Iran announced this week that it's made its first oil discovery in the Caspian Sea in more than 100 years. The semiofficial Fars News Agency reports the find, in ultradeep waters, may hold the equivalent of 7 percent of the country's known national reserves. Iran has touted its ability to continue with domestic energy production, notably in the South Pars natural gas field in the Persian Gulf, despite international sanctions targeting its energy sector. In the Caspian, however, Iran's recent claims may put it at odds with its neighbours over their rights in disputed territorial waters.

Iranian officials reported the discovery of an oil field containing as much as 10 billion barrels of crude oil in the waters of the Caspian Sea. The find was reported at a depth of around 1.5 miles, however, and Iran seemingly has little experience with deepwater development. With Iran facing a diminishing consumer base because of European sanctions, the find, if correct, could be used as political capital by Tehran should global oil supplies constrict when international sanctions take hold later this summer. Iran insists the world needs its oil and 10 billion barrels of new oil in its pocket certainly makes for attractive bargaining.

The trouble, apart from the lack of experience in deep waters, is that the field could be situated in Azeri waters. Territorial boundaries in the Caspian Sea were never settled after the Soviet Union collapsed in the 1990s. More than twenty years on, Turkmenistan and Azerbaijan are at odds over maritime patrols near a Caspian field. A similar move by the Iranians into the waters to its north could excite regional tensions even further.

The International Energy Agency predicts Iran's global share of oil production will likely decline during the next few years. Output has already declined by about 20 percent since 2008 to around 3.3 million barrels per day. This suggests Iran might be getting desperate as it looks for ways to prop up an economy financed in large part through natural resources.

Azerbaijan is a central player in European efforts to break Russia's grip on the regional energy sector. British supermajor BP holds the cards in terms of natural gas with its stake in the Shah Deniz gas complex in the Caspian Sea. BP is already pumping oil from the Azeri-Chiraq-Guneshli complex, assumed to be the largest oil field in the Azeri waters of the Caspian Sea. That suggests Baku is tilting away from its former Soviet overseers and into the arms of Western allies. In 2001, Baku apparently agreed with Iran not to develop resources in the Caspian Sea until demarcation issues were settled. A decade later, however, Iran finds itself backed into a corner and flailing at whatever dragons appear ripe for the slaying.

Source: http://oilprice.com/Energy/Crude-Oil/Iran-Looking-for-Dragons-in-Caspian-Sea.html

By Daniel Graeber of Oilprice.com