Iran yields to Russia in talks over Caspian resources

Feb. 2, 2015
Iranian acquiescence to Russia, to which the Islamic Repubic increasingly turns in response to pressure from the West, has become a standard feature of long-unresolved deliberations over jurisdiction and resource ownership in the Caspian Sea.

Mansour Kashfi
Kashex International Petroleum Consulting

Iranian acquiescence to Russia, to which the Islamic Repubic increasingly turns in response to pressure from the West, has become a standard feature of long-unresolved deliberations over jurisdiction and resource ownership in the Caspian Sea. Iran has surrendered its Soviet-era claim to half of the world's largest inland lake and has aligned itself with Russian insistence that countries lacking Caspian shorelines-especially from the West-stay out.

The Iranian position was clear at the fourth summit of the five littoral countries-Iran, Russia, Azerbaijan, Turkmenistan, and Kazakhstan-on Sept. 29, 2014, in Astrakhan, a Russian city on the northern Caspian shore. No convention on the legal status or territorial rights of the participating states was earnestly discussed or decided.

Status in question

The status of the Caspian Sea fell into question with the demise of the Soviet Union. The three littoral republics that emerged from that change demanded larger shares of the Caspian than allotted to them by treaties negotiated in 1921 and 1940, which granted the former Soviet Union half of the sea and Iran the remainder.

Much is at stake. The Caspian Sea, usually referred to as the boundary mark between Asia and Europe is not only rich in oil and gas; it also produces more than 80% of the world's sturgeon. After the collapse of the Soviet Union, the large South Caspian Basin became available to investment by western oil companies seeking exploration and production opportunities.

Caspian border countries all produce and export oil and natural gas, and all claim shares of Caspian resources. Azerbaijan is the hub for export of Caspian gas to western markets. Access to Caspian gas has been central to efforts by the European Union (EU) to diversify its members' gas purchases away from Russia.

International oil companies have been developing oil and gas in the deep basin of the Caspian Sea since the region became accessible to outside investment about 2 decades ago. The formation of Azerbaijan International Operating Co. opened a new era for development. The 1994 signing of the contract known as the "Contract of the Century," as US Sec. of Energy Samuel Bodman called it, allowed Azerbaijan oil to reach global markets for the first time a decade later via the Baku-Tbilisi-Ceyhan (BTC) pipeline.

Throughout this new era, Russia has tried to steer movement of Caspian oil and gas through its territory to keep control of the region's transport infrastructure. In 2005, more than two thirds of all crude oil exported from the Caspian moved through the Caspian Pipeline Consortium (CPC), operated by Russia. By 2010, Russia's share of Caspian oil transport had fallen below 40%.

Russia has officially expressed its disagreement about a trans-Caspian east-west oil pipeline, supposedly for the sake of environmental concerns (OGJ, Jan. 28, 2008, p. 21). Moscow increasingly has used oil and gas to leverage its foreign policy and seeks to establish a commonwealth system involving independent republics in the Caspian region.

An unproductive summit

Although expectations were high, the summit in Astrakhan was unproductive in terms of establishing a unanimous policy for the allotment of Caspian jurisdiction and resources. As in previous summits, emphasis was on the "security of the sea" and the ban on non-Caspian countries' military forces in the Caspian. This idea was originally brought up and has been advocated by Russia and Iran to resist the eastward advance of any western power, especially the North Atlantic Treaty Organization, to Central Asia and the Caspian region.

Russian President Vladimir Putin, in his opening speech at the fourth Caspian summit, said only the littoral countries have the right to active military forces on the sea. Putin, said the summit's main goals were banning the entrance of foreign troops; fighting extremists, terrorists, and narcotics traffickers; developing protocols on oil spills and pollution; and cooperating in economic resources. Further, he stated these points must become the foundation of a general agreement in the next convention about the legal status of the resources and economic development of the Caspian. That summit will be in Kazakhstan in 2016.

Iranian President Hassan Rouhani concurred with his Russian counterpart's statements, stating that security of the Caspian and its surroundings is the responsibility of the countries that surround the sea, not western forces. However, only Iran and Russia out of the five Caspian littoral states are at odds with the West, mostly the US. Both countries are subject to international sanctions, Iran for its nuclear activities and support of international terrorism and Russia for its violations of Ukrainian sovereignty and independence.

