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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Iraq And Iran Will Expedite Development Of Sanctions-Busting Shared Oil Fields

  • There are many shared fields between the two countries, but the most notable ones are Azadegan.
  • The financial potential from even relatively small increases in the oil recovery rate is massive for both countries.
  • The shared fields of Iran and Iraq have also been invaluable as the basis for Tehran’s highly successful efforts over the years to avoid oil sanctions from either the U.S. or Europe.
Azadegan field

A key reason why oil prices have remained relatively subdued despite the ongoing Russia-Ukraine and Israel-Hamas wars is that Iran has been producing much more oil than widely known, with the tacit agreement of the U.S. This acquiescence stems from the White House’s desire to avoid the sort of surging energy prices that caused inflation and interest rates to spike in it and its key allies in the aftermath of the Russian invasion of Ukraine in 2022, risking economic recessions in several of them. It also comes from the political awareness that rising oil prices cause gasoline prices to rise as well, and this directly affects a sitting U.S. president’s chances of re-election, as analysed in full in my new book on the new global oil market order. This massive additional quantity of oil from Iran over and above the official figures has gone to China for a basic discount of 30 percent minimum to the relevant grade benchmarks, which has reduced China’s demand for oil in the open market and has consequently acted as a dampening factor on global oil prices. The reason why it does not show up in any official figures is that these ‘unofficial’ oil flows from Iran are held by China in ‘bonded storage’, and oil that goes into bonded storage is not put through China’s General Administration of Customs (GAC) – it is not even recorded as having been ‘paid for’ - and consequently does not appear on any GAC documentation. Much of these unofficial flows have come from increases in the oil fields shared between Iran and Iraq, so it is little wonder that both countries are working now to dramatically increase these further.

There are many shared fields between the two countries, but the most notable ones are Azadegan (on the Iran side)/Majnoon (on the Iraq side), Azar (Iran)/Badra (Iraq), Yadavaran (Iran)/Sinbad (Iraq), Naft Shahr (Iran)/Naft Khana (Iraq), Dehloran (Iran)/Abu Ghurab (Iraq), West Paydar (Iran)/Fakka/Fauqa (Iraq), and Arvand (Iran)/South Abu Ghurab (Iraq). The new development initiative between Iran and Iraq will see predominantly local companies, many of which are closely affiliated to Iran’s Islamic Revolutionary Guard Corps (IRGC) or its Iraqi proxies, tasked with increasing the oil recovery yield from the smaller shared fields, while Russian and Chinese companies take the lead on the bigger fields. The idea behind using the local firms for the smaller fields is to allow them to develop their oil recovery techniques (with help from Russia and China) so that they can consistently average more than the 3.5 percent recovery rates that they have so far managed on sites they have been assigned. Just before sanctions were re-introduced on Iran in 2018, by comparison, a well-known Western oil firm produced a feasible plan to increase the recovery rates on a group of these smaller fields to over 12.5 percent within 12 months from starting (from the then-2.5 percent average), 20 percent a year after that, and then to around 50 percent within three years from then. The hope in Iran’s Petroleum Ministry is that by increasing the technical abilities of these local companies, they can be increasingly involved with developing the bigger fields, which would enable the Islamic Republic to reduce the discount on oil sold to China as part of the overall field development packages signed with its companies.

