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Key OPEC+ producers Russia, Iran discuss further cooperation amid sanctions


Discussing oil and gas supply swaps

Eyeing more joint energy project investments

Both countries selling crude at big discounts

  • Author
  • Rosemary Griffin    Herman Wang    Aresu Eqbali
  • Editor
  • Kshitiz Goliya
  • Commodity
  • Electric Power Natural Gas Oil
  • Topic
  • Iran Sanctions OPEC+ Oil Output Cuts War in Ukraine

Russia and Iran are looking to increase energy cooperation at a time when their sanctions-hit crudes are competing for customers seeking discounts.

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Russian and Iranian officials discussed oil and gas supply swaps, as well as increasing joint energy investments May 25, as an increasingly isolated Moscow seeks more trade partners due to unprecedented sanctions pressure.

"We discussed in detail issues relating to gas and oil supply swaps, and increasing joint investment in oil and gas projects," Russian Deputy Prime Minister Alexander Novak said May 25 during a visit to Tehran, according to the Prime news agency.

The two countries are members of the OPEC+ alliance, though Iran has long-been exempt from crude oil production quotas due to sanctions, while Russia's output has been hit by US and EU trade restrictions over its invasion of Ukraine, throwing the nature of the group's future market management pact in the air.

The production losses have contributed to a tightening market, with oil prices hovering around $115/b.

Russia's key crude grade Urals has been selling at major discounts since Russia invaded Ukraine Feb. 24. Platts assessed Urals at $79.31/b May 24, compared to Dated Brent at $115.85/b, according to data from S&P Global Commodity Insights.

On Feb. 23, Urals was trading at a discount of around $10/b to Dated Brent. Iranian Light was also trading higher than Urals, and was assessed at $111.48/b May 24.

Iranian Oil minister Javad Owji said May 18 that Iran had heard that Russia was offering steep discounts for oil supplies.

"But given the sanctions European countries and the United States are imposing on them, I think it will take some time for Russia to find markets," Owji said, according to local media reports.

Despite competition for market share, sanctions could bring the two countries together as they look to further develop oil and gas production without access to some Western financing and technology.

"There are special conditions today for us together to ensure a serious expansion of cooperation between our countries and add to those large projects that are already being implemented here," Novak said, during the Iranian-Russian Trade Forum in Tehran May 25.

Nathan Piper, Head of Oil & Gas Research and Searchlight at Investec said that Iran could provide logistical support to get some Russian barrels to market.

Ian Simm, energy consultant for Aperio Intelligence said Russian companies could also join upstream Iranian projects.

"The terrorist designation of the Islamic Revolutionary Guard is going to preclude any collaboration by most international oil companies in the country... but it looks like the one partner that they might be able to attract now is Russia," Simm said May 25.

Production impact

Sanctions have impacted Iranian and Russian output volumes. Russia's crude output plunged 900,000 b/d in April to 9.14 million b/d, according to the monthly Platts survey by S&P Global.

S&P Global forecasts peak Russian oil output disruptions of 2.8 million b/d by August, with the EU finalizing a phase out of its Russian crude imports.

Meanwhile, if Iran reaches a nuclear deal with Western countries, Iranian oil exports could increase by 1 million b/d, though an agreement does not seem imminent, in part due to Russia's involvement in the talks. The Platts survey estimated Iranian crude output at 2.58 million b/d in April.

In March, Russia threatened to scuttle nuclear deal talks with fresh demands to exempt its future trade with Iran from any sanctions.

The stance initially prompted Iranian frustration, before the two countries cleared the air and Russia backed off. But negotiations remain stalled over US-Iran disagreements involving non-nuclear disputes.

Novak discussed cooperation with Iranian partners at a time when Russia is looking to ramp up cooperation with non-sanctioning countries, including developing an international North-South transport corridor.

"Its successful implementation, in our opinion, will give a powerful impetus to development of trade from the Caspian and the Persian Gulf. This is a landmark project that could become key to the development of our trade and economic cooperation," Novak said.

Russia is already developing the Bushehr nuclear plant and the Sirik thermal power plant in cooperation with Iran.

Trade turnover between Russia and Iran increased 81% to almost $4 billion in 2021, and has increased by 10% in the first quarter of 2022, Novak said. Owji said that they plan to raise Iran-Russia economic trade to up to $40 billion per year within the next three years.

Russian and Iranian officials said that they are looking to carry out more barter deals, and trades in national currencies in future.