The Iran-Russia oil connection is a sign of the times

Moscow backs Iran’s view that its missile programme is consistent with the 2015 nuclear deal.
Sunday 01/04/2018
The signing of the offshore oil field agreement in Tehran, on March 14.      (AFP)
Interesting timing. The signing of the offshore oil field agreement in Tehran, on March 14. (AFP)

Iranian Oil Minister Bijan Zanganeh admitted it was “a difficult negotiation” while congratulating both sides on Tehran’s oil development deal with a “prominent Russian company.”

Zarubezhneft’s $740 million agreement for the Aban and West Paidar fields is Iran’s second energy deal since sanctions eased in 2016. In July, Total made a $4.8 billion commitment to phase 11 of the South Pars gas field.

The timing is interesting. A major step in energy cooperation between Russia and Iran comes amid rising expectation that the United States will withdraw in May from the 2015 nuclear deal between Iran and world powers.

Politics and economics are intertwined. After US President Donald Trump announced he would appoint Iran hawks Mike Pompeo and John Bolton as secretary of state and national security adviser, respectively, leading Iranian politicians said Iran should “look east.”

Alaeddin Boroujerdi, chairman of Iran’s Parliamentary Committee on National Security and Foreign Policy, was one of those who suggested strengthening relations with China and Russia.

However, there is wariness in Tehran about over-reliance on Russia. In 2006, Moscow agreed to refer Iran’s nuclear programme to the UN Security Council, so belying hopes of Ali Larijani, then the top security official, that a “tilt to Moscow” would rule out referral.

Even so, political cooperation between Russia and Iran has increased in recent years, as evident in the Syrian war. Moscow backs Iran’s view that its missile programme is consistent with the 2015 nuclear deal, which it argues Washington has no right to upturn unilaterally.

Seeking investment and technology transfer, Iran wants to tempt Western majors into helping develop its vast energy reserves. The new Integrated Petroleum Contract, used as a model with Total and Zarubezhneft, offers better terms to foreign companies than before. Western oil majors, including BP, Chevron and Exxon Mobil, however, have held back from concrete commitments since the nuclear agreement.

The memoranda of understanding (MoU) include Shell in 2016 for the South Azadegan and Yadavaran oil fields and for the Kish gas field. Norway’s DNO, Austria’s OMV and Schlumberger, the energy services company, have agreed to MoUs. Fears, however, of new US sanctions, and indeed of existing ones, have made Western European energy companies and banks wary.

As the Europeans pause, the Russians act. Zarubezhneft’s agreement for Aban and West Paidar, an 80% share, with the Iranian private-sector Dana Energy taking 20%, follows a MoU of 2016. It is the first of at least seven MoUs with Russian firms.

These are mainly aimed at improving yields from existing fields, which is a short- to medium-term priority for Tehran. Zarubezhneft is expected to boost the fields’ production from 36,000 to 48,000 barrels a day, an improvement that Zanganeh said would be worth $4 billion to Iran.

Zarubezhneft has other MoUs covering the Shadegan, Rag Sefid and Susangerd oilfields. Lukoil, Gazprom and Tatneft also have MoUs, while Lukoil has been assigned the two major oil fields, Mansouri and Ab Teymour, each with 15 billion barrels.

All of these seem likely to go ahead and Russian involvement will surely increase if the Western Europeans hold back. Iran is already in talks with Gazprom and Rosneft over other fields.

Zarubezhneft’s deal suggests Moscow expects “business as usual” even if the United States withdraws from the Joint Comprehensive Plan of Action (JCPOA). Total CEO Patrick Pouyanne recently suggested the company would seek a waiver if the US-imposed new sanctions, enabling it to go ahead with phase 11 of South Pars.

Paul von Maltzahn, former German ambassador to Iran, Egypt and Iraq, said a US withdrawal from the JCPOA and possible new sanctions would lead to a “cat-and-mouse game” rather than dramatic change. “Iran would employ delaying tactics [over the nuclear programme], making a movement and then waiting for the reaction of others,” he said.

Unlike 2012-15, when Iran’s oil exports were halved and foreign investment frozen by various embargos from the United Nations, the United States and the European Union, Iran would not face multilateral sanctions. Even in the face of what von Maltzahn called America’s “formidable financial firepower,” Tehran would be better placed to sell oil and to develop its energy reserves.

“The problem is that American policy is destroying the multilateral approach,” said von Maltzahn. “China already inclines to unilateralism and now has a precursor in America. Russia is outwitting the United States in the Middle East because it has a strategy, which America lacks. The Russians have been ruthless in pursuing their objectives but they also have more of a long-term view.