Underlying the one-year anniversary in mid-August of the signing of the
‘Convention on the Legal Status of the Caspian Sea’ is one of the greatest
oil industry swindles in recent years. When representatives of the five
Caspian littoral states meet on the 11th and 12th of August, Iran
intends to seek some redress from Russia on Moscow’s manoeuvring last August.
The Islamic Republic believes that it was robbed of its historical rights in
the Caspian, conned out of a US$50 billion per year income, and left without
Russia’s support against the re-imposition of U.S. sanctions.
Little of any apparent consequence was decided last August when the five
Caspian littoral states – Russia, Iran, Kazakhstan, Turkmenistan, and
Azerbaijan – signed the ‘Convention on the Legal Status of the Caspian Sea’.
The limited publicity that surrounded the signing stated only that the
agreement stipulated that relations between the littoral states would be
based on the broad principles of national sovereignty, territorial integrity,
equality among members, and the non-use of threat of force.
It refrained from specifically going into details about share allocations
in the Caspian Sea resource and talked only vaguely about giving the area ‘a
special legal status’. However, a senior oil and gas industry source who
works closely with Iran’s Petroleum Ministry told OilPrice.com that
there was a secret second part to the deal that has proven explosive for the
perennially fractious relations between the Caspian states.
At stake is the massive Caspian Sea hydrocarbons resources prize that has
been fought over since the dissolution of the USSR in 1991 resulted in three
additional partners – Kazakhstan, Turkmenistan, and Azerbaijan - to the
original partnership of Russia and Iran. Prior to the fracturing of the USSR
into its constituent independent states, Iran and the USSR had struck the
original agreement in 1921 to split all ‘fishing rights’ in the Caspian area
50-50. This was amended in 1924 to include ‘any and all resources recovered’,
meaning in practical terms that all hydrocarbons resources would be shared
equally between Russia and Iran. “Iran should have said back then that Russia
should have shared its Caspian stake with the three former USSR states, but
it [Iran] was content to wait for the official legal dispute to be settled,”
underlined the Iran source. Related: Trade War Pushes Ultra-Rich Back Into Cash
At stake is the allocation of revenues from the wider Caspian basins area,
including both onshore and offshore fields, that is conservatively estimated
to have around 48 billion barrels of oil and 292 trillion cubic feet (Tcf) of
natural gas in proved and probable reserves. Around 41 percent of total
Caspian crude oil and lease condensate and 36 percent of natural gas exists
in the offshore fields, with an additional 35 percent of oil and 45 percent
of gas estimated to lie onshore within 100 miles of the coast, particularly in
Russia’s North Caucasus region.
The remaining 12 billion barrels of oil and 56 Tcf of natural gas are
believed to be variously located further onshore in the large Caspian Sea
basins, mostly in Azerbaijan, Kazakhstan, and Turkmenistan. The area accounts
for an average of 17 percent of the total oil production of the five littoral
states that share its resources, on average totalling 2.5-2.9 million barrels
per day (mbpd).
Before the ‘Convention on the Legal Status of the Caspian Sea’ agreement
was signed last August, oil output targets for each country were set three
months in advance, with all revenues paid into a central Caspian oil account,
which was then split in equal proportions of 20 percent between the five
littoral states, said the Iran source. The revenues, at least prior to the
re-imposition of sanctions against Iran by the U.S. late last year, usually
comprised 95 percent U.S. dollars and Euros, but with some local currencies
in the mix.
Against this backdrop, the legal designation of the Caspian as either a
‘sea’ or a ‘lake’ would have far-reaching repercussions on the assignment of
revenues from it. If it was designated a sea then coastal countries would
apply the ‘United Nations Convention on the Law of the Sea’ (1982), in which
event each littoral state would receive a territorial sea up to 12 nautical
miles, an exclusive economic zone up to nautical 200 miles, and a continental
shelf. In practice, this would mean that countries such as Turkmenistan and
Azerbaijan would have exclusive access to offshore assets that Iran would not
be able to access.
