Iran cannot give Iraq what it does not have

General Jarosiliski who ruled Poland in the 1980s always wore black glasses, very much similar to those worn by welders. On a visit to Poland in 1983 I asked my Polish friend jokingly, when will the General take off his glasses so that we can see his eyes and my friend said "not before he completely welds Poland to the Soviet Union".

It looks like the Iraqi prime minister Dr Jaafari and his company are so bothered with their recently worn neck ties that they cannot wait for the day to "completely" tie up Iraq with Iran simply to get rid of their own ties.

The recent visit of Dr Jaafari and his delegation to Tehran has on paper produced wonders.

In addition to a wide ranging cooperation agreement, including unbelievably intelligence sharing, what happened on the oil front is even more interesting.

Apparently the two sides discussed a "swap" of crude oil with petroleum products by pumping crude from the Basra fields to Abadan refinery through what is reported to be a 40-km 24-inch pipeline and lay another parallel pipeline to return products to the Iraqi network.

The quantities varied between statements but the Iraqi oil minister Dr. Bahr Al Uloom said that initially they will pump 150 thousand barrels a day (tbpd) of crude and receive 50 million litres of light products (gasoline, diesel and kerosene), which sounds more like wishful thinking.

While the Iraqis in their enthusiasm ignored some of the facts of the oil products situation in Iran, the Iranians are more prudent as Zanganah, the oil minister was quoted as saying that the implementation of the project would require more stability in Iraq.

Zanganah is also thinking of receiving the full charge of Abadan refinery of about 400 tbpd and export an equivalent amount of crude from Kharj Island in a crude oil swap with Iraq.

Zanganah also said that Iran is willing to help meet some of Iraq's shortages in refined products with the exception of gasoline, kerosene and gas oil, exactly what Iraq needs and Iran does not have.

Further discussions

I do not know whether a full agreement is reached or that an agreement in principle is signed with further discussions to continue later.

However, one has to remember that Iran is an importer of gasoline because its refineries cannot produce more than about 190 tbpd of gasoline while its consumption is over 300 tbpd as reported in the Opec Statistical Bulletin.

Iran can also hardly meet its middle distillate products (kerosene and gas oil) consumption of over 550 tbpd while its production is close to 530 tbpd.

The Iranian refineries while technically superior to those of Iraq are working at a very high capacity and close to their limits and Iran is reported to embark on large scale additions to meet growing domestic demand.

Therefore Iran will not be able now to give away needed refining capacity to Iraq by allocating so much light products from Abadan and also be burdened with the resulting surplus fuel oil.

Iran can only do that if it selects to import for itself an equivalent amount of products that it can give to Iraq.

If that is so then why doesn't Iraq continue to import for itself and spend the money on improving its own infrastructure in its ports, storage depots and pipelines?

If Iran selects to import from Central Asia as the case is now, this route would be expensive and limited and cannot meet Iraqi needs on top of that of Iran.

Very limited quantities are imported by Iraq through this route with elaborate arrangement with Iranian transporters as Iraqi truckers are not allowed in Iran and the cargo has to be switched at the borders into Iraqi trucks.

Of course we have to be supportive of any cooperation between neighbouring countries that will bring benefit to both sides but I do not see these discussions in this light because one side does not have what the other needs and therefore if we are going to do that in spite of these facts the Iranians will definitely ask for a very high fee for themselves in order to alleviate the burden of imports and their transportation to consumption centres and eventually the Iraqis will realise that this is not to their liking.

Friendly line

The straight crude oil swap through Abadan was mentioned for the first time in 1990 after Iraq's entry into Kuwait. Iran was initially taking a friendly line towards Iraq and it was thought the Iraqi pipelines can be linked to supply Abadan refinery and allow Iraq some revenue after the UN embargo was applied.

The idea never took hold because Iran was not going to risk an embargo on itself to help Iraq and at the same time Iran stood to gain from Iraq's exit from the oil market.

But when Iraq rejoined the oil market at the end of 1996, Iran sent a marketing executive to Baghdad to discuss the same idea of getting crude to Abadan.

However, during the discussions the Iraqis found out that the Iranians had a very high discount in mind. The matter was also discussed between Zanganah and the Iraqi oil Minister at the time Dr Amer Rashid in their meeting in Vienna during an Opec conference.

Iraq exports were limited and the Iranian fee scared the Iraqis and the project never materialised. After Iraq's occupation, Dr Bahr Al Uloom visited Iran twice in 2003 and early in 2004 and the pipeline to Abadan was promoted again by the Iraqis but it went no further.

Even now, the Iraqi terminals are more than sufficient for Iraq's exports of crude oil and in the near future it would be better to repair, modernise and expand the Iraqi system in the Arabian Gulf and other export outlets rather than embark on new and costly ones. The swap through Abadan will have to wait a long time before it becomes viable.

In the meantime, Iraq should expand the pipeline network between the South and Baghdad and improve the receiving facilities in the ports if it wants a better solution to the logistics of products imports and distribution in Iraq.

More importantly it should improve the utilisation of its refineries from the current low of 60 to 70 per cent.

The writer is the former head of the Energy Studies Department at the Opec Secretariat and is currently working as an adviser.