Yves here. While you were busy keeping on top of all the Afghanistan withdrawal pearl-clutching, other important things have been happening, including in the Middle East. I would be curious to get reader reactions to what seems to be a plausible assessment of the significance of a big new gas find in the Iranian part of the Caspian sea.
The “geopolitical” part is that this Iran gas field can apparently serve Europe once developed. The most interesting part of this piece is the claim at the end that the reason for the Obama Administration to have signed the JCPOA was to bring Iran back into the fold, which would include the US supporting Iran gas development and supply to Europe to reduce dependence on Russia. But as this post lays out, this new field is set to be an Iran-Russia affair.
By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. He has written extensively on oil and gas, Forex, equities, bonds, economics and geopolitics for many leading publications, and has worked as a geopolitical risk consultant for a number of major hedge funds in London, Moscow, and Dubai. Originally published at OilPrice.com
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.
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 factocontrol 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.
20 comments
Comments are closed.
Perhaps a map might shed a bit of light to the general situation-
https://www.nationsonline.org/oneworld/map/Caspian-Sea-map.htm
So from here you can see that there are few options about shipping gas to Europe. To the north-west, you can send a pipeline through an Azerbaijan-Armenia-Turkey axis or an Azerbaijan-Georgia axis but both routes land that pipeline in the Black Sea which would further require more pipelines across the bottom to even get to Europe making it even more expensive. In addition the Azerbaijan-Armenia region is still a war-zone so you can forget that one. Even the Azerbaijan-Georgia route is problematical as Georgia has ongoing disputes with South Ossetia & Abkhazia from the 2008 Russo–Georgian War so is potentially unstable for an Iranian pipeline. Either way would also require Iran paying fees for letting that gas transit through their countries which would add to the costs.
My own guess would be that a pipeline would have to go north around Azerbaijan and to land in Russia where it can connect with the Russian gaspipe network. Azerbaijan may not be happy about this development as they have their own offshore gas reserves which has financed their military development – as seen in the recent war – which might compete with their own gas exports. The US will probably try to stop this project as they tried to stop the Nord Stream 2 project but once it hits the Russian network, cannot be discriminated between Iranian gas and Russian gas. Even if there was no hostility to Iran, they would probably still have to use this route. I would guess that Russia might even give Iran a small break on transit costs in exchange for letting Russia take the lead on distribution. Then again, there is nothing to say that this gas pipeline may not exit east and head off to China instead which is perhaps why they are involved in this project.
Undoubtedly the Russian will help provide security overwatch of the security of this pipeline as well which will be easier as no NATO country borders it. The terms are not that great but Iran needs a steady revenue due to the never-ending sanctions by the US and its allies. Even if the nuclear deal was re-signed there would still be more ongoing sanctions as well as additional ones. With this pipeline, it should help take off some of the internal pressure. Here, by the way, is an overview of oil and natural gas in the Caspian Sea region from back in 2013. But where it say that ‘Currently, there is no significant Iranian production in the Caspian’, that will obviously have to be updated-
https://www.eia.gov/international/analysis/regions-of-interest/Caspian_Sea
Route from Iran to EU goes thru Turkey. Negotiating with rival producers like Azerbaijan would probably be making a hard task even harder. Turkey is troublesome enough, plus EU has already been convinced by both Qatar and US to reject cheaper piped gas in favor of expensive higher-carbon-footprint seaborne gas — “for security reasons”. Like JCPOA, Iran would likely try anyway but view this as a probably waste of time.
Pipeline to Pakistan, on the other hand, goes only through Iran itself. Once built, and Pakistan’s needs are satisfied, or sooner if Chinese help is needed for Pak to build it, it will simply be extended to China. Unlike EU, China is actually interested in reducing seaborne LNG.
Another issue with gas pipelines through Turkey, or unstable mini states like Armenia, Azerbaijan, Syria, etc. is topography. Building and servicing pipelines across these regions is a nontrivial endeavor, even without the multiple state borders and incessant political instability. Piping or shipping gas north across the Caspian allows it to be routed across the vast plains of southern Russia and Ukraine.
Also, per ptb, driving a pipeline through the Hindu Kush is not for the faint of heart. And a much longer one through the ‘stans would be as tough as one through Armenia and Azerbaijan.
The bit about Russia’s recent resource grab in the Caspian is very interesting. It’s the kind of obvious, key factor that is almost never revealed to U.S. readers of high to middle brow print media. Maybe you might see this kind of linchpin fact occasionally mentioned in op-eds in the main oilpatch trade magazines, but only oilpatch people read those.
