Johnson's Russia List #7055 10 February 2003 [log in to unmask] A CDI Project www.cdi.org #13 Asia Times February 10, 2003 Russia turns to Iran for oil exports By Hooman Peimani Dr Hooman Peimani works as an independent consultant with international organizations in Geneva and does research in international relations. As stated late last month by LUKoil spokesman Dimitri Dolgov, Russia has taken steps to increase its crude-oil exports via Iran through swap deals with that country. The Russians, who began such exports in November, are working toward signing a long-term contract with the National Iranian Oil Co (NIOC) to increase the volume of their annual swap deals with Iran to 1 million tons beginning next month. In his reference to the ongoing negotiations between LUKoil and NIOC, Dolgov stated, "We are going to supply oil to Iran," a clear indication of confidence that the two sides will finally sign an agreement to that effect. Among others, LUKoil's success in increasing the amount of oil supplies to Iran to 45,000 barrels per day (bpd) in December when it made a swap deal of US$167.45 million with NIOC should have been a major reason for his confidence. For Russia, swap deals with Iran are a new way to increase its oil exports and decrease its costs, while diversifying its methods. In this case, Russian crude oil will be used in Iran's northern refineries for domestic consumption in return for an equivalent amount of Iranian oil delivered to Russia's designated buyers at Iran's Persian Gulf oil terminals. This arrangement will make Russian oil available to non-European buyers at a competitive price by sharply decreasing the cost of exports currently done by oil tankers loaded at Russia's Black Sea ports, such as Novorossisk. For all Russian swap deals with Iran, Russian crude oil produced by LUKoil's subsidiary, Nizhnevolzhskneft, will be shipped from the Russian Caspian ports of Astrakhan and Volgagrad to the Iranian Caspian port of Neka to be carried farther down into Iran through the 16-inch Neka-Sari pipeline. A Chinese consortium led by China Petroleum and Chemical Corp and China National Petroleum Corp built the pipeline last year. Having a recently enlarged oil terminal, Neka has been the destination for swap deals for other Caspian countries, mainly Kazakhstan and Turkmenistan. These countries transfer their oil by small sea tankers to Neka to be used in the northern part of Iran. Neka is already connected to Tehran via an old pipeline with the capacity of 40,000 bpd, which limits the amount of transferable oil. To remove this barrier, the Chinese consortium is building another pipeline with a much larger capacity. The Neka-Sari pipeline is the first phase of the three-phase Neka-Tehran pipeline (392 kilometers) to connect Neka's oil terminal to Tehran's oil refinery in the southern part of the capital in the municipality of Ray. By next month, the Neka-Sari pipeline's capacity will reach 50,000 bpd, as announced in December by Ali Reza Baba-i, NIOC's person in charge of transferring Caspian oil from Neka. The second phase, the 32-inch Sari-Veresk pipeline, will add about 115,000 bpd to that capacity to be increased further by 270,000 bpd when the last phase, the 32-inch Veresk-Ray pipeline, is online. According to NIOC, the total capacity of the Neka-Tehran pipeline will reach about 500,000 bpd through the construction of additional pumping stations. Thus, once the pipeline is fully operational, Iran will be able to increase significantly swap deals with the Central Asian oil exporters (Kazakhstan, Turkmenistan and Uzbekistan). Oil is not the main attraction of swap deals for Iran, a country with the fifth-largest proven oil reserves (about 99 billion barrels). In fact, its reserves may well be far larger than that, as indicated by new oil discoveries over the past few years, such as those in the central part of the country. However, swap deals make sense for Iran, whose main operating oil wells are in its southern regions. To supply their northern and central oil refineries and petrochemical complexes, the Iranians have to transfer oil from south to north via pipelines and land oil tankers. Swap deals enable them to supply these facilities at a much lower expense, while generating income for handling swap operations. Moreover, such operations increase their regional and international political influence. Having these considerations in mind, Iran began swap deals with the Caucasian (Azerbaijan) and Central Asian (Kazakhstan, Turkmenistan and Uzbekistan) countries in the mid-1990s when those land-locked states with no direct access to international oil markets sought to find alternatives to Russian pipelines for their oil exports. In particular, US opposition to any major Iranian involvement in Caspian oil exports excluded Iran as a major export route and made limited swap deals the only available means for the Iranians to play a role in such exports. Prior to the initiation of the Russian-Iranian swap deals, the domination of US oil companies on the Caspian oil industry excluding that of Russia left a small amount of crude oil available for swap deals. Being the product of non-US development projects, their annual volume ranged between 200,000 and 300,000 bpd. Russia's swap deals with Iran are a major development for both sides. Not only will they help the Russians expand their share of international oil markets significantly, they will enable Iran to turn itself into a major player in Caspian oil exports, as Russia has decided to increase substantially the amount of its oil exports via Iran. This development demonstrates that country's efforts to consolidate its position as a major global oil exporter by diversifying and expanding its export routes and means. Its existing westward oil pipelines and its Black Sea oil terminals put Russia in a suitable position to supply European markets, while making its exports to the growing Asian markets complicated and costly. The Iranian Persian Gulf oil terminals address this problem by facilitating Russian oil exports to those markets without requiring a heavy investment in Russia's oil-export infrastructure. Russia's growing ties with Iran in the oil field, as reflected in its 1-million-ton swap deal, indicate the Russians' determination to follow their national interests despite US efforts to weaken Iran economically and politically. Such ties also reveal Iran's attempts to establish itself as a major transit route for all Caspian oil exporters, including Russia, its strategic ally. ********