According to the International Energy Agency, 95% of the global economy relies directly on decisions and measures taken by five or six Middle Eastern countries, of which Saudi Arabia and Iran play the leading role. Since the region possesses the world’s largest oil and gas (O&G) resources, their production levels affect market sentiment and outcomes.
The World Bank forecasts that Iran’s GDP growth will exceed 6% per annum in the coming years, mostly due to the upturn in investment in the O&G sectors. Iran’s oil production levels fell by 25% during sanctions, but now it aims to regain its share in the regional market and also recover its key connections with Europe.
Iran currently holds around 10% of global oil supplies and over 18% of gas resources – these facts alone should be a reason for Iran’s role as a leading energy nation. Iran is capable of increasing and intensifying its export potential through the implementation of its recent research and development efforts.
In Europe, oil from Iran was replaced with crude oil from Russia and partly by Saudi Arabian producers. Prior to sanctions being imposed, Total, Repsol and Shell all had agreements with Iran for constructing LNG terminals.
In February 2016, after the lifting of sanctions, Iran scaled up its supplies to China by 1% year on year. The largest Asian oil company Sinopec and state trading company Zhuhai Zhenrong signed a contract with Iran for the supply of crude to China. Total, Cepsa and Litasco became the first European customers for Iranian oil after the lifting of sanctions; Greece’s Hellenic Petroleum also received its first crude flows early that year.
Iran could end up supplying up to half of the crude consumed in Europe. The contracts will be, for the time being, on a spot basis – this will be the case until all current agreements between European countries and other suppliers expire. At that time, European refiners will be in a position to commit to new long-term partnership contracts. Iran is ready to work according to this procedure and has already discussed such possibilities with Kazakhstan and Turkmenistan.
To achieve these ambitious goals set by the National Iran Oil Company (NIOC), the country would need to extract and produce up to 2 billion barrels of crude per year, which will require increased activity in exploration and increasing its oil recovery rate. One major competitive advantage of oil production in Iran is its relatively low cost compared with other producing countries.
Iran has also been one of the pioneers in developing the new format for oil contracts – the so-called Iran Petroleum Contracts (IPCs) – to replace buy-back agreements; in 2017 the government planned to sign such documents to the tune of $15bn. These contracts require active investment in the country’s energy sector, offering more flexible terms. They will operate like joint ventures with a potential duration of 20 to 25 years.
NIOC requires $134bn of investment for upstream oil and gas projects – all this by 2021 and to meet objectives set in the country’s Sixth National Development Plan. With these new IPC contracts it might be possible to reach this level even sooner. In the first IPC tender that was held in mid-2016 for the South Azadegan oilfield, NIOC also highlighted the transfer of new technologies to the country across all sectors: upstream techniques, engineering, procurement and production and equipment.
In 2017 Iran claimed to have produced about 260 billion cubic metres (bcm) of gas, and by the end of a six year programme (2020) this level should go up to 400 bcm – almost double. Iran set a target for 2017 to maximise oil and gas condensate export. This year they will continue developing projects in O&G fields and finishing up activities on the South Pars/North Dome gas field.
Shortly after the end of sanctions, Iran and India also signed an agreement to jointly develop gas fields and construct several oil refineries − India is ready to invest around $20bn in the development of the Chabahar terminal in Iran.
In 2016 the country’s tanker company, the National Iranian Tanker Company (NITC), announced plans to continue the expansion of bunker fuel transportation. One strategic priority is to diversify the business and get involved in auxiliary industries such as the production of liquefied natural gas (LNG) and the operation of operation of floating LNGs.
Numerous oil tankers from Iran will soon appear in European ports providing a supply of crude and oil products to the region. Last year, NITC had to resolve issues with cargo insurance. Taking into account Iran’s 5,800km of coastline, 90% of its foreign trade turnover emanates via marine shipping, therefore the country’s trade balance relies heavily on its efficiency.
Iran is also looking into different scenarios of export gas transportation to Europe; either by pipeline or as LNG, three possible routes include: via Turkey, via Iraq-Syria-Lebanon, and via Armenia-Georgia-Black Sea. The existing pipeline that is used to deliver gas from Iran through Turkey doesn’t have enough capacity to export ‘blue flame gas’ to Europe − thus a new pipeline is needed for this specific purpose, however it will take at least three years to develop an alternative route.
The Russia-Iran connection
In today’s world, energy is a vital factor in the development of the global economy and international cooperation – the energy market and diplomacy can both be used as efficient instruments of foreign policy.
