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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia Capitalizes On America’s Thinly Stretched Middle East Focus

A sliver of news from Iraq passed almost unnoticed by global media last week: Stroytransgaz has signed a preliminary contract with the oil ministry in Baghdad for oil and gas exploration in Anbar province. The fact that it was barely reported is entirely unsurprising as Stroytransgaz is an almost unknown Russian oil and gas company - except by the U.S. whose Office of Foreign Assets Control extensively sanctioned it in 2014 - and Anbar is almost a wasteland as far as Iraq’s oil and gas sector development goes. However, this tiny announcement is a manifestation of Russia’s key strategy – alongside China – to hijack much of the Middle East whilst U.S. attention is still diverted on Iran.

In terms purely of its oil and gas potential, Block 17 would not be anywhere near the top of anyone’s list of desirable development prospects, with preliminary studies having shown that it has at most 4 billion barrels of oil equivalent of gas, or may be 2 billion, or may be a lot less than that – no one knows for sure. Additionally, any gas (or oil) that there may be in the block is spread somewhere over 12,000 square kilometres of barren rocky land or desert. Worse still is that this generally lawless wasteland is punctuated by perennially quarrelsome and warring tribal communities, who even Islamic State avoided where possible or recruited as frontline operatives to cause chaos to U.S. troops in and around Ramadi, Haditha, and Falluja.

So, what on earth is going on? “You need to look at where it is – right in the middle of nowhere anyone would want to go, especially the Americans – but right in the centre of it is what the U.S. military used to call ‘the spine’ of Islamic State where the Euphrates flows westwards into Syria and eastwards into the Persian Gulf, extremely close to the border with Iran,” a senior source who works closely with Iran’s Petroleum Ministry told OilPrice.com. “Along the spine running from east to west are the historical ultra-nationalist and ultra-anti-West cities of Falluja, Ramadi, Hit and Haditha, and then we’re into Syria, and a short hop to the key strategic ports of Syria – Banias and Tartus that also happen to be extremely important to the Russians,” he added. “So, what you’re looking at there is the absolute clear sign that the Iran-Iraq-Syria oil and gas pipelines system is now going ahead, which it is, it was agreed last July just after the U.S. pulled out of the JCPOA [Joint Comprehensive Plan of Action],” he underlined. Related: Is A Full-Blown War In The Persian Gulf Inevitable?

The motivation for Iran is that Iran had it reconfirmed last May that it cannot trust the U.S., given the apparent capriciousness of its political figures. “Iran didn’t truly believe that any new [U.S.] president would revoke all of the work done by a previous one on the JCPOA, no matter what the personal animosity involved, until it happened but when it did it decided it wasn’t going to take any more chances, hence the new route, which will by-pass the Strait of Hormuz, and can run straight into southern Europe, or anywhere else for that matter,” the source told OilPrice.com.

A similar motivation pertains to Iraq allowing the pipeline to go through it. Not only is this distrust a product of the two invasions by the U.S. in 1991 and 2003, and subsequent occupation, which Iraq sees simply as opportunism designed to gain control of its oil and gas resources, but it is also a reflection of the uncertainty over how the U.S. intends to handle the Kurds in northern Iraq. “It’s well known that the U.S. promised the government of [the semi-autonomous region of] Kurdistan complete independence in exchange for its Peshmerga army acting as the West’s boots on the ground in the fight against Islamic State and the government in Baghdad is terrified of that, particularly given that over 90 per cent of those Kurds voted for Kurdistan independence from Iraq in September 2017,” said the Iran source. “Iraq knows a deal is coming between Iran and the U.S., and it’s okay with that as it needs ExxonMobil to build the critical CSSP [Common Seawater Supply Project], but [Moqtada] al-Sadr, who’s actually in control [in Iraq] won’t allow the U.S. much more past that,” he added. Indeed, al-Sadr gained effective power in Iraq through his message that Iraq should not be beholden to any single country in the future, as it has in the past.

For Russia, things could not be working out better. With the U.S. having ostracised itself from both Iran and Iraq, both through the occupation of Iraq and the sanctions on Iran, and whose confused policy towards Syria led to almost complete withdrawal earlier this year, the way has been clear for the Kremlin to make merry, and make merry it has. Not only has it effectively made Iran a joint client state with China, carving up its oil and gas resources, but, given Iran’s enduring hold over Iraq, it has got a two-for-one deal on an epic scale. With Rosneft having effectively taken control of Kurdistan in the north through the deal done in November 2017, it has put itself in perfect position to similarly establish control over the south by building out its oil and gas infrastructure and transport structure (exactly how Rosneft started in Kurdistan): cue Stroytransgaz.

