Plan to save Iran from sanctions: oil tankers – investments in the oil industry from Russia, China and India

Iran's Foreign Minister Mohammad Javad Zarif arrives at the EU council in Brussels, Belgium May 15, 2018. REUTERS/Yves Herman

Russia, Iran, and Turkey struck an agreement which would minimize the impact of US anti-Iranian punitive measures targeting Teheran’s oil trade.

Last month, Iranian and European diplomats reportedly examined a scheme to barter Iranian oil for European goods through Russia in order to bypass US restrictions, with some Asian importers doing the same.

The EU is one of the world’s largest consumers and importers of energy resources.

Its domestic production is declining, and EU member states are becoming more dependent on countries outside the EU or from the non-EU countries in the European Economic Area (such as Norway).

According to the EC, about 53 percent of overall energy consumed by EU countries depends on imports: about 90 percent of their petroleum is imported, and 66 percent of their natural gas.

In the last 20 years, overall gas production in the EU has fallen by 56 percent, and now the member states import almost 300 bcm of natural gas each year. I

n the next decade, it will rise to 340-350 bcm/y.

Russia is the main energy supplier to the EU, with an oil and gas market share of about 30 percent.

While several countries, including Japan and South Korea, have caved in to US pressure and are preparing to halt Iranian oil imports, others, including India and China, have defended their agreements with the Islamic Republic and sought ways to bypass the unilateral US restrictions.

To subvert the US economic blockade, Iran is expected to transport its crude to Russia’s refineries on the Caspian Sea, which would later sell it as Russian oil and reimburse Iran.

The presidents of the three countries, Russia’s Vladimir Putin, Turkey’s Recep Tayyip Erdogan, and Iran’s Hassan Rouhani, are said to have secretly agreed on this move, aimed to help the economy of the Islamic Republic, during their summit meeting in early September.

Over the past six months, the Iranian currency has gone through 120% inflation.

40% of drinking water in urban areas is contaminated and undrinkable due to degrading pipes.

In the past few months, there have been reports of government workers’ salaries going unpaid. In June the crisis broke:

the Iranian currency went from 75,500 to one US dollar to 87,000 to one.

Things are even getting so bad that economic migrants from Afghanistan are leaving.

More than 400,000 undocumented Afghan migrants left Iran so far in 2018, relative to under 200,000 for the entirety of 2017.

The crisis has undermined Rouhani’s authority.

In late July, he faced multiple cabinet resignations, and replaced the administrator of the central bank.

Iranian members of parliament (MP) have summoned Rouhani to answer questions on the government’s management of the economy.

And the Iranian President does not want to answer these questions, as indicated by his cancelation of an interview on the subject on Iranian State TV.

Protests in the last several weeks have broken out in two of the largest cities of Tehran, Shiraz, Ahavz, Mashhad and Isfahan.

The protestors are calling on the government to reduce spending on foreign policy objectives, and the chant “No to Gaza, no to Lebanon, my soul is Iran’s redemption” is being reported as the protestor’s slogan. Gaza and Lebanon are two of the Iranian government’s primary allies.

The protests are largely comprised of shopkeepers, farmers and truck drivers, and are focused in the cities’ commercial areas. The protests have disrupted the Iranian economy, because of the mass coordination of shop closures.


In spite of the government’s attempts to intimidate, the protesters are taking to the streets.

Riot police have been deployed, electing to use tear gas to disperse protestors on multiple occasions.

Since the Trump administration announced the U.S. would be reneging on the deal in May, Russian, Chinese and Indian firms have done billions in new business with Iran.


In spite of the fact that Iran sits on 33.8 trillion cubic meters (tcm) of natural gas (about 18.2 percent of the world reserves), it has been unable to fully develop its export potential.

It exports less than 10 billion cubic meters per year (bcm/y) to Turkey, around 2 bcm/y to Armenia and only 0.5 bcm/y to Azerbaijan.

This is caused by excessive domestic consumption of natural gas and the generally degraded condition of the Iranian energy industry.