If it was designated a lake – and this was the informal designation before
the August agreement – then the countries could use the international law
concerning border lakes to set boundaries, by which each country effectively
possesses 20 percent of the sea floor and surface of the Caspian.
In the preparations for the signing of the ‘Convention on the Legal Status
of the Caspian Sea’ last August, Iran had engaged lawyers to challenge the
established 20 percent share that each littoral state had informally agreed
upon, based on the fact that Russia should have used its own original 50
percent share to make good stakes for its former USSR states.
Iran was confident at that point that Russia would show some flexibility
as, after the U.S. pulled out of the nuclear deal last May, Moscow
immediately made a deal with Iran that would effectively have given it
control of all of Iran’s oil and gas resources. Specifically, the deal was
that Russia would hand Iran US$50 billion every year for at least five years.
This would cover all of Iran’s estimated US$150 billion of costs to bring all
of its key oil and gas fields up to Western standard, with US$100 billion
left over for the build-out of other key sectors of its economy.
“Russia also pledged to veto all attempts in the United Nations Security
Council [UNSC] to have sanctions against Iran increased or to have the terms
of the original nuclear deal re-drawn to include further sanctionable actions
such as missile testing or not allowing snap inspections of all military
facilities, which it could do as it is as one of just five Permanent Members
on the UNSC,” said the Iran source.
In exchange for this, Iran, in addition to giving Russia preference in the
oil and gas sector, was also to tighten its military co-operation with
Russia, including buying Russia’s S-400 missile defence system, allowing
Russia to expand its number of listening posts in Iran and doubling the
number of senior ranking Islamic Revolutionary Guards Corps (IRGC) officers
that are seconded in Moscow for ongoing training, to between 120 and 130. Related:
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The catch for Iran was that, under the terms of the agreement, there was
no clause that allowed Iran to impose any penalties on any Russian developer
firm for slow progress on any field for the next 10 years. The Russians,
though, during this entire 10-year period, would still have the right to
dictate exactly how much oil was produced from each field, when it was sold,
to whom it was sold, and for how much it was sold. Russia also had the right
to be able to buy all of the oil – or gas – being produced from fields that
their companies were supposedly developing at 55-72 percent of its open
market value for the next 10 years.
“The Iranians naively thought this meant that they had entered into a
genuine two-way partnership with Russia but Russia didn’t see it that way,”
the Iran source said. “In the Russian way of seeing things, once it had
secured Iran in this deal, effectively making it a client state, it had no
reason to honour any other of its previous obligations,” he added. “The
situation was also worsened for Iran by the fact that Russia had its own
problems with U.S. sanctions and didn’t want to make things worse by siding
so thoroughly with Iran,” he highlighted.
Given these considerations, and the fact that Russia wanted to strengthen
its relations with the previous USSR states, Moscow was the prime mover in
having the Caspian designated as a sea, not a lake. This was on the basis
that because Russia had opened up the channel from the Volga River into the
Caspian to prevent the levels dropping, the Caspian no longer conformed to
the legal definition of a lake, which is that it is a localised water deposit
standing independent of any river that serves to feed it.
“This meant, effectively, that Russia could divide up the shares as it saw
fit, and the way it saw fit was to benefit its existing ally, Kazakhstan,
which was assigned a 28.9 percent share, and its wished-for ally, Azerbaijan,
which secured a 21 percent stake, while Russia saw a slight increase, to 21
percent, while Turkmenistan’s share goes down to 17.225 percent, as it is
seen as a softer touch by Russia, and Iran’s share goes down to just 11.875
percent,” said the Iran source. “This switch from 50 percent to just over 11
percent means that Iran will lose at least US$3.2 trillion in revenues from
the disputed and lost value of energy products going forward,” concluded the
Iran source.
By Simon Watkins for Oilprice.com