By all accounts, Stroytransgaz is not very good at all in oil and gas development terms but it is very good indeed in terms of building oil and gas infrastructure including, notably, pipelines. In its own company description, it says: “Stroytransgaz is one of the largest Russian contractors offering a full range of construction and engineering services in the field of construction of facilities of the power, oil and gas and petrochemical industries, transport and civil infrastructure.” In fact, it acts as a spearhead company for Russia into which the bigger oil and gas firms can then appear – Stroytransgaz’s ‘customers’ include number one Russian oil giant Rosneft and number one Russian gas giant Gazprom – and carry out the Kremlin’s usual mix of geopolitical power exerted through economic dominance, especially through the oil and gas sector.   Related: Saudis Scramble To Restore 1/3 Of Disrupted Oil Production Today

Crucially in this context, it was Stroytransgaz that won US$$2.7 billion of contracts in 2006/7 to build two major pipelines and a gas processing plant in Syria. One of these was to have been the Iran-Iraq-Syria pipeline, moving Iranian, and later Iraqi, gas (and later oil) from South Pars (and nearby oil fields) to Syria. This was a cornerstone to the wider build-out of several planned refineries that had received the go-ahead prior to the breakout of the civil war in Syria. It included the 100,000 bpd facility at Abu Khashab backed by the China National Petroleum Corporation, and the South Central Gas Area - built by Stroytransgaz – that had started up by the end of 2009 and had boosted Syria’s natural gas production by about 40% by 2011. At that time, with proved reserves of 8.5 trillion cubic feet of natural gas and 2.5 billion barrels of oil, Syria was producing just over 316 billion cubic feet per day of dry natural gas and nearly 600,000 bpd of oil.

The precision with which all of these plans inexorably morph into a sustainable positive feedback loop is from an intellectual standpoint a thing of rare beauty. Specifically, income from all of these ‘occupied’ countries’ oil and gas resources – because Russia’s intention is to strike deals with Iraq and Syria that are at least as good as that which it struck with Iran – will be used to finance the build-out of its own political and military belt of influence running through them and into the Mediterranean and Europe. The belt works in the other direction as well feeding into the former Soviet Union state of Turkmenistan, plus Afghanistan and Pakistan. In preparation for this move into southern Iraq, Russia already had its other pieces in position: Rosneft in Kurdistan in the north, the deal with Iran in the East, and an absolute power in Syria.

This power, in turn, is neatly concentrated in the two major ports to which Iranian oil and gas (and Iraq’s and Syria’s oil and gas) will end up: Banias and Tartus. In January 2017, Russia signed a deal with Syria that allowed Russia to expand and use the naval facility at Tartus for 49 years on a free-of-charge basis and enjoy sovereign jurisdiction over the base. The deal allows Russia to keep both warships and nuclear vessels in Tartus, plus essentially anything else it wants, as the deal stipulates that at the base all personnel and material is under Russian jurisdiction not Syrian.

By happy ‘coincidence’ both Banias and Tartus are also extremely close to the massive Russian Khmeimim Air Base and the S-400 Triumf missile system. Although the base only came in to operation in 2015 supposedly to help in the fight against Islamic State, Russia appears to have changed its tactical plans for it, having also signed a 49 year lease on it, with the option for another 25 year extension. A short flight away is Russia’s Latakia intelligence-gathering listening station.

By Simon Watkins for Oilprice.com

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  • Robert Berke on September 17 2019 said:
    An excellent, thorough, compact and well researched article that shows Russia carefully stringing together piece that are becoming stepping stones towards dominating the entire ME region. In a well written discussion, the author also contrasts Russia patient and careful planning and executive with the US muddled and often contradictory policies for the region.
  • Hugh Williams on September 17 2019 said:
    The article is well researched and well written. It does, however contain some serious errors. One is that Syria had a civil war. The war was a regime change war financed, armed, and staffed by foreigners with the US and NATO member Turkey leading the pack of terrorist managers.
    Russia helped Syria fight off the foreigners and is trusted by Syria. If this trust continues Russia and China will continue to gain influence in Syria and in the rest of the world Island which will drive the followers in the Pentagon and the CIA of Halford Mackinder up a high wall.
  • Phil Mirzoev on September 18 2019 said:
    Russia should be really careful in Iraq, taking into account that that country is American suzerain in the full sense of that word.
    The US can just knock Russia out of Iraq at the click of the button. Actually, even the so-called* Western allies, like France, are afraid of doing business in or with Iraq in some sectors without some kind of a hint of the US OK on that because of possible economic retaliation.
    Iran - that's a different story. Iran, unlike Iraq, is a sovereign country.


    *"So-called" because in the 21st century those allies arguably suffer and get more coercive economic pressure from the US than many non-allied countries)

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