Ahead of the Organization of the Petroleum Exporting Countries’ (OPEC) ministerial meeting in Vienna Nov. 30-Dec. 1, Iranian Oil Minister Bijan Namdar Zanganeh expressed hope that production cuts that were agreed to last year would be extended.
What was at stake, however, was more than energy markets. Zanganeh and his counterparts, including Qataris, Saudis and Emiratis, met amid a delicate geopolitical situation. In light of regional competition that features economic blockades, proxy warfare and the exchange of public insults, the prospect of negotiating and subsequently enforcing a joint plan to shape global oil markets might have appeared unlikely. On the contrary, a deal was reached to maintain the production cuts without major obstacles. As in the previous year, though, an effective deal could only be realized through cooperation with non-OPEC energy giant Russia, which together with Saudi Arabia, OPEC’s leading producer, is bearing the brunt of cuts.
For Iran, the Russian-Saudi accord is somewhat of a mixed blessing. On the one hand, Tehran is pleased with the outcome itself. On the other hand, it would certainly be alarmed if Russian-Saudi cooperation would extend to sensitive arenas where the two are at odds — including regional geopolitics.
But rather than representing an overall warming of Russian-Saudi relations, the process leading to the OPEC cuts reflects a combination of necessity (in Riyadh) and realpolitik (in Moscow).
Low oil prices have caused an economic crisis in Saudi Arabia. As the Saudi government’s financial reserves are depleting and tangible progress of its touted “Vision 2030” reform program remains outstanding, Riyadh needs any increase in oil export revenue it can get. The kingdom takes harsh stances on most of its pressing policy issues, including domestic opposition, the conflict in Yemen, the crisis with Qatar and the proxy warfare in Syria. But Riyadh continues to show remarkable flexibility on oil policy — even though Moscow is a key backer of Syrian President Bashar al-Assad and a partner of Tehran.
To Russia, the OPEC deal fits into its broader approach of integrating foreign and energy policy with regard to the Middle East. Moscow seeks to increase its profile in the region and thereby partly fill the void left by a retreating Washington. To this end, and in addition to its direct military involvement in Syria and arms sales to numerous regional states, Russia has also concluded a number of energy deals that remarkably cross geopolitical fault lines. Indeed, it has signed accords with Egypt, Iran, Iraq, Israel, Qatar, Saudi Arabia, Turkey and the United Arab Emirates. Thus, while Moscow has a clear and strong economic rationale to increase its oil export revenues, Russia is also pursuing cooperation with OPEC as part of a broader effort to increase its energy profile in the Middle East.
Mindful of the above, Iran benefits from the “oil bromance” between Russia and Saudi Arabia: Identical to last year’s OPEC deal, Tehran is not required to cut production. Given that international energy companies continue to refrain from investing in the Iranian oil sector despite the lifting of sanctions under the 2015 nuclear deal — the touted contract with Total is focused on natural gas — Iran is not likely to be able to produce more crude than it is allowed to sell.
In Vienna, Iran was also able to make progress on the geopolitical dimension of energy. Beyond ensuring that it won’t have to cut production while other countries, including Libya and Nigeria, had to accept new production caps, Tehran was able to make other important deals.
First, Iran concluded an agreement with Oman aiming at the advancement of a project to export natural gas to the Sultanate. Following a meeting with his Omani counterpart on the sidelines of the OPEC meeting, Zanganeh told reporters that experts from both sides would meet in the coming weeks to make progress on the specifics. The project involves the construction of a pipeline to deliver gas from Iran’s giant South Pars field to Oman, from where it may be further exported by ship. In 2013, Iran and Oman announced that the goal of the project would be natural gas trade of 1 billion cubic feet per day, with project costs for the pipeline estimated at $1.5 billion.
Though it appears unlikely that the project will materialize in the near future, it still holds large symbolic importance. At a time when Saudi Arabia is trying to bring fellow Gulf Cooperation Council states behind its policy to isolate Iran (and Qatar), Oman is signaling a willingness to deepen its cooperation with Tehran. This may be interpreted as openly calling into question Riyadh’s credibility as the leader of the political bloc of Persian Gulf monarchies.
Second, Zanganeh announced an oil swap contract with Iraq, which was signed last week. Under this deal, refineries in Iran will receive between 30,000 and 60,000 barrels per day of crude oil from Kirkuk. In return, Iran will provide Iraqi ports on the Persian Gulf with similar quantities of refined oil, which will subsequently be exported. The Iraqi crude oil is to be delivered to Iran by truck and prospectively by a pipeline, which is currently under discussion, according to the minister.
Zanganeh described Iran’s relationship with Iraq as “strategic.” Should the oil swap deal proceed as announced, this would advance Iran’s position in multiple ways. Beyond utilizing idle capacity at Iranian refineries, Iran’s position in global oil markets could improve as Iraq’s customers will receive refined oil originating from Iran. This would make them somewhat dependent on some form of Iranian integration into global energy markets, thus likely impacting their calculus when it comes to potentially reimposing energy sanctions on Iran.
However, considering that the volumes of the proposed swap deal are rather modest, its major benefit for Iran lies in the realm of foreign policy. Kirkuk and its oil fields played a major role in the recent struggle over the Kurdistan Regional Government’s (KRG) independence referendum.
As the KRG held a plebiscite on its independence from Iraq, which was rejected by Baghdad, Kirkuk and its surrounding oil fields were claimed by Erbil as belonging to a future Kurdish state. Tehran unequivocally supported Baghdad in its rejection of both the referendum and the KRG’s claims regarding Kirkuk. Moreover, Iran played a major role in the forceful takeover of Kirkuk by Iraq’s central government in October.
With the Kirkuk oil swap, Tehran now further cements its political and economic ties with the central government of Iraq. This follows the launch of Iranian natural gas exports to Baghdad, which commenced earlier this year in June.
In light of these developments, the OPEC meeting not only confirmed the new reality in global energy markets but also reflected the shifting nature of energy-related geopolitical developments: From Russia’s increasing engagements in Middle Eastern energy to the politics surrounding the oil of Kirkuk, regional energy and geopolitics continue to go hand in hand.