Very true about geography. The same could have been said of Nord Stream vs the overland route. International political barriers can be bigger than mountains.
In the case of an Iran-Russia overland route, there are still more issues. Russia, is a direct competitor. How much risk will they really take on to transport Iran’s gas, when the EU struggles to buy their own? And wouldn’t a joint Iran-Russia project have even more external enemies capable of convincing an EU member nation to veto it, compared to either an Iran-only or Russia-only project?
We need to stop using fossil fuels!
?
I think the reality will more of sending the development from the west to the east, along with the jobs and profits while the wdst increases dependency thru their so called green initiatives. Fossil fuels are not going anywhere anytime soon.
If fossil fuels don’t go away soon, we will go away. And we still–even now, with the world literally on fire–don’t get it. Time’s up.
Really.
It isn’t a “game changer” to continue drilling, discovering, and producing…our own destruction.
With the shift to wind-generated electricity, the need for natural gas-powered electricity plants = 100% as very few locations provide enough steady, year-round wind on a scale to support a first world city. And even then, those locations tend to be far away from cities and in eco-sensitive locations.
Want to stop using fossil fuels completely? Per capita energy consumption needs to fall >50+%.
Who is going to volunteer to tell the voters that the prices of their basket at Lidl or EU Amazon must go up in 20, 30, 40, 50+% in real terms? Theoretically it can be done (without mass voter revolt), but after seeing how the West handled covid, the odds don’t look good.
The ‘stans’ as there were generally known back in the 1990’s when there were huge oil and gas plays there, have been a graveyard for the fossil fuel industry for quarter century or more. It was the frack boom before fracking was invented. During the lean years of low prices back in the mid 90’s, my brother, a gas driller spent years out in the region, and I had a lot of ex colleagues who talk with no fondness at all for their time in those deserts drilling away. There was plenty of oil and gas, but as always the difficulty is not finding gas, its working out how to get it to market. In the end, most of it was left in the ground, and its likely to stay there.
Gas is always much tricker to exploit than oil. With oil, you can just load it onto ships or trucks if need be, and send them off to find a buyer. The world is full of methane (too much of it). To exploit it you need a vast investment in infrastructure and, even more difficult, you need to put in place 20+ years of agreements on pricing and supply to justify the investment. LNG is one option, but its only proven viable in a very limited number of cases, such as with the vast reserves of Qatar (which it quietly shares with Iran, one reason for the conflict between the Qataris and the other Gulf States.
For all the usual reasons, its very hard to see Caspian gas as being useful for much more than supplying Iran itself (which has plenty of it for its own use). There are huge geopolitical risks in any pipeline going to Europe or any other major purchaser, such as China. And its pretty clear that Russia will have a veto, and it has no interest in allowing other suppliers leverage for its own sales to Europe. I suspect the geopolitical thinkers in Europe won’t have much interest in this – deposits in the Mediteranean and north Africa may be smaller, but they don’t have the risk attached and they allow greater price and supply leverage over Russia.
From Irans geopolitical perspective, it may make more sense to connect it with the Middle Eastern hubs if it is viable. This way it could become ‘Qatari’ gas and so would be more immune to political pressure, and would ensure the Russians have less say in its use. But a pipeline would still be a very expensive investment and its not clear it would be justified given the huge reserves in the South Pars field. Only the Iranians and Qataris really know how much gas there is to exploit.
One alternative option for the Iranians would be to use it locally and develop a large scale chemical industry – much depends on how much ‘wet’ gas there is (wet gas has a higher percentage of the ‘enes’, which is very useful for plastics and base chemical manufacture). However, vast overinvestment in this type of plant in the US has likely depressed prices in this sort of product for decades to come, so its probably not a particularly good option.
So, in summary, I think this is the sort of news that gets geopolitial thinkers all very excited, but in the long run has little to no meaning. It will be just too expensive to exploit fully.
The world is glutted with natgas at the points of production. Besides the enormous undersea conventional reserves, natgas it is a waste product of unconventional oil production. Delivery cost is almost all transport.
Adding another big discovery won’t determine what buyers do, in my opinion, since wellhead prices are already driven to a tiny fraction of delivery cost.
IMO, the one place this particular find could be a gamechanger is with Pakistan. If Iran has enough to singlehandedly satisfy Pakistan’s conventional energy needs, then full development of that route, and the Pakistan-China route that naturally follows it, opens up a lot faster than it otherwise would.
