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Iran: Caspian Oil Producers Considering Tehran's Swaps Offer

Boston, 10 November 1999 (RFE/RL) -- Caspian oil-producing countries may soon find it cheaper to deal with Iran because of competitive pressures from western pipeline plans.

On Sunday, Iran's oil minister said the country would cut its charges for swapping Central Asian oil for export by more than 30 percent starting early next year. The announcement comes less than two weeks before the expected signing of agreements for the Baku-Ceyhan pipeline at the OSCE summit in Istanbul on November 18.

The statement by Oil Minister Bijan Namdar Zangeneh at a conference in Tehran appears to be evidence that market forces are at work because of the prospect that pipelines to Turkey may be built. Although Iran has previously offered an outlet for oil from Turkmenistan and Kazakhstan, the cost of oil swaps has reportedly been high.

In theory, swapping oil should be the most economical solution for the landlocked Caspian nations because it allows them to export through Iran without building long pipelines.

Since 1996, Iran has had an agreement to import oil from Kazakhstan through Caspian ports and export an equal amount of Iranian crude through the Persian Gulf in exchange. But only a small amount of Kazakhstan's oil has actually been swapped under the agreement to trade up to 2 million tons of oil a year.

Iran has complained that Kazakhstan's oil contains too much sulfur for Iranian refineries to handle. Although Iranian officials have repeatedly stated that the technical troubles have been fixed, the swaps with Kazakhstan have remained stalled. One of the unsolved problems with the trade has been the cost.

Iran has reportedly been charging Kazakhstan a high fee for the service, known as a "netback cost." The charge is said to exceed the transit fee of $2.58 per barrel that has been negotiated for Caspian oil on the Baku-Ceyhan pipeline.

Turkmenistan has also swapped oil with Iran more successfully since last year, but the volumes have remained relatively small. High netback charges may make the swap option less competitive for Turkmenistan if the Baku-Ceyhan pipeline project becomes a reality. U.S. officials hope the pipeline to the Mediterranean will attract oil from both Kazakhstan and Turkmenistan.

Iran has argued for the past two years that Baku-Ceyhan is unneeded because the country can handle 750,000 barrels of Caspian crude per day with swap deals. But Iran has been slow to start work on a 324-kilometer pipeline from its Caspian port of Neka to its refinery in Tehran. Efforts to finance the project collapsed earlier this year. Iran has been working with Chinese companies on a second version of the deal. In the meantime, it has been charging high netback costs to its swap partners while negotiations for the Baku-Ceyhan pipeline have advanced. Iran must now lower its fees to stay in the game.

But the long delays and high costs may have already undermined Iran's strategic goal in offering swaps. If the trade had succeeded in providing a major export outlet for Central Asia, it might have undercut the drive for Baku-Ceyhan. Industry officials and consultants say that negotiating fees with Iran is often a long and agonizing process in which the Iranian side insists on extracting the highest price possible until the deal becomes untenable.

In the case of oil swaps, Iran might well have taken the opposite tack by offering the lowest possible netback cost in order to establish the viability of its export route for the Caspian. Zangeneh's statement on lower fees is a sign that Iran has gotten the message, but it may be too late to head off Baku-Ceyhan.

Azerbaijan reportedly considered the possibility of swaps with Iran last month, but little seems to have come of the idea. Although building pipelines in the region is difficult, it may be simpler than trying to negotiate deals with Iran.

Competitive fees might have also raised pressure on the U.S. government to grant swap licenses for U.S. oil companies operating in Central Asia. The licenses have remained a possibility because of an exemption for Caspian countries in President Bill Clinton's 1995 executive order that banned U.S. trade with Iran. But the government denied swap licenses to two U.S. companies in Turkmenistan last year.

Iran may now see the need to ease its negotiating stance because it wants to use the swap option not only for oil but also gas and electricity. With its geographic position and resources, the country has the potential to serve as a hub for regional energy trade if it can keep its drive for high profits under control.

In order to play such a role, Iran may have to change both its negotiating tactics and its attitudes toward its neighbors and potential partners. Lower swap prices could be a sign that officials are finally ready to compete, but it may be too little and too late.