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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 Huge Caspian Gas Find Is A Geopolitical Gamechanger


Iran last week revealed a huge new gas deposit located in the Iranian sector of the Caspian Sea. The ‘Chalous’ structure is to be developed with the intention of forming a new gas hub in northern Iran to complement the southern gas hub centred on the massive South Pars field.

The principal named developer of the Chalous site is Iran’s Khazar Exploration and Production Company (KEPCO) but technical and financial assistance will also come from Russia and China. If the initial estimates of the gas reserves held in the Chalous deposit are correct then Iranian gas will be able to supply at least 20 percent of Europe’s gas needs. However, the size, price, and destination of this gas will be co-ordinated with Russia, adding to the energy power that Moscow has over Europe, already a key matter of contention between Europe and its NATO partner, the U.S.  According to KEPCO’s chief executive officer, Ali Osouli, the Chalous structure is estimated to hold gas reserves equivalent to a quarter of the supergiant South Pars gas field, or around 11 of its phases. South Pars has an estimated 14.2 trillion cubic metres (Tcm) of gas reserves in place plus 18 billion barrels of gas condensate and 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. The 3,700-square kilometre (sq.km) South Pars site is part of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Dome) but the Chalous structure lies squarely within Iran’s sector of the Caspian Sea. This has not so far been affected by the recent disputes between the five littoral states that share oil, gas, and other rights in it: Russia, Iran, Kazakhstan, Turkmenistan and Azerbaijan.

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These disputes – exclusively covered and analysed by OilPrice.com – centered around the official designation of the Caspian as either a ‘sea’ or a ‘lake’ in early 2019, which was crucial in determining how all of the Caspian’s oil and gas resources would be divided up between the five states. 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. Suffice it to say that, over and above the finer points involved that are covered in the article linked above, Russia contrived to have the Caspian re-designated as a sea, not a lake, which fundamentally altered the previously agreed split of revenues from it among the partners. In this process, Iran’s share was slashed from the 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. This meant that Iran will 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. 

The reason why Iran accepted this appalling re-ordering of shares in the spoils of the Caspian Sea was that at the time it was in the throes of negotiating the game-changing 25-year deal with China that included a major corollary deal with Russia. This deal with Russia was a legal necessity to the 25-year agreement with China – allowing for Russian as well as Chinese planes and ships to use the dual-use sites across Iran, for example – and was added into the existing multi-layered 10 year deals that Iran had been signing with Russia to that point. It is apposite to note that Iran’s ambassador to Moscow, Kazem Jalali, said last month that this usual 10-year deal had now been superseded by a 20-year deal with Russia that covers political, security, military, defence and economic cooperation. Given these developments, then, Tehran felt in no position to start playing tough with the Kremlin in the negotiations over its share in the Caspian Sea resource. 

A key element of this new 20-year agreement between Iran and Russia, and the two previous 10-year agreements that preceded it, is that Russia has de facto control over where and at what price the vast majority of Iran’s gas is sold. Controlling this potential threat to its own dominance over gas supplies into Europe – and the considerable geopolitical power over the continent that comes with this – has been a major concern of Moscow’s for many years, as has Iran’s capabilities in this respect. Iran has estimated proven natural gas reserves of 1,193 trillion cubic feet (Tcf), second only to Russia, 17 percent of the world’s total and more than one-third of OPEC’s. Additionally, Iran has a high success rate of natural gas exploration, in terms of wildcat drilling, which is estimated at around 80 percent, compared to the world average success rate of 30-35 percent. It has always been vital to Russia, therefore, to ensure that Iranian gas did not flood into Europe and thus undermine Russia’s key lever of power across the continent.

Even after the break-up of the USSR in 1991, Moscow has regarded much of central and eastern Europe as its own backyard, as most notably recently evidenced by its annexation of Ukraine’s Crimea in 2014. It has been able to continue to wield power over the continent because Russia supplies just over one-third of crude oil imports to European countries in the Organization for Economic Cooperation and Development and more than 70 percent of their natural gas imports. In some countries, Russia is the near-monopoly supplier of gas, carrying with it the threat of being cut off should Russia wish, as it did at the height of winter in 2006 and also 2009. This power of Russia over continental Europe is set to be consolidated with the completion of the Nord Stream 2 gas pipeline and the U.S. knows this. It also knows that this degree of energy dependence has been the key lever by which Russia has been able to undermine the concept of the NATO partnership to European member states and to cause friction between the various occupants of the White House and Germany - the de facto leader of continental Europe - in particular.

