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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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.

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