farhad emam Farhad Emam
Publish Date : 04/09/2016

Iran-Azerbaijan Cooperation in the Field of Oil and Gas

EXECUTIVE SUMMARY

Key terms

Gas storage, NIOC, SOCAR, oil and gas swap, Caspian Sea

Summary

The PressTV report on “Iran to swap Azerbaijan's crude oil” on February 27, 2016 included the following explanations:

Roknoddin Javadi, who is also managing director of the National Iranian Oil Company (NIOC), was quoted by Iranian Oil Ministry's official SHANA news agency as saying on Saturday that during a recent visit by Azeri President Ilham Aliyev to Iran, the two countries agreed to the swap of Azerbaijan’s crude oil through Iranian soil.

“The National Iranian Oil Company has put swapping Azerbaijan's oil on its agenda,” Javadi said, adding that a memorandum of understanding has been signed between the NIOC and Azerbaijan's national oil company, SOCAR, according to which the two sides have worked out a mechanism to swap Azerbaijan's oil through the Iranian soil.

The NIOC’s managing director stated that the two countries have also agreed to boost bilateral cooperation in the Caspian Sea.

Based on the above reports as well as the information that follows, in this Legal Report the following issues are analysed:

a) What is the mechanism to be used by Iran to swap Azerbaijan’s crude oil?

b) How will Iran and Azerbaijan “boost bilateral cooperation in the Caspian Sea”?

c) How would they cooperate in Shah Deniz gas field and in storage of gas?

I. How to swap Azerbaijan’s crude oil

The legal basis of the swap deal is two MOUs signed between Azerbaijan's state energy giant SOCAR's and National Iranian Oil Company and Ghadir Investment Company. The swap deal will include the following elements:

a. Oil will be transported from Iran’s Neka port on the Caspian Sea via pipeline with a capacity of pumping 500,000 barrels per day to the Tehran Oil Refinery.

b. Azerbaijan shall deliver oil to the southern borders of Iran.

c. Azerbaijan shall also supply Iran with gasoline and shall buy naphtha and liquefied petroleum gas (LPG) from Iran.

To better understand the above deal, it is necessary to look into another swap deal between Iran and Russia as reported by Sputniknews.com on October 22, 2015:

Under the plan, Iran will receive Russian oil and gas through its northern terminals on the Caspian Sea and will sell its oil to Russian clients from its southern terminals. A similar mechanism of oil swaps is used by Iran in its bilateral trade with other Caspian states, including Azerbaijan, Kazakhstan and Turkmenistan.

According to News.az report on October 24, 2015:

"The agreement on gas and oil swaps is on the table of negotiations between Gazprom and Iranian oil and gas companies. Russia could supply gas to the north of Iran and receive similar volumes of gas from the south of Iran via the swap-deal (as a liquefied gas and pipeline gas)," the minister said.

Such swaps can be done with oil. "Our counterparts gave a positive response to this idea," the minister said.

II. How will Iran and Azerbaijan “boost bilateral cooperation in the Caspian Sea”?

The second field of Iran-Azerbaijan cooperation is their joint exploration in Caspian Sea. The available information about the MOU signed between the two countries shows that:

a. The MOU is signed between the State Oil Company of Azerbaijan (SOCAR) with the National Iranian Oil Company and the Tehran-based Ghadir Investment Company.

b. The Iranian North Drilling Company (NDC) is also involved in this project. It must be noted that NDC is conducting drilling activities in the offshore Sardar-e Jangal oil and gas field.

c. There has been disagreements between the two countries over Alborz section in Caspian Sea with Azerbaijan. Iran and Azerbaijan are also in dispute over ownership of the Araz-Alov-Sharg fields. The following map shows the positions of the above oil fields in the Caspian Sea as well as the boundaries and equidistant lines:


A proposed solution for this dispute is stated by the website of oilprice.com on March 10, 2016:

Tehran to agree to a joint venture, which will effectively help legalize Iran’s claims to these two fields. For Azerbaijan, given its current economic struggles and its need for additional gas supplies (see EDM, January 22, February 1, March 4), this kind of cooperation offers substantial benefits.

d. Iran has carried out exploratory operations with Pejvak vessel in the Caspian Sea. This ship performed 3-D seismographic operations for the above purpose. In 2011 and 2012 announcements were made by Iran concerning finding of oil and gas reserve in the Caspian Sea. Amir Kabir drilling rig was also used for exploration in the same area.

III. Shah Deniz gas field

According to IRNA news agency on October 22, 2015:

Minister of Communication and Information Technology Mahmoud Vaezi, who heads joint economic commission of Iran and Azerbaijan Republic, in an interview with Trend News Agency, said that negotiation to increase Iran's share in development plan of the phase 2 of Shah Deniz gasfield is under way with Azeri side. He added that Iran's National Oil Company is one of share holders of development project of Shah Deniz gasfield (10 percent of share) and now is negotiating to increase our share in the project.

The above investment proposal is related to another major project: Southern Gas Corridor. The website of BP explains that the latter project is composed of three parts:

Shah Deniz Stage 2 gas will make a 3,500 kilometer journey from the Caspian Sea into Europe.

This requires enhancement of some existing infrastructure and development of a chain of new pipelines:

The existing South Caucasus Pipeline (SCP) will be expanded with a new parallel pipeline across Azerbaijan and Georgia

The Trans Anatolian Pipeline (TANAP) will transport Shah Deniz gas across Turkey

The Trans Adriatic Pipeline (TAP) will take gas through Greece and Albania into Italy.

According to another report by Trend News Agency on February 5, 2016:

The European Commission sees Iran as potential gas source for the Southern Gas Corridor, which envisages the transportation of gas from the Caspian Sea region to the European countries…

The Southern Gas Corridor is one of the priority energy projects for the EU. At the initial stage, the gas to be produced as part of the Stage 2 of development of Azerbaijan's Shah Deniz field is considered as the main source for the Southern Gas Corridor projects. Other sources can also connect to this project at a later stage.

Does the last sentence of the above report refer to Iran? The Turkish Sun Report on February 6, 2016 responds to this question:

The EU spokesperson told Trend that the Energy Union Strategy identifies the Southern Gas Corridor as a key project for diversifying the EU’s external sources of energy by bringing gas from Azerbaijan to the EU market.

“The European Commission is also endeavouring to expand the Southern Gas Corridor to access the vast gas resources of the Central Asian countries, including potentially Iran,” the source said.

IV. Gas storage

Iran may also cooperate with Azerbaijan in gas storage activities. Trend News Agency reported on February 8, 2014 that:

The Iranian oil minister also said that about the issue of storing Iranian gas in Azerbaijan, the two countries are to hold negotiations over the coming days.

Iran’s gas production in winter is less than the country’s consumption. But in summer Iran produces several billion cubic meters of surplus gas. The country stores some of the surplus gas in Shoorijeh and Sarajeh gas storage facilities to pump to the national gas network in winter. The facilities’ stored gas stood at 2 billion cubic meters in autumn.

Two Azerbaijani natural gas storage facilities that may be used for this purpose are Kalmaz and Garadag. Their total capacity is 5 billion cubic meters.

Khatinoglu.blogspot.ca also confirmed the above information on May 20, 2015:

Azerbaijan has two natural gas storage facilities, Kalmaz and Garadag, with a total capacity of 5 billion cubic meters. The two facilities currently store only 3 billion cubic meters of gas, so Iran could store around 2 billion cubic meters of its surplus gas in the facilities, and receive them back in winter.

 

 

 

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