Iran: Reaping Benefits From a BTC Shutdown - 2008

Iran: Reaping Benefits From a BTC Shutdown

September, 2008

Summary

Azerbaijan has begun sending shipments of crude for transit via Iran, since the Baku-Tbilisi-Ceyhan (BTC) pipeline is shut down. Azerbaijan said the shipments to Iran will only continue while the BTC is down, but since Russia is calling the shots on the pipeline, Iran could become a regular transit option for Azeri oil. If this occurs, the entire region could experience a shift, and the U.S. position in negotiations with Iran could weaken.

Analysis

Iran received its first cargo of Azeri crude for transit Aug. 24, the Iranian Oil Ministry’s news agency, Shana, said on its Web site. The shipment falls under a longstanding oil swap deal Iran has with quite a few Caspian oil-producing nations, though Azerbaijan has never fulfilled the order. Azerbaijan says the shipments will only last as long as its Western route for oil through the Baku-Tbilisi-Ceyhan (BTC) pipeline is shut down, but with the Russians calling the shots on the BTC, Iran could become a regular option for Azerbaijani crude — something that could shift the entire region. Azerbaijan’s ability to ship its large energy wealth to the West has been doubly hit in the past few weeks. First, transport through the BTC line, which carries 1 million barrels per day (bpd) from Azerbaijan’s capital to the Turkish Mediterranean and on to Europe, was halted when a fire erupted Aug. 5 — possibly the result of a Kurdish attack — in the Turkish section of the line. That setback was compounded by the Russia-Georgia war which not only halted oil shipments through the BTC regardless of the condition of the Turkish section, but also stopped exports via the Baku-Supsa pipeline and by rail from Azerbaijan to Georgia.

Azerbaijan ended up sending approximately 100,000 bpd of oil — a small fraction of what the country is capable of — north through Russia through the Baku-Novorossiysk pipeline. The cessation of most of its oil production has put Azerbaijan in a really difficult place financially, since so much of the country’s economy is based on energy revenues. But even if the BTC and Georgian options are back up and running, Azerbaijan now knows it has to get the Russians approval for its energy to flow to the West. One of the only other options for Azeri crude is to go to Iran, which holds oil swap deals with Kazakhstan, Turkmenistan, Russia and Azerbaijan. Under the deal, the Caspian producers ship their oil by sea to the Iranian port of Neka, where it flows through a new pipeline to refineries outside of Tehran where it is used for domestic consumption. Iran then exports the same amount of crude from its southern oil fields on behalf of the Caspian suppliers and avoids the cost of shipping its Persian Gulf production north to its Tehran refineries.

Most of the Caspian producers though do not take an active part in the oil swap project because they prefer to fill their existing contracts to Russia or Europe. Kazakhstan has typically been the main Caspian producer to fulfill the oil swap contracts, though the flow from Kazakhstan is not steady. Also, Kazakhstan mostly sends its heavier crude to Iran — a burden for Iran’s refineries, which refine mainly sweet, light crude. Azerbaijan, on the other hand, has just as light and sweet of crude as Iran and is a good fit for Iranian refineries. The Azerbaijani oil is produced by BP, but the oil swap program is not considered an investment into Iran and thus avoids sanction violations. Azerbaijan reportedly only sent 200,000 barrels in this shipment to Iran, though Neka and its pipelines to Tabriz, Tehran and Rey can handle 300,000 barrels. Although the Azeri Energy Ministry said shipments to Iran would only continue while the country’s westward routes were down, with Russia’s move deeper into the Caucasus, shipping oil to Iran could become a recurring option for Baku. This means Iran could free up another 300,000 bpd or more of crude, changing two situations.

