Energy Swaps, in the Economic Cooperation Organization (ECO) and Caspian Sea region

By Mahmood Khaghani

There is considerable discussion about Iran 's production capacity and post sanctions sales of crude oil. While it is not easy predicting if the US administration will stick to its agreements with Tehran and five world powers, if and when the agreements are executed officially, Reuters claims that over 30 million barrels of Iranian oil are in floating storage looking to find a home. This claim has not been confirmed by Iranian sources that I spoke to. So, it may be attributed to intermediaries speculating in order to make a profit.

However in media reports, Mansour Moazami, Iran’s deputy oil minister for planning and supervision, has recently been saying that Iran hopes to nearly double its crude exports immediately if and when sanctions are lifted.

Naturally, once sanctions are lifted tankers loaded in the Persian Gulf with Iranian oil may be instructed to deliver their cargo anywhere in the world, and in addition to this inventory Iran also has spare capacity of perhaps 400,000+ barrels per day which could be immediately opened up. Additional production capacity requires more time and investment. Chris Cook one of well know market observers is of the opinion that Iran could increase its production by between 800,000 to one million bpd within a year at most.

Some observers are expressing views that with Iran oil back in the market prices will fall further. However, Moazami has been reported saying that reentrance of Iranian oil in the market won’t likely cause oil prices to fall further, because by the time Iran gets back its lost market share the world’s economy will improve, and therefore, create more demand for oil.

Reuters reports about 30 million barrels of Iranian oil being ready for market and causing the price to fall further, begs the question firstly, of why Iran would wish to dump inventory on the market and increase cargo lifting (as distinct from increasing capacity) if the effect is likely to depress the oil price to $45/barrel or less? Secondly, why would Iran wish to take the political risk of holding increased dollar or euro reserves while still having grave difficulty in accessing the proceeds of previous sales? If China increasingly prefers to hold oil reserves to holding dollar reserves, why should Iran be different?

Chris Cook with regard to these questions says: “I think future destinations of Iranian crude oil will be very much tied to the way in which Iran chooses to engage with oil buyers in the future. Iran has always valued stable long term relationships which give security of demand and flows of funds and this coincides with the strategic need of oil buyers for security of supply.”

That means market shouldn’t be nervous of Iran returns. In fact Iran is coming back to play its role in global energy security and economic growth.

There is also the question of Iran's own domestic crude oil refinery requirements for light and low sulfur crude oil grades on the one hand and the fact that new Iranian oil fields tend to be heavy and high sulfur grades. At the same time we need to take into consideration the previous administration in its privatization policies made grave mistakes that even have been highlighted by high-ranking officials like the speaker of Iranian parliament.

Refineries have not been looked after in accordance with NIOC standards’ and the new owners have not yet shown any interest or plan to invest in upgrading refineries either.

So, what would be the best available and short-term option for Iran ?

Chris Cook is of the view that: “The outcome will perhaps be the increasing use of crude oil swaps such as a swap of a Caspian blend delivered from Kazakhstan or Turkmenistan into Northern Iran in exchange for heavier crude oil delivered out of the Persian Gulf to the new generation of complex refineries in India and the Far East in particular. Possibly there will even be swaps of Caspian crude oil for oil products via suitable long term partnership arrangements with such refineries.”

He further suggested that: “Straight sales of oil into an oversupplied conventional oil market which depress the price would be lose/lose for Iran.”

Caspian Sea petroleum producers are all sitting in the same boat in current market situation. In my opinion as a person who played a role in defining the oil swap business a long time ago, prior to my retirement from the Iran ministry of petroleum, I think Iranian oil minister, Bijan Zanganeh should be reminded of his past policies when he returned to ministry he called it: “Energy Diplomacy,” which in Chris Cook’s view means “Energy Cooperation”. And, that is why Iran in its 21st century petroleum/energy strategy needs to give urgent consideration to the development of a new generation of energy swaps, beginning in the Economic Cooperation Organization (ECO) and Caspian Sea region.

Mahmood Khaghani, now retired, had over 33 years of service in senior international positions in the Iranian petroleum industry, including as the head of the Oil Ministry's Caspian Sea and Central Asia Department, also the business development and joint ventures advisor of Iran 's North Drilling Company. He was also the director for energy, minerals and environment at the ECO Secretariat in 1996-2000.

/By Trend/