On the one hand, the energy industry plays a positive role of integrator between different countries and regions, and on the other hand, energy resources can also be the reason for disputes between various parties.
Russia is an observer-state within OPEC, where Iran is one of the most influential members and players. At the same time, Iran and Russia are both members of the Forum of Gas-Exporting countries, being numbers one and two in the world in terms of gas reserves.
The energy industry is a locomotive for both Russian and Iranian economies because it drives all other industries forwards and supplies the state treasury with much needed funds. If any agreements between these countries come into force, they inevitably bring together other economic conventions. Russia is considered Iran’s most serious partner in its drive to implement its nuclear programme.
Some experts argue Iran’s decision to resume close cooperation with Russia instead of using its capabilities on the territory of the former Soviet Union and increase competition on that regional market, caused it to lose influence in a region which is of utmost importance for Russia, the US and many other countries.
It is clear that both Russia and Iran are interested in being active in the Caspian region, especially in terms of production and transportation of hydrocarbons, development of international marine routes and conservation – the strategic plans of the countries’ energy policies clearly define that competition should not stand in the way of extensive cooperation, which in all aspects is a wise position.
The relationship between Russia and Iran during the past five centuries has been one of the most unique in the history of diplomacy and strategic research; firstly, because of its duration and, secondly, because it has encompassed all manner of actions and reactions.
Looking at the last century, the first key date in their energy partnership was the oil concession contracts provided by the Iranian government in 1916 to the Russian Empire. In the 1920s and 30s, the Soviet government repeatedly mentioned these agreements in order to prevent similar conditions being provided to American companies.
Since 1991 Russian companies have been looking to capitalise on the cooperation opportunities with Iran. Gazprom and LUKOIL, supported by the state, began taking part in bids for developing Iranian fields.
From 1997 an international consortium of Total, Petronas and Gazprom commenced construction of the second and third lines of gas field facilities at South Pars − Gazprom’s investment amounted to $750mn. Jointly, they developed a whole production and processing complex on a turnkey basis. It’s important to note that agreements dating back to the 1990’s for nuclear plant construction and arms delivery helped a number of Russian strategic plants survive through a rough period in the country’s economy.
Russia/Iran relations entered a new phase in early 2000 with the visit of the Iranian president to Russia, leading to a signed agreement. In 2005-2006 Russian companies, such as Tatneft and LUKOIL Overseas entered the Iranian market, while Stroytransgaz was involved in the development of the country’s infrastructure.
Due to US led sanctions, LUKOIL later had to stop its activities in oil products transportation while Gazpromneft also had to leave Iran in 2011.
In 2010, the Russian Minister of Energy and the Iranian Minister of Oil signed a roadmap for O&G cooperation that is still active today – this agreement covers three main areas: exploration and production, downstream and innovation technologies. Russia is now involved in the development of an oil-gas field in Iran, the construction of a nuclear power plant, new joint pipelines are also under consideration, while Russian Railways will work on modernisation projects and some contracts for car assembly plants of Russian manufacturers AutoVAZ, KaMAZ and GAZ are ‘in the pipeline’.
All in all, there are about 35 top priority projects across different industries, while Iran and Russia plan to increase their volume of trade to $10bn. Russia agreed to loan Iran $5bn to boost infrastructure projects including power plant construction, railway electrification and energy units for nuclear plant from Russia.
Oil swap contracts with Iran will help facilitate the export of Russian oil to Asia and beyond, using the Caspian route to deliver crude to Iran and then through its Gulf coast terminals to reach the markets of the Indian Ocean.
The National Iranian Gas Company and Gazprom also have a memorandum of understanding, according to which Gazprom is to assist Iranian partners in various areas of the gas business. Russian companies made approaches to join underground gas storage facility construction projects while a major project of interest is the 300 kilometre long pipeline from Iranshahr to Chabahar, with estimated investment of $700mn.
Innovative and unique tie-ups continue: in late 2015 Iran and Russia agreed to form a joint committee for gas swap operations – a revolutionary project for both countries. Russia and Iran’s most recent link-up is between its two largest state-owned companies – Rosneft and NIOC – with a roadmap for joint development of strategic projects in upstream and more swap contracts involving a total investment of $30bn – this will result in the production of 55 million tonnes per annum of oil.
As we look to the future, Rosneft could potentially be interested in supplying the Essar Oil refinery in India with Iranian oil, while LUKOIL is also eyeing the development of the Mansouri and Ab Teimur oilfields.
Iran’s close affinity with Russia shows no sign of abating even as international pressures increase and other major players in the West watch on.
