Caspian-to-Arabian-Sea pipeline suggested by Iran as it searches for Central Asian inroads

Global Insight, November 20, 2007

Samuel Ciszuk

Iran is to start planning works for a pipeline between its Neka port, on the Caspian Sea, and Jask, on the Gulf of Oman, to offer transits of Kazakh and Turkmen oil through Iran.

Pipe Dreams

Iran is hoping to finalise design plans for a 1-million-b/d pipeline across the country from its northern Caspian Sea port of Neka to its Gulf of Oman port of Jask, by mid-2008. The 1,515-km pipeline project, complete with oil loading terminals at both ends, is expected to cost $2US billion, Platts reports the National Iranian Oil Engineering and Construction Company (NIOEC)’s Director of Engineering and Construction M. A. A. Sajedi as saying.

Global Insight Perspective 
 
Significance

Iran has revealed that it is planning a 1-million-b/d pipeline, officially targeting crude supplies from Kazakhstan’s large Kashagan field, but also offering Russia, Turkmenistan and Azerbaijan the opportunity to export to the Arabian Sea.

Implications

Iran is trying to extend its reach into Central Asia and the Caucasus by offering its own export route to the land-locked region. The offer is perilous, however, as Russia has not looked keenly on extended Iranian influence in what it regards as its sphere of influence. Nor will the region’s countries perceive Iran as a dependable partner, as sanctions are bound to hinder most of the possible supply deals.

Outlook

Iran’s isolation is the key problem facing it, as the route otherwise would have a reasonably high appeal. Relying on crude shipping on the Caspian, instead of a pipeline, will at least allow the infrastructure to be built as an all-Iranian project.

Defining the pipeline’s main objective to be the transport of crude from Kazakhstan’s vast Kashagan field, Sajedi added that the pipeline’s capacity will also be open for crude supplied from Russia, Azerbaijan and Turkmenistan, as the project would offer fast and easy access though only one country, down to the Indian Ocean port on the Gulf of Oman, with no need for tankers to enter the Persian Gulf. Instead of previously touted ideas of pipelines running parallel to the sea, Iran plans to construct a fleet of crude tankers transporting crude over the Caspian Sea and loading it into the pipeline at Neka, providing a more economic opportunity to have a diverse supplier base. Indeed, according to the Platts interview, six 63,000 dwt tankers have already been ordered.

The project will be built with the help of international investors, with Italy’s Eni and France’s Total, which both have large stakes in the Kashagan field, already having expressed interest, according to Sajedi.

Domestic Considerations

Iran has had a long-standing problem of moving adequate crude and fuel supplies up to its heavily populated northern parts, especially the Tehran area, meaning that the pipeline, in order to be useful at all times, could be built as a reversible pipeline, allowing for transports from the south to the north. More importantly, Sajedi said that the pipeline would run as close as possible to several large population centres in the north and east-central area of Iran, providing existing and possible future refineries with crude, whether from the Caspian Sea, or from the Persian Gulf. With that in mind, the Iranian gamble to build a pipeline first and let supplies materialise later, looks less risky, allowing the pipeline to fill a role in the domestic network at all times.

International Impediments

There are, needless to say, several impediments to the project. Although Sajedi officially mentions Eni and Total in his interview with Platts, the Italian major and operator of the Kashagan oil field has already said that the route through Iran is politically impossible. France’s Total will not be warm to the idea either, as its government is pressing the company not to enter any new deals with Iran and as its large LNG project in the Islamic republic is being squeezed on issues like pricing and development costs.

Although Iran appears to favour a shipping-based acquisition of crude from Caspian littoral states, allowing for Iranian traders to buy crude at its neighbours’ ports and then sell it from the Jask port, the political uncertainties, Iran’s international isolation, as well as the volumes sought make the project very risky. Although Kashagan is expected to produce 1.5 million b/d at peak production, Eni and Shell will most likely commit their share of Kashagan oil to the planned Samsun-Ceyhan pipeline running north-south across Turkey, Total will face political obstacles from the French government, and the consortia’s two U.S. members, ConocoPhillips and ExxonMobil, are prohibited from dealing any further with Iran under the Iran sanctions act. This would only leave Kazakh state-owned Kazmunaigaz’s and Japanese Inpex’s combined 16.67% share of the production, equalling 250,000 b/d–a far cry from a stable basic feed guaranteeing the pipeline’s viability. Even then, Inpex might not be too keen on the solution, already having eschewed stakes in Iranian oil and gas development projects under U.S. pressure. Should Kazakhstan’s state-owned Kazmunaigaz, which is likely to see its share of Kashagan’s output increase in any deal to resolve the current impasse over the development of the field, opt for the Iranian pipeline, it would no doubt raise Russia’s ire, long having supported Iran in exchange for the Islamic Republic not to try to spread its revolution, or its economic interest into what Russia regards as its sphere of interest.

Hoping for Turkmenistan to Deliver

Russia has been very keen to dominate the Central Asian and Caucasian oil and gas export routes as much as possible and will not look favourably on a new contestant entering the game. Although Iran knows that Russia only protects Iran as long as it can derive benefits out of the situation in regards to its relations with the United States and the European Union, it no doubt needs Russian support and its arms and technology transfers. Azerbaijan is keen to attract Kazakh oil volumes to pump via the existing Baku-Tbilisi-Ceyhan pipeline, creating a trans-Caspian supply corridor, if not an actual pipeline linking to Aqtau on the Kazakh Caspian, while Turkmenistan to some extent remains a wildcard. If Iran succeeds in securing oil feedstock for its transit project, these supplies will most probably come from Turkmenistan, if the Central Asian republic succeeds with its hitherto unachieved target to raise crude production from around 200,000 b/d to its ambitious target of 2 million b/d.

Outlook and Implications

In style with prevailing rhetoric of challenging the U.S.-led isolation facing it, Iran has unveiled another grand project, attempting to become one of the main export corridors for Caspian/Central Asian oil. By setting its sights on the Kashagan field as providing the main feedstock for the initiative, Iran is raising the project’s profile, giving the international companies a geographically sound offer, which they no doubt are unable to take politically, demonstrating to the outside world what it is forfeiting as it isolates Iran economically and politically. In fact, a far more realistic target for the project, probably partly aimed at resolving a chronic crude shortage in the northern parts of Iran, is future Turkmen supplies.

While there is uncertainty as to whether future Turkmen supplies will materialise, there is indeed still much uncertainty as to whether this Iranian pipeline will materialise. It will infringe upon Russian influence in the region and Russia’s leverage over Iran is currently strong, as long as it shields Iran from further UN sanctions. Also, the cost estimate of the project seems very optimistic in a climate of rising international raw material costs and increasing difficulties for Iran to facilitate imports at normal costs because of sanctions and financial industry isolation.

The aim is to finish the pipeline in 2012, until when much can still happen. Iran’s increasing isolation, as well as its overly optimistic cost assessment, does, however, seem to put the project into question from the start. Although Kazakh crude would be a prize, Turkmen crude looks like the aim, in what will partly be an attempt to rectify a chronic shortage of fuel in northern Iran, and especially the Tehran area.