First, Iran suffers from severe energy problems, despite ranking among the top three countries in proven oil and natural gas reserves. The main problem is Iran’s lack of refining capacity, but another large problem is that the Iranians send crude northward for refining in the country’s population centers, while the export routes are mainly in the south. This is a costly arrangement. The oil swap program was meant to solve this problem, but none of the Caspian oil producers would fill the contracts because they had better alternatives. With all of Azerbaijan’s alternative energy routes threatened, things have changed for Iran. This leads to the second situation: Iran will be able to export more oil instead of using so much domestically. Iran is the second-largest producer in the Organization of Petroleum Exporting Countries, behind regional rival Saudi Arabia. However, thanks to a more favorable investment climate, Saudi Arabia produces nearly triple the amount of oil. Iran freeing up some of its oil for export is something Riyadh will definitely notice — and not happily.

This plays into not just Middle Eastern regional politics, but also Iran’s ability to hold its own during negotiations with the West, particularly the United States. Iran has been under pressure domestically, with many issues tied to its fragile energy situation and the sanctions the West has imposed. But while Russia’s moves in the Caucasus are grabbing the United States’ attention during Washington’s tough negotiations with Tehran, the ripple effects could help weaken the United States’ pressure on Iran.

Source: http://www.stratfor.com/analysis/ira...s_btc_shutdown

In related news:

Opening Borders between Turkey and Armenia: Does Game of Light Stand for Ankara?

Under the conditions of the close economic partnership of Turkey and Azerbaijan, official Ankara will lose greater than it will acquire from re-establishment of railway communication and actually opening the land border with Yerevan, which has been closed for already 15 years. The media actively comments on the news on the forthcoming visit of the President of Turkey, Abdullah Gul, to Armenia and the parallel statements of official Yerevan regarding the plans of renewal of the railway Kars (Turkey) - Gumri (Armenia). Turkey, being the importer of fuel from many sources, obtains transit tariff from the transportation of Azerbaijani oil via Baku-Tbilisi-Ceyhan pipeline, buys gas via Baku-Tbilisi-Erzurum pipeline, builds railway Baku-Tbilisi-Kars together with Azerbaijan. The State Oil Company of Azerbaijan invests in the creation of large petrochemical complex in Turkey. Ankara lays large hopes also for Kazakhstan oil, which will pass by transit through the territory of Azerbaijan, and gas pipe Nabucco, of which beginning will be established in Turkey, will be filled up with the Azerbaijan gas and fuel from central Asia, which will pass through Baku.

Because of its aggressive policy with regards to Nagorno-Karabakh, which is integral part of Azerbaijan, Armenia was found in the total dependence on three countries: Iran, Russia and Georgia, which mainly acted as transit country for delivery of Russian goods to Yerevan. The present desire of Armenia to re-establish activity of the route Kars-Gumri is completely explainable: Georgian-South Ossetian conflict, which burnt in August, made Armenia more dependent on the import, but now already only on one source - Iran. The recent rupture of diplomatic relations between Georgia and Russia actually means that Russian goods can not arrive in Yerevan through Tbilisi, but there is no other economically attractive route. This means that according to elementary market laws, the Iranian goods will grow in price for Armenia, whose economic position even will more deteriorate in light of the last events in Caucasus. Due o the situation created in Caucasus, the question of diversifying the import of energy resources critically stands for Armenia, and the statements of official Yerevan regarding the plans of renewal of railway communication with the partner country for Azerbaijan – Turkey – proceed from this. Official Ankara hardly will go to such in the essence political step.

Opening roads - indicating relaxation of the 15-year position of official Ankara, will allow Turkey to trade only with Armenia because Turkish goods can not fall to the market of Russia through Georgia because of the recent conflict and break of diplomatic relations. Moreover, Turkey does not need to trade with Iran or Georgia through Armenia because Turkey has state borders with these countries and economic operations have been fixed long ago. According to the data provided by US Energy Information Administration (EIA), the fuel consumption in Armenia from 1992 to 2007 averaged 34,000 barrels per day (1.7mln tons per year). According to data by EIA, Armenia does not have own oil refinery, own production of hydrocarbons and main oil pipelines. Armenia repeatedly declared its desire to construct oil refinery in its territory, with a capacity of 7mln tons per year, which is estimated at $2bln. However, no one will buy gasoline from this refinery because it will prove to be very unattractive because of the high prime cost of oil refining. Imported Kazakhstan or Turkmen oil (by transit via the territory of Iran) for the refinery in Armenia will cost very expensive, and export and distribution of oil products are complicated by the absence of main oil product pipelines and, as a consequence of this, by high transport expenditures. Yerevan will not be able to buy Iranian oil because Teheran itself buys raw material from Russia, Turkmenistan and Kazakhstan for its oil refineries, located on the north of the country,.