Azerbaijan, Kazakhstan, and Turkmenistan, which have economic and strategic ties to the West, particularly in oil and gas, have not followed the proposals from Moscow or Tehran. Kazakhstan and Azerbaijan have cooperated with NATO in Afghanistan for many years. Turkmenistan receives active support of the US in the improvement of its military defenses.

Furthermore, Turkmenistan has been trying to diversify its export markets, traditionally dominated by Russia. On several occasions the country has advertised its capacity to supply at least 40 billion cu m/year of gas to Europe, provided other countries bordering the Caspian support construction of a pipeline under the sea. Putin strongly opposes the idea on what he says are environmental grounds.

Russian Foreign Minister Sergei Lavrov, in August 2011, declared the antagonism of Moscow and Tehran toward any external pressures and revealed that both countries had similar positions on the legal status of the Caspian. In addition, Sergei Shmatko, the Russian energy minister, has criticized European support for construction of a pipeline under the Caspian as a possible threat to the environment and maritime resources.

Despite Russian and Iranian opposition to any attempt by former Soviet republics to lay a pipeline across the Caspian for oil and gas bound for Europe, Azerbaijan and Turkmenistan firmly supported at the Astrakhan summit construction of a gas pipeline from Turkmenistan across the Caspian to Europe via Azerbaijan.

Staking out positions

Russia and Iran staked out their position on Caspian issues in a Mar. 12, 2001, statement following a meeting in Moscow between Putin and then-President S.M. Khatami of Iran (see sidebar).

The unanimity showed strain when officials from the five Caspian littoral countries met in Moscow on Feb. 26, 2002, to prepare an agenda for the first Caspian summit. Iran proposed that all riches of the sea be divided equally between the five surrounding countries: 20% for each country. However, Russia proposed that Kazakhstan receive 28%, Turkmenistan 22%, Russia 19%, Azerbaijan 18%, and Iran 13%. All parties agreed to this. From the beginning, Russia thus forced Iran to be isolated in its proposal for the Caspian to be shared equally between each of the littoral countries.

Thirteen years and four summits later, nothing has been accomplished save empty rhetoric, and ownership of the Caspian is still under debate. Time and again it has been said that the "Caspian Sea Convention" will determine the territorial rights of the bordering states, but no convention on the legal statutes of the sea has been submitted and accepted.

After Kazakhstan and Azerbaijan achieved independence, they and Russia reached a compromise to divide the seabed into sectors, with the water mass of the northern and southwestern sea to be shared between them. For the northern segment of the sea, Russia and Kazakhstan signed a separate agreement advocating the concept of delimitations: that is, the seabed and all its natural resources should be divided between the five countries according to each country's seabed portion and the length of its shoreline. Under this concept, the Iranian share would again be the smallest portion, about 13%, as has been the case since the collapse of the Soviet Union.

A 20% arrangement, known as condominium, for all five states surrounding the Caspian has been rejected repeatedly, particularly by Azerbaijan, which produces oil and gas from the southern portion of the sea, and by Turkmenistan, which potentially could deliver oil and gas across the southern part of the sea. Complicating the question is a dispute between Turkmenistan and Azerbaijan over ownership of an oil deposit.

Russia and Azerbaijan also have a bilateral agreement on the Caspian shelf. Disputes between Turkmenistan and Azerbaijan over the southern segment remain unresolved.

A legal debate continues, meanwhile, as to whether the Caspian should be considered a sea or lake. In 1994, a United Nations convention established customary international laws to limit all coastal countries' sovereignty to 12 nautical miles seaward of the coastline and their freedom to within a 200 nautical-mile exclusive economic zone (EEZ). If the Caspian is considered a sea, these international laws apply to riches and maritime boundaries. If the Caspian is accepted as a lake, development can occur by a joint agreement between all parties. Apart from bilateral agreements between Russia and Kazakhstan and between Russia and Azerbaijan on sharing of Caspian oil and gas fields, frequent attempts by the five littoral states to reach an agreement toward the legal status of the Caspian have failed.

