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’s Regional Electricity Hub Plan

Despite its huge oil and gas reserves, Iran has been unable to play an important role in regional and international energy market. The limitations placed on its industry, the high growth of annual domestic consumption, and the general disruptions caused to oil exports have all caused consternation among policymakers, especially in the absence of a broad, multi-tiered strategy. Iran needs to promote a smarter energy and foreign diplomacy if it wishes to increase regional cooperation and export electricity to generate the funds necessary to shift toward renewables. Any future sanctions against Iran’s energy sector would have little effect if the country increased the role of renewables in its energy basket. An improved investment climate and improved relations with neighbors would help Iran attract foreign capital and the technological know-how to achieve this goal.

 

Exporting electricity is better than exporting raw materials such as natural gas. At present, Iran produces a daily amount of 700-800,000 cubic meters. With the completion of five phases of the South Pars Field, the country could increase production by 150,000 cubic meters before March 2019. Its huge natural gas reserves allow Iran to use natural gas to generate electricity to export to neighbors.

 

According to 2018 statistics released by the Energy Ministry, Iran exported electricity to seven neighbors. In 2017, Iran ranked fourteenth among the world’s largest electricity suppliers, as well as constituting one of the countries with the lowest rates of accidents in the power sector. At present, Iran exports 12 billion kilowatt-hours of electricity, while importing around 4 billion kilowatt-hours of electricity annually. This means earnings of anywhere between $900 million and $1 billion per year. Iran is interested in drawing up long-term contracts to increase elasticity with Afghanistan, Pakistan, and Iraq, as according to Iranian officials, these countries are also interested in boosting electricity imports from Iran. For the first time in Iran’s history, the Iranian government has recently allowed foreign companies to export part of the electricity generated in the country to attract more foreign investments in renewables,

 

During the period of U.S. and EU sanctions against Iran’s energy sector, Iranian oil and gas production capacity dropped dramatically, causing decision makers to reconsider renewables in the future of the country’s energy basket. Presently, renewable energy represents less than 1 percent of electricity production, along with about 6 percent coming from hydroelectric. The government has insisted, at least on paper, that boosting renewables is a priority.

 

Hamid Chitchian, Iran’s former energy minister, has also declared that Iran’s energy diplomacy should focus on expanding electrical cooperation with neighbors. Post-sanctions Iran must apply changes to the configuration of its electricity generation, transmission, and distribution. According to the former minister, “Iran’s main priorities for the post-sanction era include use of modern technologies, plant efficiency, smart electrical grids, reopened credit lines, and foreign investment in the power industry.”

 

Although Iran’s exports of electricity in the region outweigh its imports, the country still hasn’t realized Article 60 of its Sixth Development Plan, which declares the country’s aim to become a regional electricity hub. Article 60 of the Sixth Plan for Economic Development demands steps be taken to establish a regional electricity market from the first year of the program. Iran’s geographical situation and electricity transit systems give it the perfect opportunity to connect to other markets in Russia via Azerbaijan, Europe via Turkey, and the MENA region through Iraq.

 

However, the active involvement of the private sector and the encouragement of foreign investors will be a pre-requisite for the construction of power plants and the development of electricity transmission networks.

 

From a political and security perspective, electricity exports, in contrast to conventional gas exports, could promote greater connectedness to the region and neighboring countries.

 

Currently, Iran has an electrical connection with all neighboring countries (except for Gulf states). In addition, the presence of expert and skilled human resources in Iran and high levels of self-reliance in the power industry and the construction of electrical equipment in the Middle East and Central Asian region are a relative advantage.

 

As part of the Paris agreement, Iran has voluntarily committed itself to installing the means for generating 7,500 megawatts of renewable energy by 2030. Iran has also passed new laws and regulations aiming to attract more foreign investment and technology in electricity generation.

 

A look at price changes applied to the country’s gas and electricity exports in recent years shows that the price of gas is more dependent on the price of oil than the price of electricity, and therefore revenues from electricity exports are more stable than gas-export earnings.

