A principal strategy being used by Iran to pressure the U.S. into dropping the conditions required for a new iteration of the Joint Comprehensive Plan of Action (JCPOA) to be agreed upon is to position itself as a huge reservoir of oil (and gas) that can be used to bring global oil prices down and alleviate the economic hardships that these are causing. Given the inability of OPEC member states, and Russia, to materially increase their production of crude oil, Iran has announced a huge expansion of another of its supergiant oil reservoirs, Azadegan, which is split into two main fields – North and South. Aside from placing added pressure on the U.S. to meaningfully re-engage in the JCPOA re-negotiation process, Iran’s dramatic expansion program across a range of oil fields has another added benefit for Tehran. This is that the fields in which such expansions are taking place are all shared with Iraq – unlike Iran and its sponsor, Russia, not subject to any sanctions – meaning that they can be part of the process of obfuscating provenance and transit routes that have allowed Iran to circumvent sanctions for over 40 years.
Iran’s idea of positioning itself in the rather unlikely role of white knight in the current toxic mix of the oil pricing matrix has the unusual advantage in the Middle Eastern oil industry of being well-founded in fact. Iran remains a great oil power, with a conservatively estimated 157 billion barrels of proven crude oil reserves, nearly 10 percent of the world’s total and 13 percent of those held by OPEC. As great as its oil reserves are, its gas reserves are even greater, with Iran having estimated proven natural gas reserves of 1,193 trillion cubic feet (Tcf), second only to Russia - 17 percent of the world’s total and more than one-third of OPEC’s. Additionally, Iran has a high success rate of natural gas exploration, in terms of wildcat drilling, which is estimated at around 75-80 percent, compared to the world average success rate of 30-35 percent.
Of these enormous hydrocarbons’ riches, Azadegan is one of the prime reservoirs in the hugely oil-rich region of West Karoun – the other most notable ones lying in Yaran (also split into North and South fields), and Yadavaran. Not only is the lifting cost of crude oil in the West Karoun fields on a par with those in Saudi Arabia’s best fields – and the lowest in the world, at around US$1-2 per barrel - but also for every one percent that the rate of recovery from the West Karoun fields is increased the recoverable reserves increase by 670 million barrels, according to a senior oil source who works closely with Iran’s Petroleum Ministry spoken to exclusively by OilPrice.com. At an average Brent oil price of just US$70 per barrel – around where the oil price was before the smart money began to buy ahead of Russia’s invasion of Ukraine - this equates to just under US$47 billion in additional revenues for Iran.
The supergiant Azadegan site was Iran’s biggest oil find since the late 1960s, with total estimated reserves of around 42 billion barrels of oil, of which around seven billion barrels are deemed recoverable. In broad terms, prior to the U.S.’s unilateral withdrawal from the JCPOA in May 2018, Iran had planned to increase production from the West Karoun fields to at least 530,000 barrels per day (bpd) by the end of the Iranian calendar year that ended on 20 March 2018. This was to have been achieved by a relatively modest increase in the rate of recovery at the sites, which then stood at around five to six percent but which has now drifted down to around three to four percent.
After the U.S. withdrawal from the JCPOA, however, considerable pressure was brought to bear on international oil companies that had already signed memoranda of understanding (MOUs) on key sites in West Karoun, with a prime example being a mooted deal for France’s then-Total to develop South Azadegan. “The idea was that it [Iran’s Petroleum Ministry] would announce the [supergiant] South Pars 11 [gas field] deal that [then-]Total had agreed and then, after three or four months of coverage showing that the Petroleum Ministry had been in talks with a range of other companies for the site but these hadn’t worked out, the deal with Total would have been announced,” the Iran source told OilPrice.com. “However, the U.S. Treasury made it clear that anyone involved in such deals with Iran after [Washington] had pulled out of the JCPOA would be subject to intense U.S. scrutiny,” the source added.
For some time between May 2018, when the U.S. withdrew from the JCPOA, and now, China and Russia quietly took part in the development of various of Iran’s oil and gas fields, as a part of the wide-ranging 25-year ‘Iran-China’ deal (in which Russia was designated a role by Beijing), first broken anywhere and in full by this author in September 2019, and analyzed in-depth in my new book on the global oil markets. “Neither China nor Russia wanted to openly flout the U.S. over Iran, especially with [former U.S. President, Donald Trump] in the Oval Office but things have changed now, with [U.S. President, Joe] Biden in place and Russia’s invasion of Ukraine, which China is closely watching with an eye to its own strategy in the next few months in Taiwan,” said the Iran source.
One of the shorter-term benefits that will continue to accrue for Iran (and Russia and China) from Tehran’s push to develop its shared oil fields with Iraq is the scope and scale that these shared fields offer for obfuscating the origin of crude oil being moved from unsanctioned Iraq, as also analyzed in-depth in the new book. “It is impossible, literally, to distinguish Iraqi oil from Iranian oil in the shared oil fields, with the oil on the Iraqi side of the border being drilled from the same reservoirs as the oil being drilled on the Iranian side, and sometimes through long-distance horizontal directional drilling,” said the Iran source. “Even if the Americans or their trusted appointees stationed people at every single rig in every single shared field in Iraq, they would not be able to tell if the oil coming out it was from the Iraq side,” he added.
Once this ‘re-labelling’ has been done, then it is easy enough for Iran to move this rebranded oil to wherever Iraqi oil can go, which is anywhere. The bulk of this can be done through Iraq’s existing crude oil export infrastructure, including very large crude carriers loaded in and around the southern export hub of Basra. It can also be done directly into southern Europe via the Turkish port of Ceyhan through the crude oil pipelines running through the semi-autonomous Iraq region of Kurdistan, although these have been subject to ongoing disruptions for years, and there are also plans for further pipelines from Iraq to Jordan and Syria.
For Asian-bound shipments, vessels can simply flick off the Automatic Identification System switch that allows for tracking and identification of ships, and vessels can also move to waters in Malaysia’s jurisdiction (and to a lesser degree Indonesia’s) and then forward oil exports to China, with tankers bound ultimately for that country engaging in at-sea or just-outside-port transfers of Iranian oil onto tankers flying other flags. In December 2018 at the Doha Forum, Iran’s Foreign Minister, Mohammad Zarif, stated that: ‘If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions.’ Towards the end of 2020, Iran’s then-Petroleum Minister himself, Bijan Zangeneh, added a little detail to one such tried-and-trusted method: ‘What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.’
For Azadegan, then, the plan announced by Petroleum Minister, Javad Owji, in the last few days is for an investment to be made of nearly US$7 billion to increase crude oil production up from the current 190,000 bpd to 220,000 bpd in the second year of the development program and then up to 570,000 bpd within the next seven years. This development work will be done by various as-yet-unspecified exploration and production companies from as-yet-unspecified countries, with investment also to come from them and from the National Iranian Oil Company (NIOC), said Owji. “During the 20-year operation period of Azadegan field, if we consider the base price of oil per barrel to be 80 dollars [per barrel], it will generate more than US$115 billion in revenue and income for the country and create employment for 24,000 people,” he concluded.
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By Simon Watkins for Oilprice.com
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