Russian President Vladimir Putin (L) and then Saudi Deputy Crown Prince Mohammed bin Salman at the G20 summit in Hangzhou on September 5, 2016, where they planned a successful oil production task force as OPEC+
The news that made headlines on Thursday is that the Joe Biden administration may have moved closer to resuming the 2015 nuclear deal with Iran. Meanwhile, he escaped the attention Iranian Oil Minister Javad Owji said a day earlier in Tehran following a meeting with Igor Levitin, senior aide to Russian President Vladimir Putin. that the two countries had finalized their talks on “the purchase and exchange of gas” and that a contract was in progress. will be signed in Moscow.
Owji revealed that Iran and Russia were negotiating a memorandum of understanding (MoU) to develop 14 more Iranian oil and gas fields in addition to the seven for which contracts already exist, as decided in July in an earlier memorandum of understanding. , according to which Russia agreed to invest 40 billion dollars in the Iranian oil industry. Highlights of the July MoU included the development of Iran’s Kish and North Pars gas fields and six oilfields and the completion of LNG projects – and, importantly, the exchange of gas and petroleum products and construction of gas transfer pipelines.
Owji added that the Iran-Russia Joint Economic Commission will meet in Moscow in the next two months to continue their discussions on expanding cooperation in energy, transport, trade, among others.
A Western narrative has gained traction that Russia opposes the Iran-US nuclear deal, since Iran will replace Russian oil in the lucrative European market and in doing so will also drive down the high price of oil in flooding the world market with its increased oil production. , which would erode Moscow’s revenue from oil exports, the mainstay of its economy.
In reality, however, there is no contradiction here with regard to Iran and Russia. Expert opinion is uniformly that this is far from a situation where Iran completely replaces Russian oil in the global energy market. In theory, Iran could add up to 900,000 barrels per day of production within three months of easing sanctions, and potentially pump near full capacity of around 3.7 million barrels per day in the six months.
According to Goldman Sachs, even if a deal were struck, Iran would take about 12 months to fully ramp up its oil production. The bank also estimates that Iran would increase production to 3.7 million barrels per day, but exports would likely take several months to resume. At best, Iran’s return to the market will have a temporary short-term effect, as some of Iran’s oil is already available on the market.
Hidden charms of the oil exchange
Three key factors play here. First, expectations must be tempered, given that Russia-Iran understanding is at an all-time high today and it is difficult to see Tehran challenging Russia’s core interests under the current geopolitical conditions. – not to mention the collaboration with a Western company.
Iran understands that any significant improvement in its relations with Europe or the United States will be a long-term one, while on the other hand, the lifespan of a nuclear deal could prove to be limited, as all bets are off on US policy beyond 2024 For the European energy market too, now is a period of transition to green energy.
Given these parameters, Iran is rapidly intensifying its economic cooperation with Russia, with energy and transport being the two main hubs. Iran announced on Tuesday that the rial-ruble payment system has started operating and is managed by the Russian Central Bank’s Mir system. Last month, the Tehran Stock Exchange launched rial-ruble trading. The strategic intent is clearly to circumvent the US-dominated global financial system.
Second, it is quite possible that Iran will increase its oil exports to Europe via a “swap” mechanism with Russia. A swap deal is quite viable in which Russian oil meets the needs of Iran’s northern Caspian regions while Iran exports (on Russia’s behalf) excess oil released from its internal needs. Russian and Iranian officials have fleshed out the idea of a “swap” deal.
Now, since their payment system is outside of SWIFT and dollar trade, foreigners will have to guess at any Russian-Iranian swap deal. The EU is not in a position to reject Iranian oil. Again, Iranian oil on the market today is almost entirely in blended form, which is often transported by tankers from other states.
Third, Iran has a convergence of interests with Russia (and with Saudi Arabia) regarding world market prices. It is only a matter of time before Iran joins OPEC+ (the oil alliance between Saudi Arabia and Russia at its heart) in one form or another.
Saudi Arabia is increasingly aligned with Russia than the United States on the world stage. And both need higher oil prices. Saudi Oil Minister Prince Abulaziz bin Salman recently spoke of the “self-perpetuating vicious circle of very low liquidity and extreme price volatility” in oil markets, and how it has been “amplified by the flow of unsubstantiated stories about demand destruction, the recurring news about the return of large volumes of supply, and the ambiguity and uncertainty about the potential impacts of price caps, embargoes and sanctions.
The Saudi prince was referring to the Biden administration’s widespread intervention in oil markets. From a Saudi perspective, President Biden’s climate-focused policies have thwarted upstream investment since he took office in early 2020.
The Saudi prince’s remarks were even more revealing when he was questioned by Bloomberg on the future of OPEC+. He said in a written response:
“In OPEC+, we have experienced a much more difficult environment in the past and we have emerged from it stronger and more cohesive than ever. OPEC+ has the commitment, the flexibility and the means within the framework of the existing mechanisms of the Declaration of Cooperation to address these challenges and provide guidance, including the reduction of production at all times and in different forms, as has been clearly and repeatedly demonstrated in 2020 and 2021.
“Soon, we will start working on a new agreement beyond 2022 that will build on our previous experiences, achievements and successes. We are determined to make the new agreement more effective than before. Witnessing this recent harmful volatility disrupting basic market functions and undermining the stability of oil markets will only strengthen our resolve.
Clearly, Riyadh, a key regulator of the global oil market, plans to maintain or even increase restrictions on the production and total supply of oil for the global market and, to that end, will work towards a new OPEC+ agreement. , which limits production in participating countries.
The implications are as follows: first, Russia may consider its income from oil exports to be relatively protected for the conceivable future; and, second, if a new OPEC+ deal is crafted to make it “more effective than before,” Iran will most likely have to be brought in. Also from Iran’s point of view, it will be desirable to be part of the OPEC+ cartel with Russia and Saudi Arabia.
Basically, the Saudis understand that the ousting of Russia from Asian markets might not happen, given the positions of China and India. Simply put, any increase in the presence of Gulf oil in Europe will happen on its own as Russian supplies turn east – and therefore there is no reason to ruin OPEC+ with Russia. The Minister of Oil, Prince Abulaziz bin Salman, made this very clear.
Therefore, a significant drop in world prices should not be expected due to the growth of production in Iran. Saudi Arabia and Iran primarily care about the welfare of their states. Therefore, their position will be framed so that current prices are comfortable and their companies continue to increase their quarterly earnings.
OPEC+ was the brainchild of President Vladimir Putin, then Saudi Deputy Crown Prince Mohammed bin Sultan, on a Sunday in Hangzhou, China, six years ago. (See my article Watch out for the butterfly effect of the Putin-Salman oil deal in HangzhouAsia Times, September 7, 2016)
MK Bhadrakumar is a former diplomat. He served as Indian Ambassador to Uzbekistan and Turkey. Opinions are personal.