 

Iran can and should aim to become an energy hub for the region, as it is able to receive cheap electricity from Turkmenistan, Tajikistan and other countries to export to more wealthy buyers in Turkey, Iraq, the UAE, and Pakistan, which bid for electricity at a significantly better price. According to Iranian officials, Iran’s growing energy relations with neighbors have helped it to develop the infrastructure needed to expand its electricity export destinations and put it in a position to realize its goals. However, vast improvements are needed to the transport infrastructure and connectivity of countries of the region, as well as the development of maternal industries, such as the electricity industry and energy exports.

 

Still, after more than a decade, Iran has not put forward any specific operational plans for improving the conditions of the country to become the hub of the region. The failure to develop this infrastructure means that renewed sanctions against Iran’s energy sector will bring major challenges. All the foreign firms once active in Iran’s oil and gas fields, as well as any foreign energy companies that have signed agreement with Iran, left the country after the U.S. withdrawal from the Iran nuclear agreement. Iran signed an agreement with Turkey’s Unit International to build a number of 5,000 megawatt power plants, but progress has stalled. Iran hopes that foreign capital and technology will produce more natural gas for electricity generation and greater export elasticity with neighbors mean that it may finally get back on its feet in the energy market. Iran must decrease domestic natural gas consumption and try to renew electricity infrastructure if it wishes for any chance of success in the regional electricity market. However, the main obstacle to this will undoubtedly by foreign policy and negotiating solutions with neighbors, not to mention the interlinked issue of attracting foreign investment.

 

https://lobelog.com/irans-regional-electricity-hub-plan/

 

 

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Turkey to Continue Iran Gas Exports Despite US Sanctions

TEHRAN, Sep. 16 (MNA) – Omid Shokri Kalehsar, a senior energy security analyst, told Mehr News that Turkey will continue to import natural gas from Iran despite US’ sanctions targeting Iran’s oil sector.

Omid Shokri Kalehsar, a senior energy security analyst and PhD candidate in international relations, said in an exclusive interview with Mehr News Agency that Turkey is keen on buying natural gas from Iran with “reasonable price” in contrast to the price it pays for the gas imported from Russia and Azerbaijan.

He stressed that if Iran and Turkey can agree on a price and Iran is able to produce more natural gas, Turkey will be interested to consider buying gas from Iran instead of the other two rivals.

He went on to add, however, that while Turkey’s private companies have enough financial resources to attract Iran’s market, a legal framework, an efficient decision-making process, and political stability are also needed to make attracting foreign investment possible.

The following is the text of his interview with Mehr News:

Back in 2015, Iran had voiced willingness to pipe its natural gas to Europe through Turkey. Did that plan ever come to anything? And is the project still feasible after the US withdrawal from the Iran nuclear deal and the reinstatement of economic sanctions on Tehran?

Iranian officials many times showed their interest to export natural gas to EU and play a role in EU energy security. Iran holds world’s second natural gas reserve but at present has no major natural gas export. It should be noted that Iran has high domestic natural gas consumption and suffers lack of foreign investment and technology and capital capacities due to sanctions. Iran just exports annually 10 bcm to Turkey. Major natural gas export needs more foreign investment, financial resources and decrease in domestic consumption.

In coming years there is no more demand in EU natural gas  market. At present EU members states’ LNG imports from US and Russia plays a key role in EU natural gas market and is planning to export more natural gas to EU via new pipeline projects such as Turk Stream and Nord Stream 2. EU members also made more investment in renewable energy and energy efficiency.

Iran needs about 4-6$ billion to construct required infrastructure to deliver natural gas to Turkey borders. And at present Iran has no more capital capacities. And current natural gas price is not economical for Iran to export natural gas to EU via pipeline.

Ankara has pledged to boost imports of Iranian gas despite US sanctions. Is that request still on the table?

