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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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Iran’s Geopolitical Powerplay Continues With Iraqi Oil Deals

It was no coincidence that just over a month after staunch U.S. ally-Israel and the United Arab Emirates declared that they would normalise relations and Israel and Bahrain did the same, Iran’s own neo-client state, Iraq, began to announce various relationship-enhancing deals centred on electricity and fuel oil. The geopolitical intentions of Iran and its key sponsor, China behind these Iraq deals are obvious when factoring in that Iraq itself is so desperately short of electricity and other power options that it still suffers from extreme power shortages that have repeatedly resulted in violent and deadly protests across the country. The chronic shortage of electricity and any fuel for power in Iraq is so bad that it is one of the worst offenders in the world for burning valuable crude oil to generate power and is why it is granted specific waivers from the U.S. to continue to import electricity and gas from the otherwise-sanctioned Iran. In line with Iran’s (and China’s) geopolitical strategy for the Middle East, Iraq last week announced Lebanon is set to receive 500,000 tonnes of fuel oil from it this year for power generation. Iraq also announced that last week saw the renewal of a similarly-themed deal with Jordan as well.

The theme is the build-out of the Shia crescent of power, with Iran at its geographic centre and China at its political one, backed up by Russian on-the-ground force when and where required, a process that has been expedited following the dramatic downscaling of U.S. military presence across the Middle East and West Asia during the presidential tenure of Donald Trump. With Iran already either directly (through its foreign intelligence and military organisations) or indirectly (through its proxy paramilitary groups) highly active in the Shia crescent areas of Syria, Yemen, Iraq, and Lebanon – softer pressure is being added by financing deals on offer from China (or Russia) for states teetering on the margins of this alliance that are struggling economically from the after-effects of two oil price wars in less than five years and the demand destruction effect of the COVID-19 pandemic or from general economic mismanagement. These include, from the Russian side, Azerbaijan (75 per cent Shia and a Former Soviet Union State) and Turkey (25 per cent Shia and furious at not being accepted fully into the European Union), although others remained longer-term targets, including Bahrain (75 per cent Shia), and Pakistan (up to 25 Shia and a home to sworn-U.S. enemies Al Qaeda and the Taliban). From the Chinese side, these include any country on or adjoining its land or maritime routes in its ‘One Belt, One Road’ (OBOR) program, notably in the Middle East, Oman and Jordan. The build-out of a power network across the Middle East, focused on deals with Iraq – still regarded as being a possible ally by the U.S. and thus tolerated by it – perfectly aligns with this plan for this planned expansion of power. Related: Rosneft Stake Becomes Headache For Oil Major BP

On the face of it the Jordan deal might appear innocuous enough, with the formal announcement of the extension of a previous contract that had lapsed at the end of December for Jordan to import crude oil from Iraq. Jordan’s Energy Minister, Hala Zawati, stated in July of last year that the Kingdom would resume imports of at least 10,000 barrels per day (bpd) of Iraq crude oil via tankers at a discount of US$16 to the Brent price, reflecting transport costs and quality differential. These supplies came from Baiji in Iraq direct to the Jordan Petroleum Refinery Company (JPRC), constituting around seven per cent of Jordan’s daily demand. The original deal that had been struck in 2006 mandated a discount to Brent of US$18 pb, on the basis that Jordan bore the transport costs between Kirkuk in northern Iraq and Zarqa in the Kingdom and presaged a broader build-out of energy ties between the two countries.

However, underpinning this agreement were broader discussions about the future relationship between Jordan and Iraq and these also resulted in a contract being signed last year to connect the electric power grids of the two countries. By extension, this will provide a direct link between Jordan and Iraq’s key regional sponsor, Iran, which recently signed a two-year deal with Iraq to supply it with electricity, the longest such deal signed between the two countries. The last piece of this game-changing regional networking operation was that just before the announcement of the Iraq-Jordan network deal, Jordan also announced that it had signed a memorandum of understanding with Saudi Arabia to lay out the framework of joint co-operation to connect the electric power grids of these two countries. This brought with it the prospect for China and Russia of being able to shift Saudi further away from the U.S. sphere of influence and into the Sino-Russian one.

Related Video: The Painful Death Of Coal

This shift in the previously apparently inextricable alliance between the U.S. and Saudi Arabia first became especially noticeable after the first oil price war launched by Riyadh in 2014 to destroy (or at least severely disable for a long time) the U.S. shale oil industry that Washington regarded as an unacceptable attack on a sector that was (and is) planned to be a cornerstone of its economic, geopolitical, and energy security for decades to come. This rift in the basic deal dating back to 1945 that had underpinned the close U.S.-Saudi relationship widened as the Saudis were forced to rely on Russia to add any gravitas to the OPEC oil production deals from 2017. This new mutual understanding was clearly signalled when Russia’s President, Vladimir Putin, invited Saudi Arabia’s King, Salman bin Abdulaziz al-Saud, to Russia in October 2017 – the first ever visit to Moscow made by a sitting Saudi monarch, and the largest ever foreign delegation to Moscow.

