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Ekaterina Pokrovskaya

Ekaterina Pokrovskaya

Ekaterina is a journalist covering oil, gas, energy sector, business and investments with articles published in Oil and Gas Eurasia, The Moscow Times, Russia Beyond…

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Russia And Iran Sign Flurry Of Energy Deals, What’s Next?

Russia-Iran

As lifting of sanctions on Iran boosted the influx of Iranian crude into international oil markets, some analysts and industry experts reckon that Iran and Russia are likely to be forced to compete with each other for market share in European and Asian markets, especially in the wake of growing tensions between Russia and Europe. However, a number of developments in Moscow-Tehran relations, point to the countries’ pursuit of a collaboration strategy rather than direct competition in the oil and gas industry and in the energy sector on the whole.

After the former saw its sanctions removed, Iran and Russia have demonstrated a distinct effort in tightening their cooperation in energy, industrial and infrastructure projects and investment. In July 2016, Russia and Iran signed a new strategic five year plan that encompassed thirteen agreements that focused on energy, construction and trade. It appears as if Russia has been given a priority position for investment: a $1 billion offshore rig contract was awarded to a Russian firm; 1 billion Euros of a total 2.2 billion Euro loan plan will be allocated by Russia towards construction of a power plant in Iran, and the construction of a new transport rail system called the North-South Transport Corridor (N.S.T.C.) connecting India, Iran and Russia via Azerbaijan is also to be co-financed by Russia.

Russia is also a preferred partner in helping Iran with expanding Iran’s nuclear power generation capacity.

To be able to increase its oil output significantly, Iran needs to replace its outdated oil equipment and infrastructure, which requires large foreign investments worth billions of U.S. dollars. A big chunk of investments is expected to come from developing fifty Iranian greenfield and brownfield oil and gas projects offered to international bidders under production-sharing agreements as described by the Iran Petroleum Contract; whereas the results of the bidding are expected to be announced in the beginning of December. Among Russian companies participating in the biddings are LUKoil, GazpromNeft, Gazprom International, Zarubezhneft and Tatneft.

Lukoil and Gazprom have already been shortlisted for a number of projects in Iran’s oil and gas industry.

Lukoil has completed the technical evaluation of the fields Ab Teymour and Mansouri, and as Lukoil’s President Vagit Alekperov discussed the development of the two oilfields in meetings with Oil Minister Bijan Namdar Zanganeh and NIOC Managing Director Ali Kardor during his visit to Iran in September, he announced to the media that a study on the type of investment is now underway.

While confirming studies on new model of Iranian oil contracts, he also pointed out that contractual exigencies for extent and volume of oil fields to be developed were at the stage of being elaborated.

"We are in active dialogue. We have an agreement, in terms of which we are working on exploration of the Persian Gulf shelf and a number of provinces," stated the President

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Russia’s leading gas company Gazprom and its oil industry offshoot – GazpromNeft – are also at the stage of working out several agreements on developing Iran’s oil and gas projects. When Russian ambassador to Tehran Levon Dzhagaryan visited Tehran in August, he confirmed the same.

“Memorandums between Gazprom and the National Iranian Oil Company, as well as between GazpromNeft and the National Iranian Oil Company on the development of oil and gas fields are at the stage of being agreed,” ambassador was quoted telling the press.

Earlier this year Gazprom submitted a formal request to become a partner of the NIOC in the construction of the country’s first natural gas liquefaction plant.

Russian Energy Minister Alexander Novak also announced earlier this year that Russia was considering building a gas liquefaction plant in Iran’s south. According to the plan, the plant would process LNG which is to be exported to Southeast Asian markets in exchange for Russia’s natural gas supply to northern Iran via an Azerbaijani pipeline, which will help to reduce Iran’s gas transportation costs from the south to the north.

Zarubezhneft, another Russian state-owned oil holding company, signed a deal with the NIOC in July to conduct a study on two oilfields that Iran shares with neighboring Iraq – West Paydar and Aban, – and come up with a proposal to increase the fields’ recovery rate. In October 2015, Russia’s Energy Minister Alexander Novak announced that Zarubezhneft “would take up several projects worth a total of $6 bln in Iran’s oil industry”, as TASS reported.

One other distinct indicator of Russia’s growing investment in Iran’s oil and gas technological advancement was a $1 U.S. billion offshore platform construction project signed in August. According to the project, Russian shipbuilding company Krasnik Barrikady and Iranian company TODC will construct five platforms in the Persian Gulf off the very south-west coast of Iran for exploration of its offshore oil and gas fields. The project is an example of the gradual transfer of offshore technology to Iran over the course of a few years, as a number of media sources reported.

Iran and Russia’s progress in cooperation on electric power generation is also expected to intensify in the near future, as both Iran and Russia seek to synchronize their electricity systems via Azerbaijan.

Technopromexport, a subsidiary of Russian state hi-tech corporation Rostec and the Iranian Energy Ministry concluded an agreement on construction of two electric power plants with a total capacity of over 2,000 MW, worth over $3 billion, as TASS reported.

The project will be financed with a 1.2 billion Euro loan from by Russia for a period of 5 years at a soft annual interest rate of 2.77 percent. Overall, in August Russia pledged 2.2 billion euros in loans to Iran with regards to energy infrastructure and other industrial projects.

As Iran’s national renewable energy agenda includes an ambitious goal of reaching 5,000 MW of renewable power generation by 2025, Russia and Iran again stand to benefit each other. In December 2015, Russia signed a contract with Iran to build two more reactors at the Bushehr-2 power plant in southern Iran, granting a state credit of $5 billion to boost the mutual cooperation in peaceful nuclear power generation sector, as a number of sources reported.

During the Tehran-Moscow-Baku meeting in Azerbaijan Russian President Vladimir Putin emphasized Russia’s commitment to Iran’s power generation program to the media: “We are going to help our Iranian partners further in carrying out their nuclear program action plan, which will include working with enriched uranium and producing stable isotopes.”

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While Iran has plenty of opportunities in energy, getting the necessary financing for these opportunities remains a challenge. The reputational risks and difficult compliance procedures stemming from the U.S. trade embargo on Iran, complicate Iran’s access to loans and slow trade expansion. The international compliance procedures prohibit any western business on entering into a transaction with an entity that has an affiliation with the Islamic Revolutionary Guard Corporations, whereas these entities account for a third of the country’s GDP and still control a major part of the country’s oil and gas industry, according to the KPMG report.

Given the complications with Iranian bi-lateral trade mechanisms carried out in U.S. dollars, Moscow and Tehran announced an initiative to create a single joint banking mechanism through opening a joint Russian Iranian bank, top Iranian official Bahram Amirahmadiyan of the Russia-Iran Friendship Society confirmed to the press in September.

Prior to and with the removal of sanctions on Iran, Russia has demonstrated some commitment to joint plans in energy sector. Even in the face of strong Western opposition and sanctions, Russia managed to help Iran complete the launch of Bushehr-1 1000 MW reactor in 2010. Gazprom never left Iran despite the push of sanctions and it continued to operate in the giant South Pars gas field in the Persian Gulf throughout the sanctions period. During OPEC and Russia’s meeting on stabilizing oil prices in Algiers, Moscow advocated Tehran’s stance on being exempt from an output cut, allowing it to reach its pre-sanctions production output of 4 mln barrels a day. Will the world continue to see further convergence in energy as well as well as improving military ties between Russia and Iran? Time will tell, as the actual implementation of the launched and prospective initiatives could take years, although the history of Russian-Iranian relations and their geopolitical interests suggest the way is forward, not back.

By Ekaterina Pokrovskaya for Oiprice.com

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