Iranian Routes

Turkmenbashi – Kharg Island
A pipeline through Iran might be the most logical and cost effective route, if US sanctions were not in place against Iran. The proposed route would run from Turkmenbashi in Turkmenistan, connected to Kazakh oil by Chinese-funded pipeline, to the Iranian export terminal of Kharg Island in the Persian Gulf. This 930 mile line would cost $1.5 billion. This cheaper route also avoids the Bosporus problem and allows shipment via VLCC. The major disadvantage is that more oil would be flowing out through the Persian Gulf, with all the political risks that it implies, and transport to Europe would be much longer. On the other hand, if the oil were destined for Asia, transport rates would be considerably cheaper.

There is also a concern that a major pipeline through Iran would increase the already high level of world oil that is shipped through the Persian Gulf.  Lack of diversity of supply routes could be troublesome if there is a disturbance in the Persian Gulf.  A pipeline through Iran would also give Iran a large influence over the other states in the region, who depend on the pipeline to export their oil and gas. The newly independent states of the region are already unstable and many are besieged with internal conflict. Should Iran gain greater leverage in the region, there is a fear that Iran will try to influence the nature of the regimes in the region and encourage indigenous Islamic groups.

Iran is by far one of the most stable nations in the region, rivaled only by Turkey. However, the United States seeks to prevent investment in Iran; because Iran is a leading sponsor of international terrorism, violently opposes the Middle East peace process, and is developing weapons of mass destruction. President Clinton passed two Executive Orders that prohibit investment by American companies in 1995. In 1996, Congress passed the Iran-Libya Sanctions Act, which penalizes foreign companies who invest in Iran.

Swaps with Iran
There is another possibility for Caspian exports to the south. Iran’s industrial infrastructure and population are located primarily in the northern part of the country, while nearly all its oil and gas reserves are in the south. Due to the poor condition of the Iranian oilfields and pipeline network, northern Iranian refineries have considerable excess capacity. There is also a high demand for cheap oil in Iran that could be fulfilled by the Caspian without hard currency expenditures, which Iran cannot afford . Kazakh and Azerbaijani oil would be shipped via rail or barge to Iranian ports in the north of the country and then sent to Iranian refineries by rail or a new pipeline. Iran would than export an equivalent amount of oil from its southern oilfields out of Kharg Island. Caspian oil would then be sold at world prices, with Iran charging a swap fee for the service. Currently one UK company, Monument Oil, is engaged in this venture, barging oil from Aktau in Kazakhstan to Neka in Iran. The volume is about 250,000 b/d and Iran is reportedly charging a fee of $2-3 per barrel . The Azerbaijani owned Caspian Steamship Line is also reportedly charging $1.90 per barrel  delivered between Aktau and Neka.

Although drastically underutilized, Iranian refineries would require significant investment before they could handle large volumes of oil. Iran’s four major refineries could handle 300,000 to 400,000 b/d with $500 million in investments and up to 750,000 to 810,000 with an additional $450 million . Besides refinery capacity, port facilities pose a significant limitation. The port at Neka only has one berth with a maximum draft of 4 meters and is capable of handling tankers up to 4,200 deadweight tons with onshore storage tanks for 45,000 barrels. Bandar Anzali also only has one berth and a draft of 5 meters and no storage facilities. Iranian ports would require significant investment to handle increased volumes. Future swaps with Iran seem highly likely and beneficial, even considering ILSA, as current oil volumes are under the $20 million limit. If volumes were drastically increased, oil companies would be over the limit and ILSA would exceed another limiting factor.