The new U.S. administration under Joe Biden has so far fallen short of dramatically increasing the pressure on Germany not to take the Nord Stream 2 project further. However, the new Secretary of State, Anthony Blinken, has a very clear view of what Russia is really trying to achieve with the pipeline and what the end game might be. Indeed, when he was an unknown author back in 1987, Blinken published a book – ‘Ally Versus Ally: America, Europe, and the Siberian Pipeline Crisis’ – that looked at the early 1980s threat to Europe, the U.S. and NATO, of the planned Siberian Pipeline. In 1981, then-President Ronald Reagan imposed sweeping sanctions on the project, resulting in a serious breakdown of relations between the U.S. and Europe for some time. The idea that re-engaging with Iran and ending sanctions would also enable Iranian gas to flood into Europe and so diminish Russia’s energy hold over the continent was also a key reason why former U.S. President Barack Obama and his Secretary of State, John Kerry, moved ahead with the watered-down version of the JCPOA that was finally implemented on 16 January 2016. 

By Simon Watkins for Oilprice.com


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Leave a comment
  • George Doolittle on August 20 2021 said:
    This sounds like yet another way to start a War without hardly trying in the least.

    Long $gd General Dynamics
    Strong buy
  • Jay T on August 21 2021 said:
    An article that started out well and then, typical of the majority of western analysis of Russia, fell off a cliff by purporting that Russia was to blame for gas supplies being cut off in the winter of 2006 and 2009 and not Ukraine illegally syphoning off gas that they did not want to pay for! Too bad for Mr. Watkins that Germany doesn't share his view or belief because given its decision to build Nord Stream 1 and Nord Stream 2 it would appear that Germany has NO trust in gas being transited via Ukraine rather then receiving it directly from Russia!?! A bit of a conundrum for your Mr. Watson. Why would Germany do that rather than invest in other means to secure energy supplies? Maybe it is because unlike a certain other anglo Saxon country, the Russians always honour commercial contracts. What is also amusing is Mr. Watkins' belief in the US administration. They have only been in power for a little more than 7 months and they show breathtaking levels of incompetence and lack of appreciation of ALL the players on the world stage. What does any American and even most British politicians and commentators truly understand about Asia? It seems not a lot since they seem so adept at showing little empathy of any countries position and working to find a happy compromise. Let's see how things are in about 5-10 years with Iran and many of the other countries in Central Asia most notably Afghanistan and see whether Iran will be complaining loudly about the agreement that given their weak position is a far better compromise than could EVER be hoped to receive from any western government.
  • Konstantin Chukharev on August 21 2021 said:
    "carrying with it the threat of being cut off should Russia wish, as it did at the height of winter in 2006 and also 2009."
    What a lie. Russia didn't wish to cut Europe off, it was negotiating a new gas contract with Ukraine after the old expired and kept transiting gas without a contract until the gas started to disappear from the pipeline. Ukraine-Russia negotiations are often difficult and in 2006 & 2009 they failed to reach any agreement. The new 2009 contract included a payment for the gas consumed before its signing essentially acknowledging Ukraine taking gas from transit pipes without a contract.
    The Nord Stream 2 part is also a huge misrepresentation. It changes nothing for Russia's and Germany's power to use or close pipelines between them. But if there were plans by transit states or those with influence on transit states to make such trade impossible or preconditioned on some political demands, those plans are now likely thwarted. If there never were any such plans, then nothing changed.
  • Bahram Mohtadi on August 22 2021 said:
    As a persistent admirer of Simon Watkins' polished forays into easily deceptive territory, l am surprised by a whopper he just dropped about how Iran’s share in gas reserves was supposedly "slashed from the 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". Sorry Simon! Check your sources and preferably the actual text of both agreements. No "50-50 split" on any issue. That is a favourite propaganda plant from opponents of the Islamic Republic, who rely on lazy fact checking to obscure this useful whopper that is meant to undermine or at least downplay the fact that the present rulers of Iran are unique in never having surrendered an inch of territory in war or peace.

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