iraqi territory.


Electricity export


Iran exports electricity to its neighbours and is planning to become a regional electricity hub in the long term. Iran exports between 200 to 250 MW to Iraq, Afghanistan, and Pakistan. Iraq takes a large share of this, with around 120-130 MW electricity. Iraq is the biggest importer of electricity from Iran.

 

Last summer, Iran cut off electricity to Iraq due to a shortage in its domestic market. Some analysts have said that Iran aims to export to Iraq for political as well as economic reasons. In September 2018, Iraq was unable to pay its electricity bill to Iran, and has a debt of around $1.4 billion outstanding to Tehran.

After Iran cut the power, Baghdad signed an agreement with Saudi Arabia to make up the shortfall. Saudi Arabia reportedly offered to build a 3000-megawatt solar plant in Saudi Arabia and sell electricity to Iraq at a quarter of the price of Iranian supplies, though Iran plans to increase imports in general despite this loss of custom. Domestic supplies remain, however, a priority.

Joint Oil fields 


Iran shares a number of oil and gas fields with Iraq. Iran’s inability to attract foreign capital and technology to recover oil and gas production capacity in light of sanctions particularly affects its inability to benefit from the shared fields.

By 2017, Iraq was involved in the extraction of nine shared oil and gas fields at Azadeghan, Yadavaran, Azar, NaftShar, Behloram, Paydar Gharb and Arvand.

At present, Iraq produces twice as much as its neighbour from shared fields. Iraq has managed to increase its oil production from around 1.7 million barrels a day to 4.7 million barrels per day in the time between 2005 and 2017, making it easier for foreign companies to enter the market and add to investment.

In June 2018, Iraq ceded the exploration and development of several oilfields near Iran to the UAE’s al-Hilal company. At the same time, Iran launched measures aiming to increase production in the West Karun block, some of which is shared with Iraq. It should be noted that the amount of reserves in the Iranian section, which includes the Azadegan fields (north and south), Yaran (north and south), is estimated at 64 billion barrels.

Russian companies currently have had an active presence on the Iraqi side of these fields, yet the long delay in Chinese companies launching work on the Yadavaran and North Azaghan Fields has caused Iran to miss out on effectively exploiting these reserves.


US withdrawal from the JCPOA


The US withdrawal from the JCPOA Iranian nuclear deal and its re-implementation of fresh sanctions against Iran’s energy sector provides a good opportunity for Iraq to increase its oil and gas production from shared fields and take the lead over Iran’s share of the consumer market.

It can be expected that after new sanctions are introduced, foreign oil firms will be unable to invest in the Iran energy sector at all.

Iraq is also increasing its share of the Turkish oil market and is likely to overtake Iran in this regard. Furthermore, if Iran is no longer able to enjoy electricity deals with Iraq, Saudi Arabia will take its share in Iraq’s electricity market.

Given the political tensions between Iran and Saudi Arabia, Riyadh is no doubt ready to take effective steps to exploit the resulting shortfall. Iran needs to revise its regional policy and resolve its current tension with its neighbours if it is interested in using energy exports as an instrument of foreign policy.

The US withdrawal will not only delay Iran’s plans to increase production in the common oil fields, but will provide Iran’s neighbours with an opportunity to encroach on what little progress Iran has made, and take a larger share of the regional and global oil markets.

Shared resource pools can act as a good basis for regional diplomacy to improve and expand ties with neighbouring countries. However, the continuation of sanctions will mean increasing the withdrawal of neighbouring countries from common areas and reducing Iran’s presence on the global market.

 

https://www.alaraby.co.uk/english/comment/2018/10/19/rethinking-future-iran-iraq-energy-relations

 

 

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Challenges Facing Natural Gas Export After the Sanctions

The share of Natural gas and LNG (Liquified Natural Gas) of the world energy market is increasing daily. In 2014, LNG’s share of the world gas market was 42% and according to International Energy Agency, this number will increase to 53% by the year 2040.

 

Among the LNG producing countries, Qatar has the highest share of exports. In 2016, of all the 264 million tons of LNG produced in the world, Qatar’s share was 77 million ton. Currently, countries such as Australia, Russia, United States, Mozambique… are investing heavily in this industry in order to increase their share of the market. As a result of the natural gas revolution in Chile and the new technologies and methods, the United States is quickly becoming one of the main LNG producers in the world, so much so that in near future, it will play an important part in the energy security of the European Union and East Asian countries. Since LNG export is more efficient than natural gas export, especially in long distance, we are now witnessing a new competition among the LNG producers over more shares in the market.

 

Despite having 18% of the world’s gas resources, Iran is unable to produce LNG. Iran has less than 1% of the world gas market and with the current patterns, its chances for increasing this share is slim. Before the US and EU sanctions over the nuclear program, Iran had made plans for LNG production. Three important projects of LNG, Persian, and Pars were left unfinished due to sanctions and foreign companies involved such as Shell, Repsol, Total, and Malaysia’s Petronas were forced to leave the county. “Iran LNG” project which is in 52% development, was designed for producing 10 million tons of LNG a year. After JCPOA, the regime wanted to finish this project with foreign investment and technology. The project required 4 billion dollars, but even before the United States’ decision to exit the deal, the negotiations with foreign companies were unsuccessful, and after US exit, it seems impossible to finish in such short time.

 

There were several plans designed for Iran to join the LNG exporter countries:

One of these plans was the Iran-Oman pipeline which was supposed to export 10 million square meters of natural gas a day. Iran wished to turn some of this gas into LNG in Oman facilities and then send it to market, but this deal has not come to fruition. The capacity of Oman’s facilities is about 1.5 to 2 million tons.

 

The other option was building small LNG units. After JCPOA, Iran had numerous negotiations with Russian, Chinese, and Korean companies for building small LNG units. The production capacity of these small units is 300 tons a day, and they are usually used for delivering gas to distant areas that might be difficult to reach. Iran was planning to build several of these LNG units over two years, but the sanctions and lack of interest from foreign companies prevented it.

 

Iran’s next option was using offshore LNG producing ships. Floating LNG (FLNG) is a type of ship with LNG production technology that mines a gas field under the sea and turns it into LNG. In the fall of 2017, there were negotiations between Iran and a Norwegian company to buy floaters, but that also failed.

 

Saturation of the LNG market and the competition among the producing countries will make it more difficult for the new producers of LNG to enter the market. Iran’s vast resources of natural gas is a good opportunity for the country to play a role in the regional and international market by producing LNG. Exporting LNG to distant countries through pipelines is not efficient. The safest alternative is for Iran to consider east Asia, India, and the European Union for LNG export in the long run. But without any changes to its regional policies, the Islamic Republic will have a hard time attracting foreign investments. The main obstacle to drawing investments in the energy industry, especially in natural gas and LNG, is the lack of a legal structure for effective and quick decision making and the country’s political instability. These are not difficult to overcome if there is a political will to use natural gas in order to improve the economic and political conditions of the country.

 

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