It is not well-balanced and is hampered by structural problems: underinvestment in the upstream sectors; poor management of the National Iranian Oil Company (NIOC); and the low energy efficiency of the economy, which is constrained by consumer subsidies.

According to the Russian Energy Research Institute of the Russian Academy of Science (ERIRAS) — which modeled the global energy outlook to 2040 — after sanctions are lifted, Iran will be able to increase its oil production up to 265 million tons (about 5 mb/d) by 2020. Subsequently, its production is bound to decline to 230 million tons (4.6 mb/d) by 2040.

A decline in Iran’s production capacity is inevitable since most of its oil fields are at a mature stage with high rates of natural decline.

To maintain production levels, Iran has to enhance its oil-recovery projects, which involve significant quantities of gas and water reinjections. In 2008, the volume of gas reinjections was about 26 bcm/y, and was predicted to reach 64 bcm/y in 2015.

However, according to available data, since 2011 the gas reinjections have actually never reached more than 60 percent of the projected targets.

Until the imposition of the sanctions, petroleum constituted almost 80 percent of Iran’s total export value; therefore, a priority should be to provide gas for reinjections rather than export.


The lion’s share of this business is investment in Iranian oil infrastructure, with $3 billion from Chinese firms, $1 billion from a Russian firm, and $700,000 million from India.

These transactions are largely not final (it is uncertain if the Indian deal will come to fruition), because the firms have had trouble finding a bank willing to be the intermediary in the transactions.

Iran has relied on banking firms based in Dubai for years, however in May, just days after the Iran deal decision, the U.S. cracked down on that practice.

Iran has claimed that Russia is ready to invest as much as $50 billion in its oil industry, with at least three deals worth $15 billion already on the table, following a July meeting in Moscow with Vladimir Putin and Ali Akbar Velayati, foreign policy adviser to Iran’s supreme leader.

According to Bloomberg, Iran has been in talks on investments with Russian energy companies including Rosneft PJSC, Gazprom PJSC, Gazprom Neft PJSC, Lukoil PJSC, Tatneft PJSC and Zarubezhneft JSC.

Gazprom also recently announced plans to develop key Iranian gas fields, despite sanctions, with support from Iran’s Minister of Petroleum, Bijan Zanganeh.

Iranian Foreign Minister Mohammad Javad Zarif later back peddled after the meeting in Moscow amid rumors of a Russia-Iran oil-for-goods deal.

“It’s a much bigger package and it includes a lot of other variables, including possibilities for energy cooperation between Iran and Russia,” Zarif explained.

As China and Turkey have made clear they will not be following the US sanctions, they, along with Russia, may be Iran’s lifesavers for the time being.

Since President Trump announced US withdrawal from the Iranian nuclear deal in May, China and India — accounting for 49 percent of Iran’s oil exports in the first half of 2018 – reportedly have ramped up their purchases of Iranian oil.

According to reports, the heated issue is likely to be a subject among US Secretary of State Mike Pompeo and SecDef Mattis when they meet with their Indian counterparts, Sushma Swaraj (Minister of External Affairs) and Nirmala Sitharaman (Minister of Defense), during an official visit in September. Ms. Sitharaman formerly served in India’s Ministry of Finance, and Ms. Swaraj, having served decades in various offices has been called India’s ‘best-loved politician.’

Chinese companies, meanwhile, have recently shifted towards using Iranian tankers to purchase Iranian oil.

Reuters reported that Chinese state oil companies Zhuhai Zhenrong and Sinopec Group, Asia’s biggest refiner, have activated a clause in their long-term supply agreements with National Iranian Oil allowing them to use National Iranian Tanker Company (NITC) operated ships.

With this new shipping arrangement, Iranian oil shipments to China are expected to remain at current levels through October, said sources.

Experts from both Israel and the US now agree that Iran’s plan appears to be to wait out the Trump administration, relying largely on China, Russia, and the hope that the nuclear deal has not been permanently canceled.

This plan may not be the best, however, as the US special representative for the new “Iran Action Group” stated recently that the US is “prepared to impose secondary sanctions on other governments that continue this sort of trade with Iran.”