US sanctions targeted Iran oil sector and Turkey will continue natural gas import from Iran. Turkey has some domestic pipelines project and at present natural gas system is not integrated, Turkey needs Iran natural gas to use it in Southern part of Turkey which has cold winters. Ankara is interested in importing more natural gas from Iran. Turkey begins to import natural gas from Azerbaijan via TANAP project and by next year Turkey will import natural gas from Russia through Turk Stream project. By 2026 and at the end of Iran-Turkey natural gas agreement, Turkey is interested in importing more natural gas from Iran and extend the natural gas agreement with Iran. Turkey’s officials have repeatedly stated that they want to buy natural gas from Iran with reasonable price in contrast to the gas price which Turkey imports from Russia and Azerbaijan. If Iran and Turkey agree on price and Iran is able to produce more natural gas, Turkey will import more natural gas from Iran. It should be noted that more natural gas production needs more investment in oil and gas fields and requires infrastructure and giving priority to energy efficiency in Iran. Turkey told US officials that it will continue importing oil and gas from Iran but during last month Turkey decreased oil import from Iran.

Turkey has stressed that it does not approve of US sanctions against Iran, calling them ‘unilateral’. Meanwhile, Turkish energy company Unit International has a strong presence in Iran, with a $4.2 billion worth of contract with Iran’s energy ministry to build seven natural gas power plants here. How much progress has the company achieved with the project so far? Has Unit International decided to remain in Iran or abandon its investment projects under US pressure?

Post-JCPOA Iran expected to have more foreign investment in its energy sector.  Unit International was one of the foreign firms which signed an agreement with Iran to build seven natural gas power plants. According the agreement, Iran will provide the natural gas which Unit International need for these power plants. Iran has also pledged to guarantee purchase generated electricity from these power plants at a predetermined agreed price over a period of 6 years.

By September 2018, there was no major development in this agreement. There were challenges and debates between government and parliament over this agreement.  Asadollah Gharakhani, spokesman of Iranian Parliament Commission on Energy announced that in attraction of foreign investors for energy sector, government policy should include transferring of knowledge and technology, and also human resource training. He refers to the fact that Unit International has no history of construction of power plants and this company was not considered a power plant manufacturer, he claims that Unit International in Turkey occasionally organizes hotels and business activities.

US withdrawal from JCPOA is a major problem for any foreign company interested in investing in Iran energy sector. It is expected that Unit International needs Turkish government’s strong support to keep investing in Iran and to continue construction of natural gas power plants. I think it will not be easy for Unit International to maintain in Iran. The other problem in both Iran government and parliament is the support to this company and other foreign firms to be more active in Iran energy sector. Turkey’s private companies have good experience and enough financial resources to attract the Iran market. The problem is that to attract foreign investment you need a legal framework, an efficient and fast decision process and political stability (especially in the international context). At the moment these variables are far from being achieved.

Omid Shokri Kalehsar is a senior energy security analyst and PhD candidate in International Relations. His primary research interest is in the area of energy diplomacy, geopolitics of energy, Iran–Russia relations and Iran-Turkey relations.

Interview by: Payman Yazdani, Marjohn Sheikhi

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Identifying and Explaining Geopolitical Opportunities of Energy (Oil and Gas) as part of a Long-Term Strategy for Iran and Russia

Lifting sanctions in the wake of the Iranian nuclear deal opened large opportunities for resource-rich Iran to bring its long-stagnant industry up to date. Most of the oil fields in Iran are in the second half of their production capabilities, with the productivity of wells decreasing by 8% annually. The result has been a decline in foreign exchange earnings and the gradual loss of Iran’s share in the oil market. According to Iranian officials, Iran needs around $100 billion foreign investment in the oil, gas and petrochemical sectors” to increase its oil efficiency.

 

A major Russian investment in Iran’s energy sector came in the form of Iran’s Bushehr nuclear power plant. Russia has been active in Iranian nuclear power since mid-1990 and has continued cooperation with the country’s nuclear plan despite opposition from the West. Rosatom completed the Bushher Power Plant with some delay, and some analysts believe the cost of completing this power plant was higher than could have been achieved through other companies. Iran and Russia also signed agreements for the construction of a further nuclear power plant. Electricity generated in the Busher Power plant supply just about 2% of Iran’s electricity demands. Nuclear cooperation is thus more so in Russia’s favor.

