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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's Biggest Move Yet To Take Control Of The European Gas Market

  • Russia has managed to secure the largest share in Iran’s huge Chalous gas discovery, a move that could have huge economic and geopolitical consequences
  • A senior Russian official believes this was the final act in securing control over the European energy market
  • While Iran appears to have lost out economically on this deal, it will provide the Islamic Republic geopolitical support and the IRGC a nice slush fund

A deal finalized last week to develop Iran’s multi-trillion dollar new gas discovery, the Chalous field, will see Russian companies hold the major share in it, followed by Chinese companies, and only then Iranian ones, sources close to the deal exclusively told OilPrice.com. This is despite Chalous’s position unequivocally within the Iranian sector of the Caspian Sea, over which the Islamic Republic has complete sovereignty. Billions of dollars in additional capital investment are scheduled to come from financial institutions in Germany, Austria, and Italy, as the indications are that the size of Chalous’s gas reserves are even greater now than initially thought. According to one of the senior Russian officials involved in negotiating the deal: “This is the final act of securing control over the European energy market.”

In context, the wider Caspian basins area, including both onshore and offshore fields, is conservatively estimated to have around 48 billion barrels of oil and 292 trillion cubic feet of natural gas in proven and probable reserves. As exclusively covered and analyzed by OilPrice.com in 2019, Russia was instrumental in manipulating a change in the legal status of the Caspian basins area that meant that Iran’s share of the total revenues from the entire Caspian site was slashed from 50-50 split with the USSR that it had enjoyed as from the original agreement made in 1921 (on ‘fishing rights’) and amended in 1924 to include ‘any and all resources recovered’ to just 11.875 percent. Before the Chalous discovery, this meant that Iran would lose at least US$3.2 trillion in revenues from the lost value of energy products across the shared assets of the Caspian Sea resource going forward. Given the latest internal-use only estimates from Iran and Russia, this figure will now be a lot higher.

Previously, the estimates of Iran and Russia were that Chalous contained around 3.5 trillion cubic meters (Tcm) of gas in place. This equated to around one-quarter of the 14.2 Tcm of gas reserves contained in Iran’s supergiant South Pars natural gas field that already accounts for around 40 percent of Iran’s total estimated 33.8 Tcm of gas reserves and about 80 percent of its gas production. 

As it now stands, though, revealed exclusively to OilPrice.com, following further studies by Russia, the Chalous discovery is now seen as essentially a twin-field site, nine kilometers apart, with ‘Greater’ Chalous having 5.9 trillion cubic meters (Tcm) of gas in place, and ‘Lesser’ Chalous having 1.2 Tcm of gas, giving a combined figure of 7.1 Tcm of gas. Therefore, the new Chalous figures would give Iran a total natural gas reserves figure of 40.9 Tcm, whilst Russia – for a long time, the holder of the largest gas reserves in the world – officially has just under 48 Tcm. That Russian figure, though, has not been revised to account for usage, wastage, and gas field degradation for many years, and, according to Russian gas sources, is around 38.99 Tcm as of the end of 2020. Consequently, the Chalous find makes Iran the biggest gas reserves holder in the world.

These new estimates, on top of recent developments in the European gas market, have led to a change in the plan that had been agreed on between Iran and Russia and had remained in play up until around a month ago. The plan had been for Iran’s side of the development to be led by the Khazar Exploration and Production Company (KEPCO), with the additional principal participation of then-to-be finalized Russian companies. Following both the upgrading of the gas reserves estimates in Chalous and spiraling gas prices across Europe in the previous weeks, the new stake split in the combined Chalous twin-sites is as follows: Russia’s Gazprom and Transneft will together hold a 40 percent share, China’s CNPC and CNOOC together a 28 percent share, and KEPCO a 25 percent share only. “Gazprom will have overall responsibility for managing the Chalous development, Transneft will do the transportation and related operations, CNPC is doing a lot of the financing and providing the necessary banking facilities, and CNOOC will be doing the infrastructure parts and engineering,” said one of the sources. 

Related: Biden’s Baffling Oil Policy Faces Backlash From All Sides

Bad as this may seem for Iran, it is actually much worse than that for two key reasons, according to the sources close to the deal. First, although KEPCO will nominally be in charge of Iran’s limited operations on the Chalous site, the real management on Iran’s side will be in the hands of hydrocarbons companies closely associated with the Islamic Revolutionary Guards Corps (IRGC). Second, and the explanation as to why the IRGC has suddenly taken over the Iranian side of the project, is that the 7 percent left over after the stake splits above have been removed from 100 percent, is destined to be paid into two corporate accounts – one in Shanghai and the other in Macau – that are ultimately under the control of the IRGC. This is also the reason why the IRGC has played down the true level of the reserves in Chalous since OilPrice.com’s exclusive first report on the subject was published. 

Although the IRGC has stated in a series of internal discussions within the Iranian government recently that the new terms of the Chalous deal that have placed Russian and Chinese interests above those of Iran are ‘the price we have to pay for Iran’s access to the technology and manufacturing capacity required for our missile program’, the ramifications of it are much greater than the size of future IRGC slush funds in Shanghai and Macau. Russia’s Transneft in just the past two weeks projected that Chalous alone can provide up to 72 percent of all of the natural gas requirements for Germany, Austria, and Italy every year for the full 20 years that the Chalous deal is set to run. Transneft has also reported to Moscow that Chalous alone could supply up to 52 percent of all of the European Union’s gas needs over the period as well. To gain effective control over these new Iranian gas flows through securing such a stake in Chalous, Russia privately assured Iran that, in addition to development and exploration expertise, and some funding, it will also ‘seek to support Iran’s interests in the matter of the JCPOA [Joint Comprehensive Plan of Action] and in other matters at the UN’. 

Aside from the enormous geopolitical value for Russia in adding the Chalous gas streams to the current gas supplies over which it has control, especially into the EU, Moscow is looking at an enormous financial payoff from its involvement in this field. Russia has calculated that, using an annual mean average figure of US$800 per 1,000 cubic meters of gas (it has been much higher than this, of course, in recent weeks), the value of exports from Chalous at a comfortable rate of recovery from the site is at least US$450 billion over the 20-year duration of the deal, which coincides with the next 20-year Iran-Russia deal. After the 20-year deal is up, the agreement currently is that the IRGC corporate vehicle Khatam al-Anbiya will take over ownership of Chalous for the next 50 years. Given the likely length of gas recovery at Chalous – and the fact that Russia intends to take less than 10 percent of it out over the course of its 20-year deal - sources close to the deal estimate the total value of the Chalous gas site at US$5.4 trillion. 

By Simon Watkins for Oilprice.com

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