Iran is targeting a dramatic increase in oil production from the fields it shares with neighbouring Iraq, according to the chief executive officer of its Petroleum Engineering and Development Company (PEDEC), Nasrollah Zarei. These include its enormous Azadegan oil field (split into North and South sites) that sits on the same reservoir as Iraq’s huge Majnoon site, and the massive Yadavaran oil field which occupies the same reservoir as Iraq’s Sinbad site. Other notable major shared fields – among many others -- are Azar (on the Iran side)/Badra (on the Iraq side), Naft Shahr (Iran)/Naft Khana (Iraq), Dehloran (Iran)/Abu Ghurab (Iraq), West Paydar (Iran)/Fakka (Iraq), and Arvand (Iran)/South Abu Ghurab (Iraq). This is part of a broader-based plan to bring output across all Iran’s major fields in the ultra-rich oil field cluster of West Karoun to 1 million barrels per day (bpd) from the current 480,000 bpd. Over many years of sanctions against it, Iran has established that it is impossible for international observers to determine whether oil from any of these shared fields originates in sanctioned Iran or non-sanctioned Iraq, as analysed in full in my latest book on the new global oil market order.
The planned upsurge in Iranian oil production follows a major deterioration in its economy over the past few weeks, a senior source who works closely with the European Union’s (E.U.) energy security complex exclusively told OilPrice.com last week. “The budget deficit’s spiralled out of control, inflation’s on a tear, and the currency’s going through the floor, which means the effects are being seen daily on the streets [of Iran],” he said. “The police can keep things under control there, but this sort of [economic] contraction affects the Guards’ [Islamic Revolutionary Guards Corps, IRGC] ability to keep its foreign operations going effectively,” he added. Since the Iranian Islamic Revolution in 1979, the two core purposes of the IRGC have been to safeguard the Republic’s unique version of Islam at home and to spread that vision across the world. Domestically this can be done by leveraging its own military muscle and the financial power that comes from its spider’s web of business interests. These comprise major stakes in many of the biggest businesses in Iran, including those connected to the country’s huge oil and gas sector, as also detailed in my latest book. Internationally, many of the same levers can be pulled to exert Iran’s influence but this often needs to be done through military, political and economic proxies, and these require payment through very specific mediums, most notably U.S. dollars, diamonds, and/or gold. Under previous international sanctions programmes, Iran has managed to keep these networks of influence fully operational with direct or indirect financial help from its friends in Russia and more recently China. More recently, though, four factors have conspired to threaten the functioning of these organisational structures.
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The first of these in terms of timing was the sanctioning of Russia following its February 2022 invasion of Ukraine. For the first few months of the war the resultant spike in global oil and gas prices meant that Moscow was doing better financially at that point than it was before it began the war. However, as Europe backed increasingly hard sanctions, this changed and reduced Russia’s ability to help the IRGC either directly or indirectly. China’s help for the country it had so assiduously courted as its potential key client state in the Middle East has also dwindled in light of its own uncertain economic recovery from Covid and threats of sanctions from the U.S. These recently included moves against the methods by which Beijing previously continued to import vast quantities of Iranian oil at deeply discounted prices under the terms of the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully detailed in my latest book on the new global oil market order.
The third reason hampering the ability of the IRGC to properly operate its proxies around the globe were direct and indirect moves by Israel and its Western sponsors in the war against three of its key proxies. These included sanctions on financial mechanisms used by both the IRGC, Hamas, Hezbollah and the Houthis – among others -- and by attacks on Guards’ and proxies’ personnel in the field and elsewhere. And the final reason is that, having been the one instrumental in removing the U.S. unilaterally from the Joint Comprehensive Plan of Action (JCPOA, or ‘nuclear deal’) in May 2018, second-term U.S. President Donald Trump has ordered new sanctions targeting Iran’s oil network to exert maximum pressure on Tehran. In addition to targeting further firms associated with Iranian oil exports, the new sanctions aggressively focus on firms, ships and individuals with connections to such trade, including those in China, India and the United Arab Emirates. Ultimately, according to Secretary of the Treasury Scott Bessent: “The Iranian regime remains focused on leveraging its oil revenues to fund the development of its nuclear program, to produce its deadly ballistic missiles and unmanned aerial vehicles, and to support its regional terrorist proxy groups.” He added: “The United States is committed to aggressively targeting any attempt by Iran to secure funding for these malign activities.”
Directly targeting China with aggressive sanctions and related measures may well do more damage to Iranian oil exports than it has previously known, although it entirely depends on how rigorously such measures are enforced on Beijing. For a long time, the true amount of Iranian oil being bought by China was enormously underestimated, as exclusively highlighted at the time by OilPrice.com. The key element that the U.S. had overlooked at the time was quite simply that any and all Iranian crude oil that went into ‘bonded storage’ was not put through China’s General Administration Customs (GAC) at all – and was not even recorded as having been ‘paid for’. Consequently, it did not appear on any GAC documentation and therefore did not officially exist as having been oil imported from Iran. In addition, the U.S. previously failed to fully keep tabs on the widespread Iranian practice of disguising the origin of its oil by doing ship-to-ship transfers to tankers flying the flag of another country. As also analysed in full in my latest book on the new global oil market order, such ship-to-ship transfers have long been commonplace in and around the waters of Malaysia (and to a lesser extent Indonesia) before the vessels then made their way to ports in China. So unashamedly proud was Iran of these and other efforts to outfox the U.S.’s sanctions on these oil exports that in December 2018 at the Doha Forum, Iran’s then-Foreign Minister, Mohammad Zarif, stated that: “If there is an art that we have perfected in Iran, [that] we can teach to others for a price, it is the art of evading sanctions.” Towards the end of 2020, Iran’s then-Petroleum Minister himself, Bijan Zangeneh, added a little detail to one such tried-and-trusted method: “What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.”
That said, the U.S. and E.U. have learned a lot from these past oversights according to the E.U. source. “The granularity now of the targeting being done [on Iranian oil exports] is much greater than before, and the sanctions being applied against companies, ships and people connected to it – wherever they are -- will be ramped up even more in the coming weeks,” he said. However, if these new sanctions are not intelligently and rigorously implemented, Iran has proven perfectly capable of avoiding the worst effects of such measures in the past and there is much that can be done to raise oil output from its shared fields with Iraq and more broadly from its West Karoun oil field cluster. At the moment, the rate of recovery across both sets of fields from Iran’s side is at best 4.5% However, before the U.S. withdrawal from the JCPOA in 2018, several international oil companies presented realistic plans to Iran’s Petroleum Ministry detailing how they would increase the average rate of recovery at the West Karoun and shared fields in the first instance to at least 12.5% within one year, to 20% within two years and to 50% within five years. With over 67 billion barrels of oil in place in place across the West Karoun oil fields alone, the Petroleum Ministry says that each 1% improvement in the rate of recovery would increase recoverable reserves by 670 million barrels or some US$33 billion in revenues even with oil sold even at US$50 a barrel.
By Simon Watkins for Oilprice.com
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