Iraq, Iran Oil Deal Raises Suspicions

15 August 2006

Iraq and Iran signed a memorandum of understanding (MOU) on Sunday to swap Iraqi Basrah oil for refined products, the second such deal since July 2005. The two Mideast nations also agreed over the weekend to jointly develop shared oil fields, an issue that is expected to raise suspicion by critics of an Iran-Iraq alliance.

With Iraq in the midst of its worst fuel crisis since 2003, the swap deal stipulates that Iran refines 100,000 barrels per day of Iraqi crude in return for 2 million liters per day of refined products.

Unlike the first MOU, which was never implemented, the new deal will be carried out in two phases. In the first instance, Basrah crude would be transported in trucks to the Abadan refinery in southern Iran, across the Shatt al-Arab waterway, and to the Kermanshah refinery in western Iran. In return, Iran would transport back to Iraq refined products, including gasoline, heating oil and kerosene.

In a second phase to be determined later, Iraq would export some 300,000 b/d of oil through a new 30 kilometer pipeline to be built to the Abadan refinery, with the equivalent amount of products being exported back through the twin pipeline.

According to the deal signed by Iraqi Oil Minister Hussein al-Sharistani during a weekend visit to Tehran, the price of oil exported to Iran and the imported oil products will be calculated according to market prices.

Observers raised questions over Iran’s ability to provide refined products, largely because Iran is currently a net importer of gasoline. In addition, some observers wonder if the deal is politically motivated, much like the agreement signed a year ago during former Iraqi Prime Minister Ibrahim al-Jaafari’s high-profile visit to Iran. Al-Jaafari’s July 2005 visit was the first by a head of government to Tehran since the overthrow of the Baath regime in 2003 and was considered as a Shiite gesture toward Iran which hosted many Shiite exiles who fled Saddam Hussein’s rule before the collapse of his regime.

Iraqi sources in Baghdad said they doubt the Iranian deal would do much to alleviate Iraq’s fuel crisis. Iraq has been plagued by periodic fuel shortages over the past three years, but the current crisis comes amid higher demand for fuel for power generation as summer temperatures top 120°F. At times, the Iraqi government has struggled to supply electricity for more than three hours per day.

Iraqis desperate for gasoline and fuel have been queuing at gas stations for 12 hours and sometimes overnight as insurgent attacks on pipelines and distribution centers, as well as corruption, cut supplies of refined products. On some occasions, Iraqis have ventured out during a night-time curfew to join the queues only to be killed by armed militias who stormed the gas stations.

The shortages in a country which was producing close to 3 million b/d of oil until 2003 and still sits on the third-largest oil reserves in the world — in addition to the development of a black market where a gallon costs four times its prewar price — is causing ripple effects that compound problems facing an Iraqi public weary of bloodshed, sectarian strife, a military occupation and the government’s inability to restore a sense of normalcy to life.

“The [oil] products situation is really very bad. People are very angry and coming out in the open shouting their anger. Nobody can blame them,” a former senior Iraqi oil official told International Oil Daily from Baghdad.

“Political leaders are very concerned and desperately looking for a solution but the problem is almost out of control,” he added.

While it remains to be seen how the Iraqi oil ministry will curtail smugglers to ensure the delivery of Iranian oil products across Iraq, the Iran-Iraq deal is expected to raise even more suspicions as it announced the two sides agreed on “cooperation in joint oil fields in terms of production and development plans,” according to a statement quoting Iranian Oil Minister Kazem Vaziri Hamaneh.

Border-straddling oil fields represent a contentious issue in the Mideast region and many borders are still awaiting delineation. Iraqi sources said some oil fields are known to be straddling both sides of the 1,600 kilometer Iraqi-Iranian border, including the Naftkhanah field — called Naftshah in Iran — which lies to the east of Baghdad. Others are controversial, including the Azadegan oil field on the Iranian side of the border which some Iranian officials have been listing as a joint oil field, implying it is the extension of the giant Majnoon field in southern Iraq.

The integrated development of jointly owned oil fields brings a host of advantages for both countries as it would lower development costs and improve oil recovery rates, Mohammad-Hadi Nejad-Hosseinian, Iran’s deputy oil minister in charge of international affairs, told Iranian newspaper Sharq.

“Instead of having each country develop and exploit the shared oil field separately, the two countries would do that together,” Nejad-Hosseinian was quoted as saying.

According to the Iranian official, additional details on the joint development of the oil fields will have to be worked out by a joint technical committee already in place.

By Ruba Husari, Dubai

(Published in International Oil Daily Aug. 15, 2006)

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