Iran’s joint oil fields could resolve regional tensions

It is common for oil and gas fields to be joint-owned by two or more countries, which often presents various challenges. There is a particular fervour over the need to focus on extracting from such fields, with international energy companies often invited to vie for generous extraction contracts.Iran shares 26 oil and gas fields with its neighbours yet, due to a lack of technological and financial investment over the past years, Iran has been unable to extract a competitive amount of oil from such fields. This has led to their exploitation by Iran’s neighbours. Studies show that around 20 per cent of Iran’s recognised oil reserves and 30 per cent of its natural gas reserves are in joint fields.

 

So far, Iran has only been able to procure from ten of these 26 fields. Despite an increase in productivity in these fields – most notably in the South Pars, in the Persian Gulf – the Rouhani Administration has failed to acquire the capital and foreign technology needed to compete with, let alone acquire an edge over, neighbours in terms of procurements.

 

The majority of Iran’s joint oil fields are located on the Iraqi border – Iran shares at least five oil fields with Iraq. Iraq, for its part, has a seven-year plan to increase oil production capacity and reach 1.2 million barrels per day (bpd). Its focus has been on those fields it shares with Iran and, in 2010, the Iraqi government invited Iran to invest in joint fields with the aim of increasing production and developing an equal production capacity.

 

However, Iran was unable to invest more in these joint fields due to a lack of financial resources. During the period in which heavy sanctions were placed on the Iranian energy sector, Iraq produced 295,000 bpd from joint fields with Iran, yet Iran was able to produce a mere 130,000 bpd in the same period. Iraq also managed to sign agreements with major international oil companies to increase its share from joint fields with Iran. Iraq revised oil contracts and added new conditions in order to attract oil companies, offering increased benefits in return for technological know-how and investment. Iraq’s new contracts are more attractive for oil companies, while the fields themselves are geologically favourable for procurement. Iraq has a program to increase oil production from joint areas shared with Iran.

Iran has no production capacity in its fields in the Caspian Sea, where it has two oil fields shared with Azerbaijan and Turkmenistan. Both countries plan to increase production from these fields and Iran will be not able to attract the foreign technology and capital needed to benefit due to US sanctions.

Qatar has also become a major exporter of liquefied natural gas, with a lot of investment in foreign technology and gas production focused on the South Pars. Given that the South Pars field has been Iran’s top priority, over the past five years Iran has at least succeeded in increasing procurement through investment here. In March 2017, Iran drew a competitive 250,000 bpd from the South Pars, with Qatar drawing 300,000 bpd over the same period.

Iran and Saudi Arabia share four oil and gas fields. By 2017, Iran’s oil production from the Forouzan oil field – also in the Persian Gulf – numbered between 38,000 to 40,000 bpd, while the Saudi side has far outstripped its rival with a production capacity of 400,000 bpd from this field. Similar imbalances are apparent in all shared fields in this area.

 

Joint oil and gas fields are important for all countries in the region, with all countries which share oil and gas fields with Iran gaining billions from their procurement. The US withdrawal from the JCPOA (Joint Comprehensive Plan of Action, more commonly known as the Iran nuclear deal) has motivated many regional rivals to accelerate their activities further. Since major foreign oil firms have abandoned Iran in response to the now-ineffective agreement, these firms have similarly sought activities elsewhere in the region. Unconfirmed reports so far state that around $6 billion worth of gas has thus been lost to competitors. Any delay in the development of joint fields will thus cause irreparable losses for the country. Experts warn that any delay in signing contracts for foreign investment will hinder the development of joint fields and will help the neighbouring states to plunder Iranian oil reserves.

 

Cooperation between Iran and neighbouring Arab countries in the development of plans for joint fields could provide the basis for increasing security and stability in the region. Moreover, foreign investments are important for Iran in recovering its oil and gas production capacities. Iran’s huge oil and gas reserves can play a key role in the world energy market yet, as expected, with the withdrawal of the United States from the nuclear agreement the Iranian energy industry faces yet more challenges in attracting foreign investment and technology. After the removal of sanctions, Iran plans to create conditions for attracting foreign investors by drafting new oil contracts. Iran has repeatedly stated that it needs $2 billion of foreign investment to revive its oil and gas production capacity.

 

Considering developments in the energy market and US sanctions, attracting foreign investment and technology to the Iranian energy industry will be tougher than ever. Achieving the goals of the country’s Sixth Development Plan and Twenty-Year Development Plan is possible only with foreign investment, which requires a reduction of political risk in the country. In the event of a reversal of fortunes in terms of foreign policy and the provision of other requirements for foreign companies, capital can be expected to pour in – particularly from Russian and Chinese companies.

 

A change of attitude in foreign policy and an attempt to eliminate tensions with neighbouring countries will be an important step towards attracting foreign investors. An increase in the oil and gas production capacities of the country is a short and mid-term priority for Iran’s Oil Ministry. Yet Iran must resolve political tension with its neighbours and also negotiate with the West to if these goals are to become workable.

Iran’s joint oil fields could resolve regional tensions

 

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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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