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The Two Global Powers Controlling Iran’s Oil Sector

Aside from becoming the number one petrochemicals powerhouse in the Middle East within the next three years, Iran’s priorities in the current U.S. sanctions environment is to increase its production of gas, particularly from the South Pars field, and of oil, particularly from the West Karoun fields. In both cases, this is partly because of the sheer opportunity available in the resources but partly as well because Iran can use the fact that many of these reservoirs are shared with Iraq to operate largely unfettered by such sanctions.

The last major foreign development firms that remain in Iran, principally from China and Russia, in the meantime, are equally keen to obfuscate the extent of their presence in Iran not just by engaging in these shared reservoirs in preference to standalone fields but also by operating where they can as just straightforward ‘contractors’, rather than fully-fledged field developers.

There are two key reasons for these operations being done more in the shadows than in the limelight. First, is the desire to take a break from the consciousness of the Iranian public following the revelations – broken exclusively first in OilPrice.com in the past few months - of the terrible deals for Iran that have been made with those countries.

In Russia’s case, two such deals are the most notable and stand alongside the earliest deals of Saudi Arabia with the West’s ‘Seven Sisters’ oil firms as being the worst deals ever made in the history of the oil business, as analysed in great depth in my new book on the oil markets.

The first was done when it was clear that the U.S. was considering unilaterally pulling out of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in May 2018. At that point, Moscow offered Iran US$50 billion every year for at least five years that would cover all of Iran’s estimated US$150 billion of costs to bring all of its key oil and gas fields up to Western standard, with US$100 billion left over for the build-out of other key sectors of its economy. Related: Why 2020 Could Be A Record Year For Oil Trading Giants

Russia also pledged to veto all attempts in the United Nations Security Council (UNSC) to have sanctions against Iran increased or to have the terms of the original nuclear deal re-drawn to include further sanctionable actions such as missile testing or not allowing snap inspections of all military facilities.

In exchange for this, over and above the added military co-operation (including further listening stations, and Iran’s purchase of a dated missile system for brand new pricing), Russia was given basically carte blanche over key Iranian oil and gas fields. This included the final say on how much oil was produced from each field, when and to whom it was sold, and for how much.

Russia also had the right to be able to buy all of the oil being produced from fields that their companies were supposedly developing at 55-72 percent of its open market value for the next 10 years. As it was, Russia instead turned around and swindled Iran out of trillions of dollars of revenues from its Caspian assets – the second terrible deal for Iran - and did not support it at all in the UN.

China, in the meantime, was also busy negotiating its own similar deals on other fields in Iran – Russia and China, unsurprisingly, work very close together on foreign hydrocarbons and other interests – securing various knock-down pricing on South Pars phases and various oil fields.

For China, the aim was not just to secure access to a huge oil and gas energy reservoir relatively close by but also to advance the middle section of its multi-generational ‘One Belt, One Road’ initiative. Given Iran’s enduring political, economic, and military hold over neighbouring Iraq, by cementing its position in Tehran China tangentially does the same in Baghdad, of course.

Following the revelation of these deals, Russia and China took a back step in order to assuage public antagonism to the selling out of Iran amongst the indigenous population but also to try to fly under the radar of the anger-scattergun approach of the U.S. to anything pertaining to Iran since May 2018.

This has been achievable partly through using their operations in neighbouring Iraq (both north and south) to move Iran oil and gas out of the country by rebranding it as Iraqi oil and gas, a practice that was perfected during the last period when global sanctions were increased in 2011/12. Partly as well this has been done through avoiding acting as the chief exploration and development firm for oil and gas fields in Iran, according to a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry.

“The big Russian and Chinese oil and gas firms that are actually involved have taken cover behind much smaller firms with specific contracts, such as for drilling only, or for field maintenance only, or for parts replacement only and so on and so on, that are either not disclosed or that attract no publicity” he told OilPrice.com last week.