However, at the second Caspian summit, held over 2 days in October 2007 in Tehran, the matter of partitioning of the sea was readdressed, and Iran did not contest the reduction of its historical share of 50% of the sea, seemingly yielding to pressure from the Kremlin. Mahmoud Ahmadinejad, then president of Iran, represented himself as being amenable to the desire of Putin.

Likewise, in the fourth Caspian summit, Rouhani acted obedient to his Russian counterpart, calling western sanctions against Russia unjustified and declaring, "Iran is ready to provide assistance in any form to the government and the Russian people." Under pressure from Moscow, Iran thus lost its 50% share of the Caspian.

Rouhani, in an interview at the end of the summit, told a state-run Russian television station that Iran and Russia have signed a letter of understanding on closer atomic cooperation, including installation of more nuclear reactors in Iran, tighter involvement of Russian oil and gas companies in the Iranian oil industry, oil and gas exporting policy, and the thwarting of US influence in the Caspian region.

Security, environmental issues

The intensifying issue of security of the Caspian was for the first time brought up authoritatively and discussed by Putin in the first summit. However, in the third summit, held in Baku in 2010, the five Caspian nations agreed with Russian and Iranian insistence that only they have the right to sail in the Caspian and that no foreign ships would be allowed. This agreement redefined two treaties between imperial Iran and the Soviet Union in 1921 and 1940 that divided the Caspian between these two countries and further banned the sailing of vessels with foreign flags.

So far, the terms of agreement between the five countries include working jointly against illegal migration and smuggling of people; terrorism; illegal movement of arms, explosives, and narcotics; piracy; and maintaining the safety of shipping and the ecosystem of the sea.

Russia has been the greatest polluter of the Caspian. For more than a century, industrial wastes from companies clustered along the Volga River have flowed into the Caspian. Occasional crude leaks in recent years have aggravated the pollution.

A legal document concerning cooperation of the littoral states in protecting the Caspian from oil discharges and land pollution, known as the Regional Readiness Protocol, was signed in 2012.

Era of cooperation

An era of cooperation in the oil and gas industry between the present regime in Iran and its communist neighbor in the north started in the Caspian Sea.

In May 1989, during a visit to Moscow by the speaker of Iran's Islamic Consultative Assembly, Mola Rafsanjani, a deal was reached in which the USSR agreed to drill wildcats off the Iranian coast; in return, Iran would resume gas deliveries to the Soviet Union. A month later, an agreement was signed by the All-Union Foreign Economic Associations head and the National Iranian Oil Co. executive director in Baku, headquarters of the Soviet Union's Caspian Sea operations. The contract required the Soviet Union to drill at least two exploratory wells on Iran's Caspian shelf.

Soviet Russia collapsed before work could start. On Mar. 21, 2010, state-owned Iranian television reported that Khazar Exploration & Production Co., a subsidiary of NIOC, commissioned the first domestically built semisubmersible rig, called Iran-Alborz, for drilling in the Caspian. Further, the NIOC on different occasions in late 2012 reported a gas discovery off Iran, called Sardar Jangal. This claim has not been confirmed by outside sources.

Since establishment of the Islamic Republic in Iran, the country has lacked the technical and capital capacity to exploit its abundant resources to full potential in general and in the Caspian Sea in particular. Furthermore, corruption and western sanctions have discouraged work in Iran by international oil and gas companies. This has pushed Iran toward dependency on Russia. Oil and gas deals struck between Tehran and Moscow have been far more favorable for Russian firms than any past agreements Iran made with western oil and gas companies.

Russia's Gazprom initially expressed interest in Iranian gas prospects in 1997, when it was awarded interests in the second and third phases of development of giant South Pars gas field in partnership with Total and Petronas. After controversy unfolded over Iran's nuclear activities, Total withdrew, and the partnership fell apart. Since then, expanding bilateral cooperation was due mainly to western pressure on the Islamic regime as Iran showed itself to be increasingly compliant with to Russian desires. Iranian natural gas nevertheless competes with Russian supply in Europe. Understandably, the Kremlin does not want any other major gas producer to jeopardize European dependence on Russian gas.

Cooperation through swaps

Russia and Iran also have shown intentions to sign crude oil swap deals across the Caspian to boost cooperation. If materialized, these deals could undercut the efficacy of the international sanctions on Iran and technically violate them.