In this context, just a month or so before Iraq Prime Minister, Mustafa al-Kadhimi’s visit to Washington last year, Iran’s Energy Minister, Reza Ardakanian, stated that Iran and Iraq’s power grids have become fully synchronised to provide electricity to both countries by dint of the new Amarah-Karkheh 400-KV transmission line stretching over 73 kilometres, which also ‘paves the way for increasing energy exports to Iraq in the near future, from the current 1,361 megawatts per day now.’ He added that Iranian and Iraqi dispatching centres were fully connected in Baghdad, the power grids were seamlessly interlinked, and that Iran had signed a three-year co-operation agreement with Iraq ‘to help the country’s power industry in different aspects’. At the same time, it was announced by the Iranian Electrical Power Equipment Manufacturing and Provision Company that Iran’s electricity exports to other neighbouring countries in the previous Iranian calendar year (ended on 19 March 2020) reached over 8 billion kilowatt-hours (kWh), a mean average increase of 27.6 per cent year-on-year. So far, the countries receiving power from Iran’s grid are: Armenia, Azerbaijan, Pakistan, Afghanistan, and the Nakhchivan Autonomous Republic, plus, of course, Iraq (which saw an increase of 34.6 per cent from the preceding year). This network does not include the parallel network connections that Iran is consolidating in terms both of direct electricity and gas exchanges, which further includes Turkmenistan and Turkey.

The deal with Lebanon is exactly in the same vein, although Iran’s influence in the country – which, very usefully for Iran’s crude oil export sales, has a very long Mediterranean coastline – is currently much greater and more disruptive, wielded through its political and military proxy, Hezbollah. According to a statement last week from Lebanon’s caretaker Energy Minister, Raymond Ghajar, the country is set to receive 500,000 tonnes of fuel oil from Iraq in 2021 for power generation. The Energy Ministry will also be buying spot cargos of fuel, as and when required, as its state power company does not have the capacity to meet demand, resulting in increasingly widespread and lengthy power cuts across the country. Compounding the obvious point that these deliveries will just be used by Iran as part of its ongoing use of Iraq as a front to export and sell its own crude oil and fuel oil and other related products was the additional – bizarre, if not taken in the above context – comment from Ghajar that: “Iraq’s heavy fuel does not match Lebanon’s specific needs but an Iraqi company can arrange a swap for another kind of fuel that was more suited.”

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on February 11 2021 said:
    Since the days of the Shah Iran has always been the policeman of the Gulf encouraged by the Nixon administration and supported by substantial American arms deals. Iran wants to maintain its geopolitical primacy in the Gulf region as in the days of the Shah supported eventually by nuclear weapons and long-range ballistic missiles and underpinned by the Chinese-Russian strategic alliance and China's Belt and Road Initiative (BRI). Whatever political or oil deals Iran does with Iraq, Jordan or Lebanon or anywhere around the world aim fundamentally to achieve that objective.

    Against this background, a new deal between the United States and Iran won’t see the light of day soon.

    One has also to consider the unthinkable eventuality that Iran might be happy with the level of success it has achieved so far in nullifying and evading US sanctions. It might even think that the sanctions are a small price to pay for forcing the ejection of US military presence from Iraq and making Iraq a vassal of Iran thus achieving a spectacular geopolitical victory over the United States.

    Iran’s Foreign Minister, Mohammed Zarif once boasted 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. To this could be added the Iranian Goreh-Jask oil pipeline which when completed by the end of March 2021 will allow Iranian crude oil exports to bypass the Strait of Hormuz and will also enhance Iran's geopolitical reach immeasurably by allowing it to be able to use the threat of closing the Strait of Hormuz for political reasons without hindering its own oil exports.

    The Chinese-Russian strategic alliance aims to replace the current uni-polar political order led by the United States with a new multi-polar order led by China and Russia and underpinned economically by China’s BRI. They see the United States as a spent indispensable superpower using futile sanctions and tariffs haphazardly to give the impression that it is still the master of the world.

    Since the days of the Shah, the United States has always played Iran against Saudi Arabia in order to sell lucrative arms deals to both of them. Successive US administrations continued to follow this tried and trusted policy faithfully. However, former President Trump took that policy to a much higher level of chicanery by portraying Iran as a real threat to Saudi Arabia and other Gulf States in order to get protection money in a Mafia-like manner through highly lucrative arms deals. However, Saudi Arabia and other Gulf States are starting belatedly to awake to the United States’ ploys.

    I have always argued that Saudi Arabia and other Arab Gulf States would benefit economically, strategically and financially from building bridges of trust with Iran. There are no fundamental issues between Saudi Arabia and Iran. They can both be the top regional powers in the Gulf. Moreover, cooperation between them could bring stability and prosperity to the Gulf region and would also support crude oil prices and also ensure the safety of Saudi oil infrastructure.

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

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