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

Yves here. This ongoing and increasing shared oil development between Iraq and Iran is remarkable given that they fought an eight year war that depleted Iraq’s fighting capacity. On top of that, recall the first Gulf War. The casus belli was that Iraq had invaded Kuwait because Kuwait, in Iraq’s view, was pulling too much oil out of a shared oil field. Oh, and in typical US double dealing fashion, Saddam Hussein had informed the US that he intended to invade as a result of what he regarded as theft, and we did not object (this per the Economist many years later).

Notice also that at least in the case of Iraq, the low recovery rates are the result of US intervention. After the first Gulf War, when Iraq oil exports were sanctioned and then constrained under the oil for food program, maintenance of the Iraq oil fields languished. Many contend that the reason for the second Gulf War was for the US to control Iraq’s oil, which at the time amounts to the second largest proven reserves in the world. However, the summary I read some years ago (and later revelations may undermine this version of events) was that the Bush Administration wanted to do something awfully close to expropriating Iraq’s oil, which the oil majors who would upgrade the infrastructure and engage in new development were not keen about. So I surmise the scheme foundered over how exactly to move forward and how the Iraqis would participate.

By Simon Watkins, a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for Credit Lyonnais, and later Director of Forex at Bank of Montreal. He was then Head of Weekly Publications and Chief Writer for Business Monitor International, Head of Fuel Oil Products for Platts, and Global Managing Editor of Research for Renaissance Capital in Moscow. Originally published at OilPrice.com.

• 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.

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.