On Apr. 6, 2014, Russian Energy Minister Alexander Novak held talks with Iranian Oil Minister Namdar Zanganeh about a deal to launch a south-north, reverse oil swap project. Russian media reported the deal under a barter agreement could involve 500,000 b/d of Iranian crude for Russian commodities.

Later, Reuters reported a tentative agreement for swapping industrial goods for oil between Russia and Iran. Russia is to export equipment, metals, and food to Iran and install two reactors in the Persian Gulf city of Bushehr. Iran, in return, will deliver to Russia 300,000 b/d of Iranian crude through the Caspian Sea and 200,000 b/d via the Persian Gulf. The parties further agreed to establish trade and transport links to the Persian Gulf and to resist US influence in the Caspian region.

On Apr. 8, 2014, US Sens. Mark Kirk (R-Ill.) and Robert Menendez (D-NJ) urged President Barack Obama to warn Iran that, if it proceeds with the proposed swap agreement with Russia, the US will reinstate the sanctions eased under the November 2013 interim agreement. Two days later, Russian Finance Minister Anton Siluanov, during World Bank and International Monetary Fund meetings in Washington, mentioned to reporters the "oil for goods" agreement between Russia and Iran would follow UN rules on sanctions, not US rules.

US Treasury Sec. Jack Lew, who participated in the monetary organizations' meeting in Washington, warned the Russian finance minister that any "oil for goods" agreement Russia might reach with Iran could run afoul of the US sanctions.

In early January 2015, US Rep. Eliot Engel (D-NY), the leading Democrat on the House Committee on Foreign Affairs, said, "This irresponsible move raises serious questions about Russia's commitment to ending Iran's quest of nuclear weapons."

On Jan. 20, the Russian defense minister, Sergei Shoigu, visited Tehran with a large delegation to sign an intergovernmental treaty on military cooperation. His Iranian counterpart, Hossien Dehgan, after signing the agreement, said, "Emphasis was placed on the need for cooperation between Russia and Iran in the joint struggle with the intervention of outside forces in the region." According to the Associated Press, Dehgan continued, "Iran and Russia are able to confront the expansionist intervention and greed of the US through cooperation, synergy, and activating strategic potential capacities."

According to TASS, Russia's state media, the agreement between Russia and Iran covers cooperating more closely in the oil and gas industry, training Iranian workers in Russian oil fields, building numerous nuclear reactors, producing electricity and developing power infrastructure, training Iranian military personnel in Moscow, and visiting Russian warships in Iranian ports on the Caspian Sea. Furthermore, according to Leonid Ivashov, who accompanied the Russian defense minister, "In the direction of arms technology cooperation, at least defensive systems, such as the S-300, probably will be delivered to Iran." This is contrary to US and Israeli objectives.

Growing obligations

Iran owes at least $2 billion to Atomstroy Export, a Russian state firm, for construction of the Bushehr nuclear reactor. And Russian support of Iran's nuclear quest in the UN Security Council has given Russia tremendous leverage over the Islamic regime, including in the Caspian negotiations and any oil and gas partnership arrangements.

Russia cannot be considered an inveterate friend of Iran, especially in the ongoing territorial dispute over the Caspian Sea, where Putin has behaved more as an antagonist than as an ally of Iran. In addition, the partnership between Russia and Iran has never been one of equivalence. Since formation of the Islamic regime in Iran, the country has depended on Moscow for the purchase of arms, for diplomatic support, for management of the Iranian oil and gas industry, and for technological assistance in nuclear activities. Russia's commitment to this bilateral relationship and its support of Iran in the international arena have been reciprocated by Iran's compliance with Russia's stipulations in regards to the Caspian issue.

So far, three Islamic Republic presidents have kneeled before the wishes of Russian leaders, and Tehran's officials have uttered nary a word about Iran's historical right in the Caspian conflict.

The author
Mansour Kashfi, PhD, is president of Kashex International Petroleum Consulting and is a college professor in Dallas. He also is the author of more than 100 articles and books about petroleum geology worldwide. Kashfi holds a BS degree in geology from the University of Tehran, an MS in geology-subsurface stratigraphy from Michigan State University, and a PhD in geology-tectonics and sedimentology from the University of Tennessee. His e-mail address is [email protected].