Iran Looks East For Support As US Squabbles With Europe

Iran has received a geopolitical boost from two summits in two continents. At the G7 in Montreal, US efforts to secure the buy-in of key allies on Iran sanctions took a hit, whilst in China, Iran held crucial talks with Russia and major Asian economies.

The 9-10 June annual summit of the Shanghai Cooperation Organization (SCO) offered Iran an invaluable opportunity for discussions with key eastern partners. At the same time as US President Trump was alienating the European parties to the Iran nuclear agreement at the G7 summit, Iranian counterpart Hassan Rohani was wooing Chinese and Russian officials.

Although not a member of the SCO, Iran was granted observer status in 2005 and applied for full membership in 2008. Alongside China and Russia, the eight full members include major Asian oil and gas importers India and Pakistan. Mr Rohani left China with glowing pledges of support: will they be backed up?

China hosted the summit in the country’s beer capital of Qingdao. But the Iranians had other priorities. Mr Rohani had a one-on-one meeting with his Chinese counterpart Xi Jinping. Mr Xi says he aims to “strengthen cooperation with Iran within the multilateral framework” of the JCPOA, which he asserts bolsters regional security.

Keeping China onside is arguably Iran’s key foreign policy priority. China is the biggest buyer of Iranian oil, taking 648,000 b/d in 1Q 2018 (see chart). India is the second largest buyer some way back at 484,000 b/d, although it did briefly overhaul China in early 2017.

CHINESE, RUSSIAN FIRMS STAND TO BENEFIT

China’s state-owned CNPC (30%) last year signed up alongside Total to develop Phase 11 of Iran’s South Pars gas field ( MEES, 23 June 2017 ). With Total set to relinquish its 50.1% stake in the project unless it manages a seemingly-impossible US waiver, CNPC’s presence is more essential than ever ( MEES, 25 May ).

CNPC is also in the running to develop the 175,000 b/d Azadegan field. Of the previous contenders for the field, Total and Shell are now out of the running, as are several other Asian firms such as Japan’s state-owned Inpex. China stands out as one of the few potential remaining investors in Iran’s oil and gas sector, in stark contrast to South Korea which is backing out of planned downstream deals ( MEES, 8 June ). Korean oil imports from Iran fell to 178,000 b/d in May, the lowest level since the JCPOA entered effect at the start of 2016.

China Buys More Than 25% Of Iran's Crude And Condensate Exports, Despite Growth Of European Sales ('000 B/D)

source: Import stats, mees.

Russia is also crucial to Iranian efforts to ride out the looming economic storm of US withdrawal from the JCPOA. President Vladimir Putin says Russia remains committed to the Iran nuclear deal. “For our part we will continue to implement our obligations,” Mr Putin said at the SCO, where he also held bilateral discussions with Mr Rohani.

Unlike China, Russia is a major oil and gas exporter and so doesn’t buy Iranian hydrocarbons. But Russian firms are also strong contenders to help develop a number of Iranian fields. State firm Zarubezhneft signed a contract to develop two oil fields – 30,000 b/d West Paydar and 6,000 b/d Aban – in March ( MEES, 16 March ). Other Russian firms also stand to benefit from European IOCs’ Iran ambitions having been placed on ice.

Lukoil signed an MoU for studying the Mansuri and Ab Teymour fields in January 2016, but said last month it has put its Iran plans on hold. This may legitimately be over concerns over the Iranian operating environment, or merely a bargaining position. But as yet there are no indications that state-firms Gazprom Neft and Tatneft are looking to walk away from potential contracts.

Whilst tension between President Assad’s two key foreign backers has been mounting in Syria ( MEES, 15 June ), so far this appears not to have impacted their broader relationship.

INDIA EYES BUMPER VOLUMES OF CUT-PRICE CRUDE

Greater uncertainty surrounds the future of Iran-India commercial relations. Indian oil firms such as ONGC are less likely than their Chinese and Russian counterparts to risk the wrath of the US by investing in Iran.

But the likelihood of India severely curtailing its purchases of Iranian crude from last year’s record high is small. Especially with the IEA projecting annual demand growth of 6% this year and a still robust 4.4% in 2019.

For now India is showing no signs on curbing its appetite for Iranian crude. The IEA says India imported 730,000 b/d from Iran last month, which if accurate would be a monthly record. Q2 imports would be on track to break 600,000 b/d for the first time since 1Q 2017, and potentially 650,000 b/d for the first time.

Iran has in recent months cut the pricing of sales of its key Iranian Heavy export grade to near record discounts to competing Saudi crude in a bid to counter political headwinds in key Asian markets (see chart). Indian and Chinese buyers can expect to receive further sweeteners in the coming months: possibly in the form of cut-price shipping and relaxed payment terms rather than cheaper headline prices.

IRAN GAS: RECORD OUTPUT BUT PAK PIPELINE GOING NOWHERE

Iranian gas production is growing rapidly thanks to development of the South Pars gas field. The oil ministry’s Shana news agency reports that Iran processed 214 bcm (20.7bn cfd) of gas in the Iranian year ending 20 March 2018, up 9% year-on-year.

This has enabled a major ramping up of exports, and for Iran to shrug off the politicized fall of imports from Turkmenistan last year ( MEES, 13 January 2017 ). Iran’s net gas exports surged sevenfold to 10.7bcm for 2017, thanks to volumes to Turkey edging up, Azeri volumes surging and the startup of exports to Iraq in June 2017 ( MEES, 7 July 2017 ).

Iran Heavy Keeps Big Discount Vs Saudi Arab Medium ($/B Fob, Asian Delivery)

See ( MEES, 15 June ) for full data.

But despite Pakistan’s role as a growing gas (LNG) importer ( MEES, 13 January 2017 ), long-mooted and seemingly logical plans to link Iran to its eastern neighbor by gas pipeline appear a long way from being realized.

There appear to have been no references during the SCO summit to the long-delayed Iran-Pakistan pipeline project, though Iranian officials continue to assert that the route remains viable. Iran says it has completed its stretch of the pipeline – initially slated to carry 750mn cfd from 2015 – to the Pakistan border.

Iran Gas Balance: Net Exports Up In 2017 (Bcm)

SOURCE: SOCAR, ARMENIA MINISTRY OF ENERGY, BP STATISTICAL REVIEW, MEES.

Pakistan said earlier this month that the project will be “reviewed” later this year, but prospects of Islamabad pressing ahead with the project in the face of escalating US-Iran tensions are limited.

With the gas link to Pakistan unlikely to be completed any time soon – and a planned subsea route to Oman similarly beached ( MEES, 4 May ) – Iran will have to look to existing buyers to take its additional gas volumes. Iraq looks the likeliest recipient owing to its chronic shortages ( MEES, 25 May ).