Publication: Eurasia Daily Monitor Volume: 3 Issue: 22

On January 18, Iran’s North Drilling Company (NDC) and the Hong Kong-registered China Oilfield Services Ltd. signed an oil-exploration agreement for management, repair, and maintenance of the Alborz semi-floating platform, currently being constructed by the Iranian Offshore Industries Company.

A three-year contract with an estimated cost of $33 million will enable Iran, with China’s help, to move its exploration activities to the deep waters of the southern Caspian (MehrNews, January 20). Until now, Iran has been unable to explore fields that were deeper than 90 meters.

In November 2005, the Iranian Offshore Industries Company (Sadra) announced that 97% of the Alborz platform had been completed and the rig would be ready for oil exploration operations in February 2006 (Iran Daily, November 24, 2005).

Tehran has not yet made public where exactly in the Caspian Sea it plans to use its Alborz platform. But the rig’s name indicates that the drilling might take place in a contested offshore oil and gas field in the southern Caspian, which Azerbaijan calls Alov and Iran calls Alborz. This could lead to another crisis between Baku and Tehran.

In July 2001, Azerbaijan and Iran came close to confrontation when an Iranian gunboat threatened and chased away a BP-operated research vessel that was exploring the Alov/Alborz field. All exploration activities in this area were halted following the 2001 incident.

Azerbaijan and the United Kingdom signed a production-sharing agreement to explore this field in 1998. Iran, however, has refused to recognize the deal. Tehran claims that the agreement is not valid due to the undetermined legal status of the Caspian Sea.

Since the collapse of the Soviet Union in 1991, the legal status of the Caspian Sea has been in limbo. Only three — Azerbaijan, Kazakhstan, and Russia — out of the five littoral states were able to agree on how to divide the seabed of the Caspian. Iran and Turkmenistan adopted different positions, although Turkmenistan has been moving closer to the position of the three states.

Iran claims that the Caspian Sea should be divided into five equal parts with 20% for each littoral state. Azerbaijan disputes Iran’s claim and argues that the division should be done according to a median line, which leaves Iran with only 12-13 %. The trilateral agreement signed among Azerbaijan, Kazakhstan, and Russia is based on the median-line approach, which has weakened Iran’s stance. But Tehran insists on its right to 20% of the sea, as only then does the Alov/Alborz field fall under Iranian sovereignty.

In September 2005, Abbas Maleki, director of Tehran’s International Institute for Caspian Studies, stated that Iran would not wait for a final resolution of the legal status of the Caspian Sea. “Iran is already active,” added Maleki (IranMania, September 18, 2005).

In fact, the negotiations over the legal status of the Caspian Sea were used by the Iranian government as an opportunity to buy time and develop its deep-sea technology. During this lull, Iran has also negotiated with foreign companies, including some European and Brazilian energy firms, that were interested in taking part in exploration work (IranMania, September 18, 2005).

The executive director of NDC, Haidar Bahmani, declared that Iran chose the Chinese company “due to its technical capabilities and more reasonable offer in comparison with its European rivals” (MehrNews, January 20). Nonetheless, the timing of the agreement led many to believe that the contract had a political agenda as well.

As the members of the International Atomic Energy Agency (IAEA), scheduled to meet on February 2, seriously consider referring the Iranian nuclear program to the UN Security Council, Tehran hopes that Beijing will veto potential economic sanctions against Iran, which could damage China’s energy interests in this country.

On January 20 the Governor of the Central Bank of Iran, Ebrahim Sheibani said, “We are moving our foreign exchange reserves to countries that we consider to be safe.” Since most of the money is going to banks in Southeast Asia, and potentially China, observers have interpreted this move as Tehran’s attempt to ease the impact of a probable UN economic embargo (Echo-Az, January 24).

In 2004, Beijing and Tehran signed a $100 billion mega-gas deal that enabled China to import as much as 10 million tons of Iranian liquefied natural gas (LNG) annually over a 25-year period (Asia Times, November 6, 2004). Hence, the Iran-China energy cooperation is not accidental.

The recent Iran-China deal to develop oil fields in the Caspian Sea, however, may spark another crisis in the region if Iran unilaterally decides to start exploration of the disputed Alov/Alborz field. To confront Iran, Azerbaijan is likely to turn to Turkey and the United States for help, which will further escalate the situation in the region. Baku may also try to approach China and improve its bilateral relations, hoping that Beijing will not attempt to drill this field before the legal status of the sea is decided.