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Iran: Tehran Puts Off Oil Swaps With Astana

Iran is said to have suspended its plan for oil swaps with Kazakhstan, despite a series of official statements that the trade would start soon. Tehran has invested heavily in the alternative for Caspian exports since 1997, but its progress now seems to be in doubt. Our correspondent Michael Lelyveld reports.

Boston, 21 March 2001 (RFE/RL) -- In a surprise move, Iran has reportedly put off its plans for conducting oil exchanges with Kazakhstan, dealing a setback to its goal of becoming an export route for neighboring countries on the Caspian Sea.

The decision to suspend plans for exchanges of crude, known as oil swaps, was blamed on the high mercaptan content of Kazakh oil, which was said to be incompatible with Iranian refineries, the London-based Petroleum Argus newsletter reported last week. Mercaptan is a class of chemical compounds that contain sulfur, which is common in Kazakh oil and gas.

The move by the National Iranian Oil Company came despite a series of recent statements, pledging that the swaps with Kazakhstan were about to begin.

Last month, Reza Majedi, director of the state-owned NIOC, said the company was ready to start pumping Kazakh oil through a new pipeline from Iran's Caspian port of Neka to its refinery near Tehran. The deal called for using the fuel locally in northern Iran, while exporting an equivalent amount of Iranian crude through Persian Gulf ports in the south.

Majedi told the Reuters news agency in February, "We will start this swap procedure very soon."

Last December, Iranian Deputy Foreign Minister Said Kharrazi said during a visit to Kazakhstan that the swaps would commence in a month, the Russian news agency Interfax reported.

According to Majedi, there were only slight seasonal problems with the "pour point," or the viscosity, of the oil. He said: "This is winter. So small technical problems over the pour point exist. As soon as we solve them, we will start swaps." There was no mention of a mercaptan problem.

Majedi's statement left the impression that Iran had only a minor issue with the thickness of the Kazakh oil that would be solved with warm weather. He did not mention the more difficult problem of dealing with the high mercaptan content of the oil, which requires special equipment at Iranian refineries.

Iran had similar trouble with Kazakhstan's oil after it signed a swap deal with the country in 1997. Despite great expectations, very little of the oil was delivered, and the deal languished for years.

But Iran has since invested heavily in the swap plan as a way of competing for Caspian exports with Russian pipelines and the U.S.-backed route from Baku to Ceyhan. Although Iran's oil exchanges with Turkmenistan are growing, it is not clear why the larger swaps with Kazakhstan have not worked out.

Kharrazi said Iran has invested about $450 million in its swap efforts. The new pipeline from Neka cost some $250 million, while refinery upgrades to process Kazakh oil have cost an additional $200 million. But the refineries still do not appear ready to handle the oil.

Iran has spent years promoting its swap business but has suffered a series of false starts. At least one deal with Iranian and Chinese firms fell through due to lack of financing and expertise.

Despite a breakthrough on building the pipeline from Neka last year, the refinery upgrades were reportedly left for a later stage. At a meeting in Beijing in January, Iranian officials declared that the refinery work with China's Sinopec oil company only officially started under a $150 million contract two months ago.

Kazakh and Iranian officials have negotiated over the blend of crude that would be provided for the swaps, perhaps leading Iran to believe that the trade could begin. But if mercaptan is still a problem, it leaves the impression that little progress has been made since 1997 despite Iran's investment.

Industry sources suggest that Kazakhstan may be saving its higher-quality crudes for pipeline transport through Russia, which handles most of the Kazakh exports. Whatever the reason, the suspension may hurt Iranian credibility on its swap project. Last year, Iran offered steep discounts on its charges for oil swaps to attract Kazakh crude.

Tehran has also publicized swaps as a prelude to a Caspian pipeline to the Persian Gulf. It has offered the route as the low-cost alternative for Caspian exports and has received expressions of support from officials in Kazakhstan. But unless Iran can make more progress with its swaps, it may have a hard time convincing its neighbors that it can complete its pipeline plans.