The price for the Iranian alternative

Why did it take the US Department of State 4 years to remove sanctions

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It has been 4 years since Belorusneft left the Iranian project but US sanctions against the company have been lifted only recently. This is a sign of an improving relationship between Belarus and the United States.

The US Department of State has removed sanctions against Belorusneft which were imposed from March 29, 2011 (the decision was signed by the Principal Deputy Assistant Secretary for the Bureau of Economic and Business Affairs Kurt Tong)

The Department of State said its decision was based on the fact that the company no longer engages in activities which fall under sanctions and has no reason to engage in such activities in the future.

The sanctions were implemented because of a $500 million contract which Belorusneft signed with the NaftIran Intertrade Company (NICO) for the development of Iran’s Jofeir oilfield.  (The United States had imposed sanctions on NICO in 2010 because the government was allegedly using the profit from it to sponsor its nuclear program).

Let’s take a look back at the project

About 10 years ago Russia made crucial changes to the conditions under which it supplies Belarus with oil, thus making drastic cuts in Belarusian oil subsidies. After this the Belarusian government was desperate to find a substitute for Russian oil and it turned to Iran.

The Iranian oil project was first officially mentioned in November 2006 during a visit to Iran by Alexander Lukashenko. “We have received full support here,” said the Belarusian President. The Iranian President Mahmoud Ahmadinejad visited Minsk 6 months after that.

“I am especially grateful to the Iranian President for giving his support to our country in such a delicate matter as hydrocarbon production. Iran has met the Belarusian side half way and provided us with the oil field that we wanted. Our experts have already had a look at it and we are ready to start extracting oil on Iranian territory,” said the President.

In 2007 Belorusneft and NICO created the Belarus-Iran joint venture company Belpars Petroleum Company Ltd (BPC).

The oil was supposed to be extracted by the Iranian side; BPC was responsible for drilling and maintenance. The company was based on a buy-back service contract (it meant that the funds invested in the project were to return to the company in the form of oil). Under these terms the BPC helped develop the Jofeir oilfield which had about 300 million tons of geological hydrocarbon reserves.

During the fourth year of the oil-field development, as was planned, no more than 1.3 million tons of oil was extracted. The stable production period was estimated to be 10 years. Consequently, BPC was counting on extracting 9.3 million tons of oil in the course of 10 years. (Note the fact that there is only 1.645 million tons extracted annually in Belarus while Belarusian refineries can handle up to 23 million tons).

Iran’s Ambassador to Belarus Seyed Hosseini noted during a press conference in February 2011 that Belarus has already started extracting oil in the framework of the project “Jofeir”. There are 10-15 thousand oil barrels being produced per day. Now we are looking at initiating stage two – 30 thousand barrels per day. As was mentioned before, the extracted oil is sold via the trading house at Iran’s oil and Gas Company.

According to the Ambassador, Belarus and Iran have considered the possibility of organizing the shipment of Iranian oil to Belarus on swap arrangements with third countries. At that time Belneftekhim Concern never denied the fact that Belarus could potentially import oil from other countries including Iran. “There are opportunities out there, but we need to know the commercial viabilities,” noted the former Deputy Chairman of Belneftekhim Vladimir Volkov.

It is also possible that after the United States introduced sanctions against Belorusneft the Belarusian side got second thoughts about the commercial viability of the Iranian project. In August 2011, 6 months after the implementation of sanctions, Belorusneft officially announced its withdrawal from the contract for oil-field development in Jofeir.

In an official statement Belorusneft explained that according to the contract oil-field development was to be done in several stages. The first stage was completed in September 2010. However “in the course of the work there was new information discovered about the geological structure of the field which meant changes in the technical, financial and economic conditions of the project.” With this in mind Belorusneft decided to withdraw from the contract after the first stage; there were provisions for such a situation in the terms of the contract.

US sanctions weren’t imposed only on Belorusneft, they were also applied to the French company Total, Norwegian company Statoil, Italian company ENI, Dutch company Royal Dutch Shell and Japan’s INPEX. All of these companies were quick to refuse to work in Iran.

It is possible that the sanctions were the reason for Belorusneft to withdraw from the Iranian project. Moreover, as the representatives of the Department of State said it themselves, imposition of sanctions is a sign for US partners in Europe.

It is important to remember that in 2011 Belorusneft got the chance to export its oil (previous agreements with Russia excluded such a possibility). The main buyers at that time were Germany and the United States.

It’s not hard to see the importance of foreign currency inflows for the national economy from selling its oil (about $1 billion); there was no point in taking such a risk. Moreover, by that time Belarus had already reached a reasonable agreement with Russia on oil imports and there was no dire need for alternative suppliers.

However, the Iranian news agency Mehr reported at that time that the reason for the termination of the contract was a disagreement about the methods and technologies of work, as well as the monetary compensation for the exploitation of the field by the Belarusian side. According to the news agency Belarus didn’t fulfill the conditions of the contract: Belorusneft was to extract 3.5 thousand barrels per day, while in reality it only extracted at most 2.8 thousand barrels per day.

Belorusneft’s Deputy Director General Alexander Sharayev noted that extracting such an amount was possible only during test runs. In reality production was lower than was stipulated in the contract. According to the contract the Belarusian side was not directly involved in oil production; it only provided operation and maintenance services.

In any case, it is hard to ignore the fact that even though Belorusneft withdrew from the Iranian project 4 years ago the US Department of State lifted the sanctions only now. This can be explained by a change in the political relationship between the United States and Belarus; the same was said by the spokesman for the Ministry of Foreign Affairs of the Republic of Belarus Dmitry Mironchik.

“The decision made by the US Department of State to lift sanctions on Belorusneft is a step in the right direction. In the course of several years the company had no ties to the oil project in Iran which was the trigger for US sanctions. The decision made by the United States fits in with the joint effort both of both countries in improving the US-Belarus relations,” said Dmitry Mironchik

 

Original text from belmarket.by