 

In 2017, Iran and Russia signed an oil-for-food deal with Iran to be will be implemented next month with the purchase of 100 000 barrels of oil a day from Iran. The first oil for food agreement was signed in 2014, in the midst of EU and US sanctions. In Januray  2014, Iran and Russia an oil-for-goods swap worth $1.5 billion per month that would enable Iran to lift oil exports substantially, undermining Western sanctions. Such agreements could come back on the agenda with the likely return of new US sanctions, and causing Russia to once again play a role in the Iranian energy sector.

 

By 2015, Russian firms such as Luk Oil and Gazprom began showing interest in investing in Iran’s energy sector.  On March 2015, Russia’s Zarubezhneft signed agreements with the Iranian Oil Ministry to boost production at two oil fields in the country’s west. Zarubezhneft and Dana Energy, will develop the Aban and Paydar fields in Ilam province near the Iraqi border jointly with a private Iranian company, to boost production from 36 000 to 48 000 barrels of oil per day. The Russian company Zarupozhgft’s share of this contract is 80%, and the share of the National Iranian Oil Company is 20%. The cost of increasing the production efficiency of Aban and Sustainable West oil fields is estimated at $675 million. In addition, $68 million is also expected to cover indirect costs for the project. Part of this money will be spent on the repair of pumps and replacement of worn pumps.

 

After US withdraw nuclear deal major foreign companies withdraw from Iran energy sector. Luk oil official said that they no more consider invest in Iran oil and gas fields. It should be noted that in during past years and last round of US and EU sanctions, Russia had no major investments in Iran’s upstream industry. Russia prefers to invest in oil and gas fields which will pose no threat to its own oil and gas market. Both countries are trying to use their vast hydrocarbon reserves as a political tool to get more gain in their relations with rest of the world. Thus, despite its diplomatic and economic cooperation with Iran, Russia is in favor of any sanctions which decrease Iran’s oil and gas production capacity.

 

Limiting the production capacities of Iranian oil and gas is in favor of Russia and other major oil producers. At present, Iran only exports natural gas to Turkey and has no major plans to export more natural gas for other countries. In terms of natural gas and LNG, Iran is far from posing a threat to the Russian market, but in oil Iran still has potential. US new sanctions aimed at decreasing Iran’s oil exports give an opportunity to Russia to fill the vacuum and take Iran’s would-be share in the regional and global market, especially in Asia and the EU.

 

Russia’s investments in Iran have led to closer coordination in foreign policy, not least with regards to Syria. Last year, and in mid-2018 ,Russian official many times declared their interest in investing  about  50 b$ in Iran’s energy sector. In the first week of July, the Senior Advisor to the Leader of Iran’s Islamic Revolution in International Affairs, Ali Akbar Velayati visited Russia, and after negotiations with Russian officials said that Russia was ready to invest  50 b$ in Iran’s energy sector. The discussion focused on Russo-Iranian cooperation on issues in the region, including developments in Syria. The parties reaffirmed their commitment to the Joint Comprehensive Plan of Action on Iran’s Nuclear Deal (JCPOA), Iran-Russia energy relations after US withdrawal from the JPCOA, thereby utilizing the situation to further bilateral relation with an obvious increase in Russian influence on Iran. In an alternative scenario, Iran could provide an alternative to Russian gas for the EU in the long term.

 

On 23 July , Iranian Oil Minister Bizhan Zanghaneh attended the Gas Exporting Countries Forum (GECF) in Moscow, meeting with Russian Energy Minister Alexander Novak. They discussed bilateral relation, particularly in the field of energy. Last March, Russia and Iran signed a string of cooperation agreements in various fields, including energy. Details of the outcome of these meetings have still not been distributed to the press.

 

The actual question is whether despite the US opting out of the nuclear agreement, whether Russian investments in the country’s natural gas and oil fields will have an impact? This rests on whether the investments will go towards developing infrastructure and technological capacities. If this is the case, then which countries will benefit from purchasing renewed output? How will this renewal impact Iran’s regional relations? Will Russia eye this development closely? The coming months will reveal much on this front.

https://uwidata.com/

 

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