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Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest.

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Is A Russian-Iranian Energy Pact In The Making?

Oil Rigs

In the lead-up to President Rouhani’s visit to Moscow, expected to take place in late March, a plethora of news regarding joint Russo-Iranian energy projects has been circulating on the Internet. A three-year long negotiation process regarding a 100,000 barrels-per-day swap contract is believed to be agreed upon, premised on Iran providing Russia (most likely, Rosneft) oil from Kharg Island or other hubs in the Persian Gulf in return for cash and Russian goods that Iran would “require”. Teheran also woos LUKOIL, currently Russia’s only major oil producer in the Caspian, to participate in swap deals bound for Iran’s Neka Port (in return for Iranian crude provided from Kharg Island or other Persian Gulf hubs), albeit on a much smaller scale at 4000 to 5000 barrels per day. To top it all up, numerous Russian oil companies have committed themselves to developing Iran’s hydrocarbon fields.

The lifting of most of Iran’s sanctions encouraged almost all oil & gas majors to consider investing in its largely untapped oil and gas fields. Total, apart from spearheading Phase 11 of the South Pars development project, now intends to resuscitate the halfway-constructed, currently-frozen Iran LNG initiative. Royal Dutch Shell signed a memorandum of understanding on conducting technical studies at the Azadegan and Yadavaran fields next to the Iraqi border, as well as the offshore Kish field not far away from the supergiant South Pars field. Yet the good will demonstrated by Moscow during negotiations prior to the lifting of nuclear sanctions, as well as Russia’s instrumental role in turning the tide in Syria’s sanguineous civil war in support of President Assad’s regime have elevated the Moscow-Teheran axis to new heights. Related: Can OPEC Resist The Temptation To Cheat?

These developments were further strengthened by Russia’s mediation between Teheran and Riyadh in the midst of the Vienna OPEC negotiations last November. Even if for six months, the sides managed to find a mutually acceptable modus vivendi, with Iran’s output capped at 3.795 million barrels per day. So far, Teheran reached out to four Russian energy companies (Gazprom Neft, LUKOIL, Zarubezhneft and Tatneft), preliminarily allotting seven oil fields from the presumed list of 34 included in the Iran Petroleum Contract (IPC) initiative. It is noteworthy that all of them are located right next to the Iraq-Iran border, up north from Basra, and all but one are brown fields, mostly discovered in the 1970-1980s and only partially appraised and developed. Teheran is yet to present the final terms of the long-awaited IPC and according to media rumors, it is about to do so in late March. Subsequently, other Russian companies might come on board, one of the most prominent of all being Rosneft, which confirmed its interest previously but fell short of signing up to a specific project.

The energy cooperation between Russia and Iran is not solely limited to oil, gas is also a big part of the deal. Throughout 2016, Gazprom and NIGC have been discussing the possibility of gas swaps along the lines of the above mentioned oil deals. Gazprom would supply gas through Azerbaijan to Iran’s northern parts in exchange for Iranian gas made available in the Persian Gulf for further supplies towards South Asian nations, mainly India. Moreover, Gazprom might be involved in the development of Iran’s underground gas storage facilities and the modernization of its overage gas transmission network. Notwithstanding potential deals and partnerships, the long-term prospects of Teheran and Moscow converging on energy-related issues are somewhat dim. Currently, Teheran needs Russian oil & gas know-how to modernize its obsolete infrastructure and kick-start the production of its plentiful reserves, whilst Moscow needs new markets to do business with, as the still ongoing sanctions regime of most Western nations has nullified the potential to conclude new big deals with Western majors.

Yet in the long-term, Russian and Iranian interests diverge. Iran aspires to surpass the 300 Bcm per year mark by the end of this decade, surging from the current 230 Bcm, and sees Europe as one of the most desirable gas markets. Unlikely to handle the burden of constructing a new gas pipeline, Teheran will seek to join an already existing conduit, such as the TANAP-TAP and ramp up its LNG projects. This will inevitably cause tension with Gazprom that sees Europe as its domain. The Teheran-Moscow relationship is fraught with numerous difficulties in the oil sector, too. Russia has no problems whatsoever with Iran supplying crude to Mediterranean countries like France, Greece or Italy. Yet if Teheran, against the background of its raising crude exports to Europe to 800 000 barrels per day from the current 500 000 barrel-per-day level, will move out of its traditional supply region, Moscow might react angrily. Related: New Oil Price War Looms As The OPEC Deal Falls Short

Thanks to its post-sanctions charm offensive, Teheran has been expanding its geographical reach to export oil to countries as far as Poland, previously considered to be the domain of Russian suppliers. A recent spat between Russia and Belarus culminated in Minsk buying its first-ever 80kt cargo of Iranian crude, to be delivered to the Ukrainian port of Odessa or to one of the Baltic ports (none of which will please Russia’s energy authorities). The deal is a Belorussian tour de force, as Iranian oil will not be exempt from export duty as Russian oil and entails a heftier transportation costs, in order to demonstrate that Minsk might source its hydrocarbons from elsewhere if necessary. Eager to conquer new markets and not to stir up a wasps’ nest, Iran would be ill-advised to get stuck in the quagmire of Russo-Belorussian negotiations and most likely won’t. For now, the Iran-Russia relationship is in its “laugh now, quarrel later” phase.

By Victor Katona for Oilprice.com

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