Tehran counts cost of lost oil swaps
By Ebrahim Gilani
Three months since Iran's oil ministry announced it was ending an import deal
with three Caspian states, future plans remain unclear.
The ministry announced in June that it would not be renewing contracts with
four companies that had been bringing in oil from Kazakhstan, Turkmenistan and
Azerbaijan. Under an arrangement known as an oil swap, the imported crude was
refined locally in northern Iran, and an equivalent amount of Iranian oil was
then made available for export from seaports in the south.
The oil swap deals were managed by Germany's Select Energy
Trading GmbH, the Swiss energy trader Vitol, Dragon Oil from the United Arab
Emirates, and the Ireland-based Caspian Oil Development.
The first oil swaps began in 1997, allowing Caspian states with limited export
options to go through Iran.
The oil ministry's decision to stop them came as a surprise because only a few
months earlier, President Mahmud Ahmadinejad predicted that the volume of oil
swaps - then between 70,000 and 100,000 barrels per day - could rise to nearly
320,000 bpd by 2015.
Explaining the decision, officials said Iran was not making money because
receipts from the swap - about US$1 per barrel - had not increased in line with
spiraling oil prices over the past decade or so.
Seyyed Abdolmajid Shoja, formerly of the Iranian parliament's energy affairs
committee, said revenue from the 115 million barrels exchanged between 1997 and
2006 came to just $146 million.
Asked by reporters why the oil swaps had ended, Oil Minister Massoud Mir-Kazemi
said the deal had been a loss-maker rather than generating a profit.
He noted that any oil moved from southern ports on behalf of Caspian states
counted towards Iran's total exports, and domestic production had to be curbed
accordingly to keep within Organization for Petroleum Exporting Countries'
Since these exports earned Iran only a small flat fee instead of reflecting the
going rate for oil, Mir-Kazemi said that "it was as if we were losing $69 on
every barrel, which was completely disadvantageous for us". The minister has
indicated that the contracts could be renewed, but with the fee increased "from
$1 to $5" per barrel.
Months before oil swaps were suspended, Swiss energy trader Vitol had already
made it clear it wanted to end its arrangement with Iran. At the time, its
decision was seen as a desire to avoid falling foul of United States sanctions.
Meanwhile, Dragon Oil made arrangements to ship its oil from Turkmenistan to
Azerbaijan, where it could go into the Baku-Ceyhan pipeline.
The oil swap was of mutual benefit to Iran and its northern partners. Kazakh
oil has traditionally had to go through Russia, which can dictate volumes and
transit fees, and an eastward route to China opened up only recently.
Azerbaijan has a major pipeline running via Georgia to Turkey's Ceyhan
terminal, but the Russian-Georgian conflict in 2008 showed the advantages of
having alternative options to hand. Finally, Turkmenistan is mainly a natural
gas producer and has no easy way of exporting its crude oil, except to
For Iran, the swaps with nearby producers meant it could supply northern areas
from oil processed at the Tehran, Tabriz and Arak refineries without having to
transport it all the way from wells in the south. Just as importantly, the
arrangements provided Tehran with opportunities to position itself as a player
in the Caspian energy market.
Following the collapse of the Soviet Union, successive Iranian governments
tried to attract investment in pipelines to take Caspian oil and gas to the
Persian Gulf - an easier route to international markets than going through
But mounting international sanctions meant this never happened, and the
Baku-Ceyhan oil route and the projected Nabucco gas pipeline through Turkey and
southeast Europe reduce Iran's ability to sell itself as the shortest and
For geopolitical reasons, the firms involved in oil swaps now appear less
motivated to maintain the arrangement, especially if Tehran is going to demand
Although Iranian oil officials say they are open to negotiations, an oil expert
in Tehran, speaking on condition of anonymity, said this is looking less likely
than ever, as the latest UN sanctions "create new obstacles", so that "bringing
these companies back is a difficult task".
Speaking on the sidelines of an oil and foreign policy meeting held in Tehran
in March, energy expert Nersi Ghorban said the former Soviet Caspian states now
viewed Iran as something of a liability because of sanctions.
The Iran advisor for a major western oil firm, who asked not to be named, says
Iran's peremptory decision to shut off oil swaps was an error of judgement,
coming as it did at a time when the country is increasingly hemmed in by
economic sanctions, the latest of which were imposed by the United Nations and
the US in early June.
Instead of simply ending the deal, he said, Tehran could have warned its
partners in advance and then entered into negotiations about raising the fee
Hasan Mansoor, a professor at the Schiller International University in Paris,
says Iran could have followed Russia's example by asking intermediaries to pay
a tax instead of bumping up the fee itself.
"It appears that Iran was not levying specific taxes on its contractors," he
Ebrahim Gilani is the pseudonym of an Iranian journalist and foreign
policy analyst based in London.