Iran and Azerbaijan share oil fields, so what's stopping Tehran from drilling?

Probing cooperation in the Caspian Sea, Iran and Azerbaijan face huge obstacles, not least in the form of the US sanctions regime.

Analysis

6 min read

Umud Shokri

16 November, 2018

Iranian-Azerbajani oil relations go back decades [Getty]

Iranian-Azerbaijani energy relations go back to the 1990s collapse of the Soviet Union. Both countries hold large reserves of oil and gas, and Azerbaijan has used an active energy and foreign policy to carve itself a place on the world energy market.

The Baku-Tblisi-Ceyhan pipeline project was the first major step for Azerbaijan in this endeavour. Both countries are interested in developing successful bilateral relations based on energy. Iran hopes to use the infrastructure of Azerbaijan, particularly the Baku-Tblisi-Ceyhan pipeline to export its oil.

Iran also hopes to join the Trans-Anatolian Gas Pipeline project in the future. However, at present, Iran has not enough natural gas exports to export to the EU or other countries.

Azerbaijan has also called on Iran to use its natural gas storage for use in times of increased consumption.

Shared fields in the Caspian Sea represent a potential basis for future cooperation. Azerbaijan has also invested in Iranian renewables as another potential platform for partnerships.

Iran is the only state in the Caspian Sea area which has no oil and gas activities in that region. This is due partly to the fact that the majority of Iranian oil and gas fields are located in its southern half and offshore in the Gulf.

Shared fields in the Caspian Sea here represent a potential basis for future cooperation

The ability to harness the Caspian's reserves is not just an issue of procurement but also about distribution pipelines, thus meaning further efforts are needed in conjunction with other nations.

Read also: Washington boosts LNG with Iran in sanctions crosshairs

Iran's Caspian field, Sardar-e Jangal, was discovered in 2001. According to initial estimates, this field holds 50bcm of natural gas and 2bb of oil - of which Iran could expect to obtain 500 million barrels.

After the signing of the nuclear agreement, Iran offered four projects in the Caspian Sea, blocks 24, 26 and 29, as well as the Sardar-e Jangal oil field, to foreign companies for exploration and development.

The development plan for the deep-water Sardar-e Jangal oil field is said to cost in the range of $7-10 billion, with Iran open to foreign investment for the project. Similarly, Iran has also invited foreign companies to invest in other fields. Iran is ready to attract foreign investment, and has frequently assured foreign companies with guarantees of the security of their investments - though such guarantees are constantly weighed up by investors vis-à-vis international developments in Iran's foreign policy.

After the nuclear agreement was signed, Iran invited foreign companies to invest in its oil fields, with NIOC and Norway's ORG signing a memorandum to study feasibility, as well as in three exploration blocks in the Caspian Sea. However, this agreement has so far resulted in little by way of actual progress.

In a visit to Tehran by Azerbaijani President Ilham Aliyev in April 2018, leaders of both countries signed a Memorandum of Understanding on the "Joint Development of Relevant Blocks of the Caspian Sea".

This followed a visit to Baku by President Rouhani in March, during which both sides signed a protocol in agreeing that Iran's state-run NIOC and Azerbaijan's SOCAR would recover oil on a 50-50 basis.

The Khazar Exploration and Production Company (KEPCO) was tasked by the NIOC to improve Iran's share of oil and gas fields in the Caspian Sea.

According to the document, a joint oil company would be established between the two countries, with the Alborz and Alvand fields identified as common areas in which Iran and Azerbaijan could enjoy an equal share.

Iran has divided its exploration area in the Caspian into 46 blocks, eight of which have been given priority. Two blocks are shared with Azerbaijan.

Iran, between 2003 and 2005, carried out seismic tests across more than 4,000 square kilometres of the Caspian Sea at blocks 6, 7, 8 and 21. According to Mohsen Delvaz, CEO of KEPCO, Iran still need more exploration in order to have a clear estimate of how much capital will be required to launch extraction operations.

Read also: Rethinking future Iran-Iraq energy relations

However, preliminary estimates indicate that at least $10 billion will be needed for the joint Iranian-Azeri oil field and between $7 and $10 billion for the Sardar-e Jangal field.

Iran is, again, open to foreign investment for the development in order to meet these heavy costs. But foreign companies remain wary, given the re-imposition of US sanctions on Iran.

One energy expert has pointed out that the Alborz and Alvand fields mark the first successful step towards stabilising Iran's energy rights in the Caspian Sea, but the recent agreement has also been a cause for uncertainty.

The challenges for Iran in extracting hydrocarbon resources from the Caspian Sea mainly draw from concerns about the depth of its waters and the land-locked nature of the sea. This results in a lack of connection with open water, operational restrictions related to transportation of equipment, the changing climate, the very difficult and complex nature of providing support due to distance from the coast, as well as the cost and risk of exploration operations, a lack of background in fleet maintenance and offshore services, and technological sanctions.

Iran has a lot of experience in the development and production of hydrocarbon fields in the offshore sector

Of course, Iran has a lot of experience in the development and production of hydrocarbon fields in the offshore sector in general, but these experiences are of a completely different nature in the southern parts of the country and in the Gulf.

The Caspian Sea, due to its depth, requires special conditions at all stages of drilling, development, production and transfer.

The sanctions regime represents the over-riding issue in these challenges. It is possible for Iran to sign agreements with Chinese and Russian energy firms to invest in joint fields in the Caspian Sea, yet deals with China have so far failed to materialise.

Azerbaijan is far more active than Iran in the Caspian Sea. This is to expected, since the US withdrawal from the JCPOA allowed Azerbaijan to attract foreign technology and capital for extraction from a joint field with Iran, playing an important role in the regional energy market at Iran's expense.

Furthermore, Azerbaijan can bolster EU energy security via the TANAP and TAP projects - of which Iran is not yet a part.

Geological and financial problems will continue to plague Iranian efforts, yet an active regional foreign and energy diplomacy could yet lead to breakthroughs.

Chinese companies would not be the best option for Iran in terms of the Caspian, due to financial requirements and insufficient experience in deep water.

The crucial issue is to resolve the tension with the west - and this requires engagement with the US.

Without foreign financial capabilities and technology, Iran will face serious problems in playing a key role in the regional energy market and producing more oil and gas from joint fields, let alone those over which it has full sovereignty.

Omid Shokri Kalehsar is a Washington-based senior energy security analyst.

His primary research interests are in the field of energy diplomacy, US energy policy, the geopolitics of energy, Iran-Russia relations and Iran-Turkey relations.

Follow him on Twitter: @ushukrik