CENTRAL ASIAN STATES INCREASE ENERGY SWAP DEALS WITH IRAN
BACKGROUND: Concerned about the political, economic and security consequences of their over-reliance on the Russian and Azerbaijani-Georgian export routes through which they started to export oil in the 1990s, the two Caspian states of Kazakhstan and Turkmenistan began their swap deals with Iran in the mid-1990s. Having small oil exports, Uzbekistan followed suit for the same considerations. As the American sanctions on Iran ensured a lack of funding for major pipeline projects to connect their oil resources to Iran’s Persian Gulf oil terminals, the three Central Asian oil exporters had to confine their exports via Iran to a portion of their annual exports, which could be handled through swap deals with Iran without antagonizing Washington.
Having continued to this date, this type of deal provides for the Kazakhs, the Turkmens and the Uzbeks to ship their crude oil to Iran’s Caspian Sea port of Neka by tankers via the Caspian Sea. Iran uses such oil in its northern refineries, which are far from its oil resources mainly located in its southern part. In return, Iran delivers the equivalent amount of oil to the designated clients specified by the Central Asian oil exporters through the Iranian Persian Gulf oil terminal of Kharq.
Swap deals are beneficial for both sides. Apart from their lack of insecurity, for the Caspian oil exporters, such deals significantly reduce the cost of oil exports. They therefore eliminate the cost of transferring crude oil from the Caspian Sea to the Persian Gulf via long (about 2000 kilometers) expensive pipelines to be built, while taking advantage of the already developed Iranian Persian Gulf oil terminal with an access to the Asian market. For Iran, swap deals decrease the cost of supplying its northern provinces by decreasing the amount of oil to be pumped via pipelines or be carried by land tankers from its southern oilfields to the north where most of its population lives.
IMPLICATIONS: Appreciating the opportunity, Iran has significantly invested in its northern oil infrastructure along the Caspian Sea, especially in that of Mazandaran Province. Consequently, Neka has turned from an insignificant small port into Iran’s main Caspian oil terminal. It regularly receives crude oil from the Central Asian oil exporters to be transferred to the northern Iranian refineries. Having the capacity of 40,000 barrels per day (bpd), the old Neka-Tehran pipeline has been repaired to allow the transfer of excessive oil to Tehran’s oil refinery in Shahreray. After a few years of delay, in early 2000 the Iranians started the construction of a second pipeline with the initial capacity of 130,000 bpd to be increased at a later time to 170,000 bpd. If everything goes well, the pipeline, which is being built with China’s financing, will be operational in about a year to enable Iran to increase its swap capacity to over 200,000 bpd.
The KazMuniaGaz/Kaznafta June announcement reflected the growing interest of Caspian oil exporters in using the Iranian route for exporting crude oil. For its eliminating the need for extensive investments in building export infrastructure and for its offering the shortest route for oil exports to the Asian markets, Iran is especially interesting as it offers the cheapest oil export option to the lucrative Asian markets. Their oil import requirements are increasing on a steady basis to reach an estimated 10 million bpd by the end of this decade, while that of Europe will be around one million bpd.
By and large, the Caspian crude oil could be sold at a higher price in the Asian markets than that of the Western European ones. For example, as stated in early June by the director for international affairs of the National Iranian Oil Company (Hojatollah Ghanimifard), “the price of Iran’s crude oil exported to Asia was higher than that of the European oil market by $3.5” during April and May 2004.
Added to their plan to diversify their export routes and clients and the absence of insecurity in Iran, whereas in the Caucasus issues like the Ajaria crisis had adverse effects for oil transit, the higher rate of profit that the Iranian route offers to oil exporters is the major reason for the Kazakhs to build oil terminals in Iran in order to increase their export capacity via Iran.
CONCLUSIONS: The June announcement was certainly good news for the Iranian oil industry in search of expanding its presence in the Caspian. The latter is not only significant for its own merits, but also for its possible encouraging impact on other Caspian oil exporters, including Azerbaijan, all of which are trying so hard to increase their share of the international oil market. The announcement did not include any clear time table for constructing the two oil terminals. However, knowing the American opposition to any increase of Iran’s role in the Caspian oil exports and appreciating the concern of many non-American potential investors about possible American sanctions on them should they engage in such project, the Kazakhs seem to have somehow solved the financing issue. Nevertheless, it is still unknown when actual construction begins. Despite this uncertainty, the June announcement indicated that Iran’s efforts to turn itself into a major transit route for the Caspian region could well become a reality given the growing interest in that route among its Caspian neighbors.
AUTHOR’S BIO: Dr Hooman Peimani works as a Senior Research Fellow for the Centre for International Cooperation and Security (CICS), University of Bradford, UK.