Azerbaijan has solid geo-political position in South Caucasus, possessing convenient and infrastructurally fixed transit territory for exporting both its hydrocarbons and from central Asia to Europe. Due to the present high prices for oil and gas, Turkey obtains significant benefits from the co-operation with Azerbaijan, whose raw material goes to the Port of Ceyhan. And Kazakhstan will supply part of its own oil from Kashagan Field via Baku- Tbilisi-Ceyhan. Kazakhstan possesses oil terminal in the Port of Batumi in the Black sea in Georgia, loads for which are supplied through the territory of Azerbaijan. Economic factor and solid fixed partner agreements with Azerbaijan, in all likelihood, must be more accepted by Turkey against the background of the possibility of opening borders with Armenia.

Source: http://capital.trendaz.com/index.sht...287259&lang=EN

In other news:

Cheney's trip to Baku “failed”

Vice President of the USA Dick Cheney completed his trip to the South Caucasus targeted at strengthening Washington's positions in the struggle for Caspian energy resources. Kommersant Daily qualifies the outcome of Baku talks as “failure.” The daily accounts that President of Azerbaijan Ilham Aliyev did not offer to the US guest a warm reception, hinting that Baku was not intending to support the idea of retracting energy carriers' flows bypassing Russia.

The daily details: “Dick Cheney's visit to Azerbaijan proved utterly unsuccessful for Washington. The high-ranking guest, who was visiting Baku for the first time, was not met by either President Ilham Aliyev or even Prime Minister Artur Rasizade. Instead, the Vice President was welcomed by First Deputy Prime Minister Yagub Eyyubov and Foreign Minister Elmar Mamedyarov. What about Ilham Aliyev, he was not in a hurry to receive Mr. Cheney. So the latter first headed to a meeting with President of BP Azerbaijan Company and top management of Chevron's Azerbaijan subsidiary, proceeding then to the US embassy to Baku to converse with Ambassador Ann E. Derse. To the Azerbaijan President's residence Dick Cheney made it toward evening.” As sources in the President's administration commented to Kommersant, the talks were rather difficult, although Dick Cheney and Ilham Aliyev have had confidential relations from the times when Mr. Cheney used to be employed by Halliburton and Mr. Aliyev was Vice President of state-run oil company SOCAR. The sides conferred on the war in Georgia and prospects of Nabucco gas pipeline construction.

According to Kommersant's information, “Dick Cheney informed Ilham Aliyev that the USA were going to firmly support their allies in the region and intended to further extend the trans-Caspian gas pipeline circumventing Russia. Ilham Aliyev, however, hinted that, despite his high esteem of relations with Washington, he was not going to quarrel with Moscow. It essentially meant that, in the current situation, Baku decided to wait and see rather than accelerate realizaiton of Nabucco.” Kommersant sources in President's administration accounted that Dick Cheney was highly irritated with the talks' outcome — he even refused to attend a ceremonial supper given in his honor.

Kommersant cites sources in the State Chancellery of Georgia who said that closed negotiations between Mikhail Saakashvili and Dick Cheney in Tbilisi also had not gone smoothly. The sides mainly discussed security of existing pipelines laid through the Georgian territory round Russia, and the Nabucco pipeline project. Dick Cheney made it clear that the USA were ready to maintain security of these pipelines, however, by merely political means, so Georgia would not receive US military aid at the moment.

Source: http://www.regnum.ru/english/1050782.html