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.