The same hope is held for the bigger fields too, and the financial potential from even relatively small increases in the oil recovery rate are massive. Looking at just the shared fields in the exceptionally oil-rich cluster of fields in the West Karoun area - which comprises the fields of North Azadegan, South Azadegan, North Yaran, South Yaran, and Yadavaran, for example - these are conservatively estimated to contain at least 67 billion barrels of oil in place and, even more propitiously, have an average recovery rate currently of just 5 percent. This compares to average recovery rate across Saudi Arabia of at least 50 percent. “For every one percent increase in the average rate of recovery across West Karoun, the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in revenues, even if we were only to sell at US$50 a barrel,” the Iran source told OilPrice.com. “With the right joint development, an increase in recovery rate across the [West Karoun] sites to at least 25 percent over a 20-year contract period could be expected to add US$838 billion in revenues for Iran,” he added. Currently, West Karoun’s oil output averages around 360,000 barrels per day (bpd), with spikes to 380,000 bpd, compared to 120,000 bpd in 2017, according to the Iran source. A key part of the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and also analysed in full in my new book on the new global oil market order, was that Chinese firms increase the collective output from the West Karoun fields by at least 500,000 bpd. This should not be difficult, given that the average US$1-2 lifting cost per barrel of crude oil in Iran – a proxy for ease of extraction - is the same as in Saudi Arabia and Iraq. So far, though, no meaningful increases have been effected by Chinese firms, which may be another reason why Iran and Iraq want to increase the abilities of their own people in exploiting their enormous oil resources.

The shared fields of Iran and Iraq have also been invaluable as the basis for Tehran’s highly successful efforts over the years to avoid oil sanctions from either the U.S. or Europe. The oil on the non-sanctioned Iraqi side of the border is often drilled from the same reservoirs as the oil drilled on the sanctioned Iranian side, sometimes even through long-distance horizontal directional drilling. Even if the Americans, Europeans, or any of their most trusted appointees stationed people at every single rig in every single shared field in Iraq they would not be able to tell if the oil coming out it was from the Iraq side or the Iranian side. So this has allowed for decades Iranian oil simply to be rebranded at source as Iraqi oil and shipped to wherever is required in the world. Other layers of complexity have been added to this to further obfuscate the true origin of the oil in question, as also analysed in full in my new book on the new global oil market order. One simple but very effective method is just to switch off a ship’s automatic identification systems (AIS) transponder, making the vessel much more difficult to track. Another involves simply lying about a ship’s final destination in the freight documentation and in the vessel’s voyage plan.

This standard Iranian sanctions-avoidance measure was openly acknowledged in 2020 by its former Petroleum Minister, Bijan Zanganeh, when he said: “What we export is not under Iran’s name. The documents are changed over and over, as well as [the] specifications.” Additionally, transfers at sea in territorial waters of Malaysia and Indonesia have proven another popular way for Iran to move oil ultimately to China. As Iran’s then-Foreign Minister, Mohammad Zarif, stated in December 2018 at the Doha Forum: “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.”  In any event, following the recent meeting of Iran’s Petroleum Minister, Javad Owji, and his Iraqi counterpart, Hayan Abdel-Ghani, the development of these shared oil fields is to be expedited, with further meetings scheduled in the coming month to task individual local firms with new awards to do so. These discussions will also include finalising corollary details such as the further development of required infrastructure, methods to move money related to these developments, and how to monetise gas produced at the oil fields, according to the Iran source.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on March 25 2024 said:
    Iran's estimated crude oil production and exports have hardly changed since the United States reintroduced the sanctions despite the Ukraine conflict and the more recent Hamas-Israel war. Production and exports are estimated at 3.21 million barrels a day (mbd) and 1.5 mbd respectively with hardly any impact on oil prices.

    So the claim that the reason why oil prices have remained relatively subdued is because of rising production with the tacit agreement of the U.S is unsubstantiated, inaccurate and ludicrous.

    What has made prices subdued through 2023 and early 2024 is deliberate market manipulation orchestrated by the United States and involving the IEA, speculators and oil traders aimed at depressing oil prices for the benefit of the US economy and the refilling of the SPR.

    This manipulation has taken the form of strengthening the dollar via hikes in interest rates, announcements by the US Energy Information Administration (EIA) about excessively hyped rises in US crude output and a build of US oil inventories every time prices show signs of recovery, flooding the market with SPR oil and letting the IEA fabricate data about weakening demand and a glut in the market.

    However, bullish sentiments are now prevailing over manipulations with Brent crude soon hitting $90 a barrel.

    Since the reintroduction of sanctions, Iran has been highly successful in evading them via many innovative ways. The fact that both Iraq and Iran share oilfields and therefore similar crudes has enhanced Iranian efforts to evade the sanctions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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