Indian Council of World Affairs

Recently, new dynamics have emerged in West Asia’s energy sector. On May 18, 2023, Russia signed scientific and technical cooperation agreements with Iran linked to its oil sector, following a formal meeting in Tehran between Iran’s Oil Minister and the Deputy Prime Minister of Russia, and co-Chair of the Permanent Russian-Iranian Commission on Trade and Economic Cooperation.[i] On May 30, 2023, another significant development took place, when Iraq’s Deputy Prime Minister and Minister of Planning met the Chinese Ambassador to Iraq. During the meeting, the two sides discussed the mechanisms for broadening and deepening of ‘oil-for-projects’[ii] framework agreement.[iii]

With the outbreak of the Ukraine conflict and pursuant to Western sanctions, Russia has expanded its energy cooperation with Iran. China, on the other hand, has deepened its cooperation with Iraq in the energy sector since the launch of the Belt and Road Initiative[iv] (BRI) in 2013. However, these two latest energy cooperation developments between Russia and Iran; and China and Iraq indicate the changing dynamics in West Asia’s oil sector. These become even more significant in the context of the apparent decline of the Western countries’ influence in the region. 

The energy sector in the West Asia region is predominantly controlled by the Western countries led by the USA. Lately, the region has witnessed a transformation in its energy sector as Iran and Iraq are partnering with non-western countries such as Russia and China in the oil sector due to the following factors. First, the Iraq War (2003-2011) and the aftermath of the Islamic State’s rule in the country that resulted in catastrophic political, economic, and security implications facilitated the Iraqi Shia political leadership to make close partnerships with non-Western countries such as Russia and China for energy and development cooperation. Second, under decade-long Western sanctions, Iran has become a close partner to Russia and China to conduct energy trade in local currencies. Third, following the Ukraine Conflict, Russia has faced severe sanctions that have pushed it closer to non-Western countries for energy trade and economic cooperation. Fourth, the influence of the Chinese Model, which does not require the ‘democratic system’ in exchange of cooperation, is very similar to the government system that the West Asia region is witnessing in contemporary times. These factors also have the potential to de-dollarise the energy sector in the West Asia region. 

On its part, China desires to turn the West Asia region into a large oil and gas station to meet its economic growth targets. Therefore, it signed agreements with Iran and Saudi Arabia to conduct the trade in Yuan, replacing the dollar. In Iraq, China has followed the ‘oil for projects’ mechanism by providing investment and technology for the reconstruction of the country and getting oil in return. For instance, the infrastructure projects in the cities of Al-Zubair (US $700 million) near Basra and Al-Sadr (US $8 billion) have oil fields. Besides, China is completing an airport project in the oil-rich Dhir Qar governorate by 2024, where Iraq’s most significant oil fields– ­­ Gharraf and Nassiriya – are located.[v]

Following the sanctions imposed by Western countries, Iran and Russia have expanded their energy cooperation moving forward from only an ‘oil for goods swap’ to a broader agreement on the oil and gas sector. The former agreement has allowed Russia to buy Iranian oil in exchange for Russian equipments and goods, while the latter has facilitated the two countries to work together in the oil and gas sector. During the May 2023 Tehran Meeting, the Russian delegation assured Iran that Russia would assist Iran by sharing their knowledge to improve the efficiency of the oil, gas, and energy industries. Russian firms would participate in Iran’s oil sector and present their technology for drilling and maintenance of wells and modern devices used for oil transfer systems. The Russian oil and gas company Gazprom has invested approximately US $40 billion in Iran. The two countries are working on expanding oil production and revamping infrastructure in the prominent gas fields of Iran, such as Kish, North Pars, and South Pars. Besides, they are increasing gas and product swaps, completing various Liquefied Natural Gas projects, and constructing gas export pipelines.[vi] Most importantly, the two countries have preferred their national currencies, Roubel and Rial, to conduct trade. 

Amidst these emerging new dynamics in West Asia’s oil sector, India is also making inroads in the region to protect its energy interests. India expanded the energy partnership with Iraq, Iran, Saudi Arabia, and United Arab Emirates (UAE), in which trade is conducted through local currencies. 

In a nutshell, crude oil has started playing a vital role in gluing Russia, China, Iran, Iraq, and Saudi Arabia together because they are global stakeholders in the energy trade. One of the critical outcomes of the close energy cooperation is that energy trade is being conducted in local currencies, challenging the dollar-dominated energy world order. India is navigating these changing dynamics in the oil sector through its proactive foreign policy embedded with pragmatic national interests. The changing geopolitical landscape of the West Asia region and the energy dynamics may present opportunities which would need to be harnessed for sustaining strengthened partnerships with the countries of the region.

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*Dr Arshad is a Research Fellow at Indian Council of World Affairs.
Dislcaimer: The views expressed are personal.

Endnotes

[i] “Iran, Russia sign 10 MoUs, agreements on oil cooperation,” Shana, May 17, 2023, accessed https://shorturl.at/fvAHI, June 18, 2023

[ii] It is a mechanism through which China is providing investment and technology for the reconstruction of the country and getting oil in return.

[iii] “Iraq and China discuss oil for projects framework agreement,” Zawya, June 6, 2023, accessed https://shorturl.at/dryFY, June 19, 2023

[iv] It is a global infrastructure development strategy adopted by the Chinese government to invest in more than 150 countries and international organizations.

[v] “China wins engineering deal for giant Iraqi gas plant,” Iraq-Business News, May 31^st 2022, accessed https://shorturl.at/CT057, July 23, 2023.

[vi] “Iranian Press Review: Russia to modernize Iran’s outdated oil and gas industry,” The Middle East Eye, May 18, 2023, accessed  https://shorturl.at/bdjwP, June 26, 2023.