Natgas is also theoretically to be reduced for climate reasons — as we are learning that in terms of greenhouse gas effect, the efficiency advantages of natgas are wiped out by the methane leak rates along the full chain of production, transport and distribution (with methane having 20x CO2 equivalent). But that is a story for another day.
There may be other markets contemplated for Iran’s new gas field.
The gas may end up getting transported eastward instead of northward into the EU.
Iran has a gas pipeline east from the Caspian region almost to the border with Afghanistan.
A pipeline through Afghanistan, following the existing main roadway eastward could be built.
That line might also be extended via proposed China rail-line right of way into western China if the political and economic picture in Afghanistan stabilizes.
Iran has announced that it’s “turning east”.
With respect to accepting a reduced partnership deal with Russia, the bird in the hand may be much better than more birds in the bush. It’s unclear to me how many more years of fossil fuel burning are possible. They may be deciding to front-load the revenue stream, as the risk to out-year revenue may be increasing.
That’s the lens I’m viewing the reduction in oil exploration investment and pump-as-much-as-possible-now philosophy of OPEC.
Lately there was discussion here @ NC about using the hydrogen technologies to provide buffers between variable wind/solar production and electricity consumption.
Note that Germany and some of the other northern European states that have strong wind resources are investing a lot in the hydrogen technologies. They’re looking for a long-term solution.
Oh, great. More fossil fuels to burn.
A carpet of gold or a carpet of bombs? Wasn’t that how Dick Cheney phrased Afghanistan’s options in 2003? The US wanted to build a pipeline from the Caspian into and thru Afghanistan to the Indian Ocean, right? So, a hub exists for gas transport to all points east at Iran’s border? And Iran is relying on China (?) to do this engineering? The very people we were trying to block? And there is more than enough natgas to fuel all the development of Eurasia. And Afghanistan, the ideal crossroads, has all the mineral wealth an industrial explosion might ever wish for. And Russia is Big Brother, the guy standing in the back of the room with his burly arms folded. And we’ve got chickens. Coming home to roost ever since 1953 when we first betrayed Iran’s sovereignty. So we tried (foolishly) but we couldn’t strong-arm our way into this bonanza… so we devised another energy play in the eastern Mediterranean? Turning Israel into the broker/distributor? We got kicked out of Eurasia. Booted as it were. This at least explains one thing for me: Obama’s frantic “pivot to China” and his big fracking boondoggle here.
Honestly, at most this is irrelevant: Iran will export gas through Russia; Russia will maintain its influence on European energy use; without Russian cooperation American sanctions on Iran will be incomplete.
There has been discussion from time to time of importing Iranian gas while bypassing Russia, but that has never come to fruition.
Of course, to the extent gas is replaced by renewables, this whole issue becomes rather moot.
It’s been awhile since I’ve followed this part of the world in great detail but what always seems obvious is that the US is always playing checkers while our adversary plays chess. Our geopolitical calculations are not based on quarterly results but it does appear that our time frame and competing “national” security priorities always seem short sighted.
Well! . . . burning that much more natgas into skycarbon means we will have that much more skycarbon to suck back down out of the sky. Won’t we.
Every new source of fossil fuel is, first and foremost, another step to climate catastrophe! Everyday there is news about another global-warming disaster. Floods, drought, fires, storms, hurricanes, climate refugees. extinctions, and more. Whether or not Iran exports through Russia or not is absolutely secondary to increasing the negative impact of a warmer world. In that sense, this article is a huge distraction from the most important issue, which is ending the burning of fossil fuels ASAP!
The article concentrates on the political and practical problems with their resulting dangers Iran has in exporting this gas but the same is also true for those looking to import it. They are very aware of the potential for blackmail if they become dependent on it, or for supplies to be interrupted by local flare-ups they have no interest in or control over. Even, or perhaps especially, China will be aware of and presumably cautious of this.
It is therefore to be hoped that perhaps while looking to keep their options open in this direction countries will also for purely practical reasons look to build up their home-grown energy production which for most places lacking their own substantial oil and gas fields, will mean building renewables fast, leaving the Iranians, Saudis et al with these ‘vast’ reserves in the ground and no market for them.
Maybe Iran and Russia should look into using the natural gas and convert it into hydrogen for use in fuel cells. According to this article (https://www.energy.gov/eere/fuelcells/hydrogen-production-natural-gas-reforming) the emissions are about half compared to regular petroleum products. Cutting vehicle carbon emissions by half would be a step in the right direction.