The US is now going to offer waivers to countries that make efforts to scale back Iranian oil purchases, which India and South Korea have already done.

This creates a serious incentive for firms to comply with the US sanctions, and Chinese firms that do any business in the US are just as likely as EU companies to begin to pull their interests out of the region.

And many officials concur that Chinese investment will not be enough to keep Iran afloat, anyway.

Iran would need to import advanced and expensive technology only available in the US and Europe in order to keep up in the industry on its own, and it seems that that won’t be an option.

Whether or not emerging alliances or oil deals between Iran, China, India and Russia will be sufficient to preserve Iran’s economy is yet to be seen.

Iran is in many senses racing the clock to find a real solution to its economic and diplomatic problems, despite its peacocking of new military power.

The relationship between Iran and other energy players

Turkmenistan is a country with tremendous hydrocarbon resources potential (4th place in the world in proven reserves: 7% of the world crude oil reserves and 9.4% natural gas).

Turkmenistan has several features in common with Iran in terms of amount of reserves, low output and high consumption.

Turkmenistan was always seen as a potential gas alternative for Europe, the dilemma being the transmission route.

The idea of a trans-Caspian pipeline ensuring the connection between Turkmenistan and Azerbaijani through the Caspian Sea was rejected following Russian and Iranian opposition, considering the blurry legal status of the Caspian Sea.

For the time being, as a result of Russia´s domination in the region, Turkmenistan will still be a significant exporter although mainly oriented towards China (agreement for the exportation of 65 billion cubic meters of gas by 2020), Russia and Iran (14 billion cubic meters of gas yearly out of which 6.5 billion was actually imported in 2014; there is the intention to conclude a barter agreement between Iran and Turkmenistan regarding the gas import from Turkmenistan in exchange of an export of goods, technologies and services by Iran, amounting to 3 billion USD annually).

Best case scenario, the Turkmen gas will reach Europe after having been purchased by Gazprom- which is usually happening at lower scales. The widespread conclusion is that Turkmenistan chose China as favorite market on short and medium term, due to the complexity of the European route and to both the Russian opposition and the competing Iranian interests.

Although a potential Turkmen gas transit to Europe through Iran is no priority for the two countries, the bilateral cooperation relations have improved in the recent years; see 2015 when 19 agreements were concluded, some in the energy sector.

Iran enjoyed privileged relations with European states such as Greece, Bulgaria and Germany. Traditionally, Greece was Iran´s gate to Europe and the US.

Iran replied to this convenient position by significant discounts to the petroleum delivered to Greece during 2006-2011.

The representatives of both countries consistently plead for the idea to create a strategic partnership

. The partnership between Greece and Iran becomes even more relevant as Greece will have a decisive role in the European energy equation as gateway to the EU for the transit through the Southern Corridor (TANAP/TAP) and, maybe through the Russian gas pipeline Turkish Stream, and as regional gas “hub”.

In terms of EU policy, the privileged relation between Iran and Germany will make a big difference, energy sector included.  Once the sanctions against Teheran are lifted, Germany will undoubtedly be at the forefront of the foreign investors in Iran.

Last but not least, the idea of a Shiite Iran free of sanctions and with strong energy development perspectives could trouble the already problematic Sunni-Wahhabi relations with Saudi Arabia. Although in terms of population (80 million in Iran as compared to 28 million in Saudi Kingdom) and of an economy slightly different from the Saudi petrol based mono economy, Iran  is ahead in its relation with Saudi Arabia, whereas  in terms of GDP and of the capacity to influence global petroleum markets, Saudi Arabia is still in the lead.

Iranian gas competitiveness, once (and whether) ready to be delivered to Europe, might also reposition the Azeri competitor to increase its gas transmission capacity through the Southern Corridor.

In the same context, the strategic, conflicting position of Israeli, a country with strong regional energy perspectives (by the deposits in Eastern Mediterranean Sea) as to the lifting of Iran sanctions might gain new competitiveness proportions, once Europe would be regarded as harbor for the hydrocarbon in the two countries.



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