Iran is making “good progress” on its first concerted oil drilling operation in the Caspian Sea in 30 years, a senior energy source who works closely with the Islamic Republic’s Petroleum Ministry exclusively told OilPrice.com over the weekend. “The signs are promising in the block [‘18’ in the Roudsar formation from 70-metre waters around 15 kilometres from the northern Iranian coastline] and if it continues to be so then there is great potential there,” he said. “Official estimates are that this small area could have around 600 million barrels of oil and around two trillion cubic feet of gas in it,” he added. This is not surprising, as across the wider Caspian basins area, including both onshore and offshore fields, there are a conservatively estimated 48 billion barrels of oil and 292 trillion cubic feet (Tcf) of natural gas in proved and probable reserves. Around 41% of total Caspian crude oil and lease condensate and 36% of natural gas exists in the offshore fields, with an additional 35% of oil and 45% of gas estimated to lie onshore within 100 miles of the coast, particularly in Russia’s North Caucasus region. The remaining 12 billion barrels of oil and 56 Tcf of natural gas are believed to be variously located further onshore in the large Caspian Sea basins, mostly in Azerbaijan, Kazakhstan, and Turkmenistan. The area accounts for an average of 17% of the total oil production of the five littoral states that share its resources, on average totalling 2.5-2.9 million barrels per day (mbpd). Given these numbers, two natural questions emerge: why has Iran not resumed drilling activity here earlier, and why is it doing so now?

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On the first point, several factors have conspired to keep Iran from focusing on drilling in the Caspian Sea, despite its vast potential resources, but one in particular has prevented it from doing so in recent years. Of the broader reasons, a great degree of the engineering, technology, know-how, and money required for Iran to develop its Caspian reserves, much of which are located in challenging geological areas, has been denied it through the various sanctions regimes in place since its 1979 Islamic Revolution. Given this, Iran has focused instead on its multitude of oil sites offering easy development opportunities, with the lifting cost in many of these equalling the lowest rate in the world – around $1-3 per barrel – along with some sites in Iraq and Saudi Arabia. This is one part of the explanation as to why Iran dug the last shallow-water well in its Caspian Sea region in 1997 and stopped developing the deep-water wells in 2014. The other – special – reason why it has done nothing to restart these operations more recently dates back to the 2018 signing of the stunningly dull-sounding ‘Convention on the Legal Status of the Caspian Sea’, which in reality surely figures as one of the biggest – but least well known — swindles in recent years in the global oil industry, as analysed in full in my latest book on the new global oil market order.

The officially published papers on the agreement refrain from going to details about share allocations in the Caspian Sea resource and talk only vaguely about giving the area ‘a special legal status’. However, the Iran source exclusively told OilPrice.com at that time in 2018 that there was a second part to the deal, never officially released, that has proven explosive for the perennially-fractious relations between the Caspian states — in particular Iran’s with every other partner — and its genesis lies in what happened when the USSR collapsed and fractured into its constituent independent states. Prior to this, Iran and the USSR had struck the original agreement in 1921 to split all ‘fishing rights’ in the Caspian area 50-50. This was amended in 1924 to include ‘any and all resources recovered’, meaning in practical terms that all hydrocarbons resources would be shared equally between Russia and Iran. However, following the dissolution of the USSR, three new independent countries adjoining the Caspian Sea were created – Kazakhstan, Turkmenistan, and Azerbaijan – to add to the original partnership of Russia and Iran. “Iran should have said back then that Russia should have shared its Caspian stake with the three former USSR states, but it [Iran] was content to wait for the official legal dispute to be settled,” underlined the Iran source. Iran’s trust in Russia’s fair play was of course misplaced, and by changing the legal definition of the Caspian from a ‘lake’ – its original designation in the original agreement – to a ‘sea’ (because Russia had opened up the channel from the Volga River into the Caspian to prevent the levels dropping), the original even share distribution of oil and gas profits for the region no longer held good. Instead, Russia was effectively able to divide up the shares as it saw fit, and the way it saw fit was to benefit its existing ally, Kazakhstan (which was assigned a 28.9% share), and its wished-for ally, Azerbaijan (which secured a 21% stake), while Russia saw a slight increase (to 21%), Turkmenistan’s share went down (to 17.225%), and Iran’s share plummeted to just 11.875%. This switch from 50% to just over 11% meant that based on hydrocarbons values at that time Iran was set to lose at least US$3.2 trillion in revenues from the disputed and lost value of energy products going forward. Unsurprisingly, then, Iran’s appetite to start drilling again in its Caspian region was further diminished.

So what has changed now? The answer in part is financial necessity – not just on Iran’s part given the parlous state of its economy, but also on Russia’s for the same reason. The Islamic Republic’s development efforts will provide it with 11.875% of the value of the oil and gas drilled but it will give Russia 21%. The other part of the answer is that even Iran’s relatively paltry share is increasingly required to service the terms of the ongoing multi-layered oil-for-arms swaps taking place between it and Russia. These swaps are of an altogether greater complexity than those between Iran and North Korea, for example, which were characterised by the latter sending personnel, information, and technology (much of which first came from China) relating to its nuclear weapons programme to Iran in return for oil being sent back to it. The swaps between Russia and Iran, according to the Iran source, involve oil-only (designed to reduce transport and distribution costs on both sides), weapon-only (Iranian drone and ballistic missiles in exchange for Russian assistance on nuclear weapons development), and a combination of oil for weapons in each direction. All of this was agreed as part of the 20-year comprehensive cooperation deal between the Islamic Republic of Iran and Russia, agreed by Iran’s Supreme Leader, Ali Khamenei, on 18 January 2024, as exclusively revealed at the time by OilPrice.com. In several key respects, this new deal – ‘The Treaty on the Basis of Mutual Relations and Principles of Cooperation between Iran and Russia’ – mirrored key elements of the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and analysed in full in my latest book on the new global oil market order.

It is no secret now that Iran has been supplying Russia with munitions, artillery shells, drones and ballistic missiles since the onset of the 2022 invasion of Ukraine. Iran has also long been promised Suhkoi-35 fighter jets, Mig-28 attack helicopters, and the S-400 missile defence system, although several of these assurances remain unfulfilled by Russia. However, according to a senior figure in the European Union’s energy security complex spoken to exclusively by OilPrice.com in the past two weeks: “Verified reports show that Iran is becoming ever more active in the Russia-Belarus campaign of eroding NATO’s eastern flank defences particularly along the vulnerable northern and southern border defences that are most vulnerable.” He added: “In the last delivery of mid- and long-range missiles from Tehran to Moscow, for the first time the IRGC [Islamic Revolutionary Guards Corps] included as they had promised in February in a meeting a visit to Moscow, Etemad [a late generation ballistic missile], and Fath 360 [a multi-lunch ballistic missile launching system], with most of the latter to be positioned by Moscow near the Belarus border with Poland.” Consequently, Russia for its part has increased the assistance it is giving to Iran on its nuclear programme, for which it is charging Iran much more than for any such assistance previously given, so Iran now needs more money, which means developing its Caspian resources too.

By Simon Watkins for Oilprice.com

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