“For example, let’s say that a big state-owned Chinese hydrocarbons company wants to continue as the main developer of a particular oil or gas field in Iran without attracting any negative attention from either the Iranian public or the U.S. State Department – all it does is get a plausible-sounding Iranian development firm to take over the exploration and development contract in name on a field and then the Iran firm quietly awards a number of very dull-sound and specific contracts to a number of firms virtually no one has heard of – all in fact, controlled by the big Chinese firm - and China is back in business as the de facto developer, and that’s it, and it’s the same thing with Russia,” he underlined. Related: US Oil Exports Could Explode After Once In A Lifetime Power Shift In China

Quite coincidentally, of course, progress on a number of phases in the South Pars gas field and on a number of fields in the West Karoun reservoirs cluster has been going very well even despite the apparent pull back of Chinese and Russian firms in Iran in recent weeks.

In the case of the former, the third platform of Phase 14 is now fully set up, under the nominal control of Iran’s Pars Oil and Gas Company, with the fourth being in the final phase of construction and likely to be fully installed by the end of the current Iranian calendar year (ending on 20 March). In the meantime, Platform 14B has started production in earnest, and is anticipated to produce at least 14.2 million cubic metres per day (mcm/d) of gas from Phase 14 of the supergiant non-associated gas field that is shared by Iran and Qatar in Persian Gulf waters within the next six months.

From Platforms A and B, Iran expects to produce at least 28 mcm/d of gas plus 20,000 barrels per day (bpd) of gas condensate and 100 tons per day of sulphur (for petrochemicals use in large part), plus varying quantities of liquefied petroleum gas and ethane per year. Another 28 mcm/d of gas is expected to come from Platforms C and D when they are fully operational, totalling at least 56 mcm/d for Phase 14 as a whole.

On the oil side, the Iranian (nominally) operator firm of the Azar oil field - Petroleum Engineering and Development Company (PEDEC) – said just recently that several sections of the central processing unit of the project were about to start early production, bringing the field’s output to the original (pre-U.S. JCPOA withdrawal) target of 65,000 bpd.

Located in Mehran, on the border with Iraq and shared with its Badra field, the Azar field’s 65,000 bpd target is just the Phase 1 objective, although making further progress on it will be no easy task, as it is regarded as being the most challenging of all the principal prospects in the Anaran bloc – which also includes Changuleh and Dehloran - due to its surface stony ground and condensed reservoir rock.

However, Chinese money, equipment, and personnel are being funnelled into this project as it is an important field for Iran because it is shared. Therefore, output can be shielded from the watchful gaze of the U.S. via rebranding as Iraqi and, for China, it was part of a deal agreed way back in 2016 to develop a swathe of Iran fields as part of its overall Iran development plan.

Although the next phase of Azar’s development is not insignificant in itself – 100,000 bpd – the immediate development package includes the Changuleh and Dehloran fields, in which Russian companies will also be involved, albeit playing second fiddle to China’s, according to the Iran source.

“From that point, by which time there may have been a change in U.S. president or at least a weakening of Trump’s position in the Senate, China will gradually re-embark on its bigger developments firstly in South Pars Phase 11, then South Azadegan, North Azadegan, and then North and South Yaran,” he said. “By that point as well, the railway infrastructure build-out – which will bring a lot of jobs and money to Iranians – will have begun properly, starting with the first phase construction of the Tehran-Qom-Isfahan high-speed train line,” he added.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on February 02 2020 said:
    Iran is probably the most important regional power in the Gulf region and therefore no foreign power can control its oil sector whether it is the United States, Russia or China.

    However, facing the most intrusive US sanctions, Iran might have knowingly signed some oil and gas deals with Russia and China which are less favourable to it because strategically the two countries are counterweight to the United States and capable of ignoring US sanctions against it.

    That is why Russia has a barter trade agreement with Iran under which it buys Iranian crude oil and sells it around the world as its own and provides Iran in return with manufactured good including weaponry.

    China on the other hand is not only the largest buyer of Iranian crude accounting for 31% or 659,000 barrels a day (b/d) of Iranian oil exports but is also preparing itself to embark on its bigger developments in gas and oil firstly in South Pars Phase 11, then South Azadegan, North Azadegan, and then North and South Yaran oilfields.

    Moreover, China considers both Iran and Iraq strategically important not only because of their huge oil and gas reserves that keep the Chinese economy growing but also because they are crucial elements of its Belt and Road Initiative.

    Strategically, both Russia and China know that the days of US military presence in Iraq and the Middle East are numbered and they are readying themselves to fill the political vacuum created by US withdrawal.

    Furthermore, Russia and China currently control Venezuela’s oil sector and keep the Venezuelan economy afloat in the face of US sanctions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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