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Iran poll may herald Caspian oil shake-up

MOSCOW, Feb 25 (Reuters) - Russia has welcomed the election of a reformist government in Iran , but analysts say it may mark the start of an upheaval in the politics of Caspian oil as three key players, Russia, Iran and Turkey, battle for supremacy.

The Caspian Sea contains huge if undetermined oil and gas reserves, but is landlocked. Getting them out means building pipelines. And pipelines give transit countries cash and clout.

Until the Soviet Union broke up in 1991, all Soviet Caspian oil crossed Russia, which still sees neighbours Azerbaijan, Turkmenistan and Kazakhstan as in its sphere of influence.

But with independence came a desire by these countries to loosen ties with Russia. Backed by diplomatic muscle from the United States, they looked at new export routes.

To Russia's dismay, U.S. ally and NATO member Turkey emerged as the favourite, even though any pipeline built across it would be longer and more expensive than any other option.

But Iran has always promoted itself as the best candidate for an export line. It is the shortest and cheapest way for oil to reach the sea, and its oil terminal at Kharg island allows easy access to where the oil is actually needed - the Far East.

While nobody doubts the commercial attraction of Iran , U.S. sanctions have ruled out the development of this option.

But a change of government there, if it leads to a review of U.S. policy towards Iran , could alter that. And that could lead other would-be exporters to lose out.

"The one thing at the moment that stands in the way of exports across Iran is the attitude of the U.S. government," Julian Lee, Caspian analyst at the Centre for Global Energy Studies in London, said.


Russia has dismissed any threats to its influence. Asked on Thursday if he saw any danger to Russian interests from Iran 's election result, Energy Minister Viktor Kalyuzhny replied simply: "We're not worried about that".

Russia's foreign ministry officially welcomed the election, and hoped it would "create a basis for free and independent development in a country with which we are friendly."

It has good grounds for optimism in the medium term. The biggest oil project under development in the Caspian basin is Kazakhstan's Tengiz field, from which a pipeline with an eventual capacity of over a million barrels per day is already being built to Novorossiisk on Russia's Black Sea coast.

A second huge project, the Azerbaijan International Operating Company (AIOC), developing an offshore Caspian field, will send oil through Russia for years to come, largely because of Azeri government intransigence.

AIOC now sends some of its oil across Georgia to the Black Sea, and wants to expand capacity on this route.

But Azerbaijan is reluctant to agree to this, fearing that if it did, it would allow AIOC to stall on its pledge to build the U.S.-favoured pipeline across Turkey to the Mediterranean.

As a result, Azeri oil will have to move north across Russia for the foreseeable future, once a bypass avoiding the war in Chechnya has been completed, supposedly within a few months.


But Turkey may not be so lucky. Lee said BP Amoco, leader of AIOC and with long historical roots in Iran , had never really been committed to the trans-Turkish line, although a company spokesman denied this.

"BP Amoco is leading the efforts to progress the Baku-Ceyhan pipeline," he said, adding that strong forecast Turkish demand growth was a factor in the Caspian energy balance.

Stephen O'Sullivan, head of research at United Financial Group in Moscow, agreed that the possible emergence of an export route across Iran was most likely to hurt Turkey.

"That is by far the most expensive and by far the least attractive from the commercial perspective of the oil companies involved," he said.

Meanwhile the Iranian option is gaining ground. Some firms are already "swapping" crude from Turkmenistan across Iran .

This involves giving Iran Turkmen oil to be refined and used in big population centres in the north, and receiving in exchange Iranian crude at an export terminal in the south - in effect moving oil through a "virtual pipeline".

Swiss-based trader Vitol said this month it was close to winning a deal to organise finance for a new $400 million pipeline from Iran 's Caspian coast to northern refineries.

This would allow Iran to swap out a further 370,000 barrels of crude per day, and could be a precursor to a larger pipeline being built across the whole country.

But that would still depend on the U.S. welcoming Iran back into the fold. And few expect that in an election year.


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