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Global Risk Insights

Global Risk Insights

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2014 May Be A Crucial Year For Iranian Oil

2014 May Be A Crucial Year For Iranian Oil

Caspian Summit

On September 29, representatives from the five Caspian littoral states (Azerbaijan, Iran, Kazakhstan, Russia, and Turkmenistan) convened in Astrakhan, Russia for a fourth round of negotiations on the legal status of the Caspian Sea. An agreement among the states will prove highly beneficial to Iran and, if a deal is reached in talks on the Iranian nuclear program between Tehran and the P5 + 1 group, may lead to a reversal of the decline in the Iranian oil and gas industry.

The age of Iran’s oil industry means that some of the country’s oil fields are maturing and production rates are declining. Current estimates put the rate of decline in Iranian oil production at 500,000 barrels per day every year. To boost output in the short term, Iran’s national oil company, the NIOC, needs to employ enhanced oil recovery techniques, including reinjection of natural gas into oil fields.

The NIOC, however, has not shown itself capable of mustering the expertise and technology needed to develop these fields. Moreover, sanctions prevent Iran from accessing the financial capital necessary to shoulder the billions of dollars of required investment. International oil companies are prohibited by sanctions from partnering with Iran to increase output levels.

Related: World’s Most Expensive Oil Project Just Got More Costly

Sanctions have also hampered development of the resources that lie under the waters of the Caspian Sea, just to the north of Iran, though they are not the only obstacle. The legal status of Caspian Sea resources has been in dispute since the end of the Soviet Union.

In a series of treaties signed in 1921, 1935, and 1940, Iran and the Soviet Union agreed to divide the resources of the Caspian Sea between them. The status of these treaties was put in limbo by the collapse of the Soviet Union and the appearance on the Caspian of 4 new littoral states: Azerbaijan, Russia, Kazakhstan, and Turkmenistan.

At the Almaty Conference in December 1991, the Soviet successor states agreed to uphold the commitments and treaties of the former USSR. For Iran, this means that its treaties with the defunct USSR should be the basis for any new agreements on the status of Caspian resources, and that the Caspian Sea should be governed by the principle of “condominium”, meaning that all resources in the Caspian Sea would be jointly owned and managed by all of the 5 countries that border it.

The other 4 littoral states disagree, and instead prefer that sections of the Caspian Sea are accorded to each country based on its relative proportion of the Caspian coastline, and sections are configured such that no oil resources being developed by one country are shared with another. Under this arrangement, the distribution would be as follows: Kazakhstan, 28.4%; Azerbaijan, 21%; Russia, 19%; Turkmenistan, 18%; and Iran, 13.6% – in this arrangement, Iran is the loser.

Iran has countered that, in the absence of an agreement on communal use of the sea and its resources, the only equitable solution is to divide the Caspian into five equal sections (20% for each country). It has also stated that no country should develop Caspian resources until a resolution on the status of the Caspian has been agreed to by all members, and that interim bilateral agreements concluded between Kazakhstan, Russia, and Azerbaijan to allow development of subsurface resources in the short term are illegitimate.

These are not idle words, though Iran has not taken any action against the production occurring northern Caspian. On July 23, 2001 two Iranian fighter jets and a gunboat intercepted a BP Amoco exploratory ship from Azerbaijan that was exploring an oil field disputed by Iran and Azerbaijan, and forced it to return to Baku.

Related: Caspian Sea Could Be Key To Russian Control Of Eurasian Energy Markets

Until recently, Iran had an incentive to delay reaching a consensus with the other states on the use of the Caspian Sea. By threatening to disrupt exploration until the status was settled, Iran could deter investors from initiating projects in the region and impede competitors’ petroleum products from reaching the market. In addition, no sizeable discoveries had been made in Iran’s portion of the Caspian Sea that would spur it to reach a settlement that would allow for development.

The situation, however, has changed.

In April and May of 2012, Iran’s state news agency announced the discovery of two oilfields in the Iranian section. These oilfields also provide the potential for a significant amount of gas resources as well, and may convince Tehran that it has a vested interest in resolving the Caspian dispute, not least because they are closer to Iran’s population centers and it is less costly than transporting oil and gas from southern Iran all the way to the north.

Of course, once the dispute is resolved, Iran will still have to grapple with the sanctions that have stunted investment in its maturing fields and natural gas sector. Progress on that front has been slow, but there is growing optimism that 2014 will be a pivotal year for the long-term viability of Iran’s petroleum industry.

By Leroy Terrelonge III

(Source: www.globalriskinsights.com )

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