The Fuse

Iran’s New Port Project: Moving Past the Persian Gulf

by Gregory Brew | July 17, 2020

In late June, Iranian President Hassan Rouhani announced a new oil pipeline project that would allow Iran to bypass the Strait of Hormuz—the vital waterway at the end of the Persian Gulf, through which passes thirty percent of all global oil trade.

“Many countries in the region have managed to find a second way,” said Rouhani at a public event, “so that they can export their oil using other routes whenever the Strait of Hormuz is in danger.” The project would reduce Iran’s dependence on the Strait.

This “strategic project” would link the cities of Bushehr, a major port city on the Persian Gulf, with the city of Jask on the Indian Ocean, approximately 1000 kilometers away. According to Rouhani, the project will be completed in March 2021, by the end of the Iranian calendar year.

The Chahabar pipeline could have geostrategic and political consequences, tied to Iran’s shifting strategic situation and its recent decision to improve ties with China.

A significant infrastructure project, the Chahabar pipeline could have geostrategic and political consequences, tied to Iran’s shifting strategic situation and its recent decision to improve ties with China. It could also increase the chances of Iran carrying out its age-old threat to close the Strait of Hormuz to oil tanker traffic—a move which would have de-stabilizing effects on the global oil trade.

Jask is about 350 kilometers west of Chahabar, Iran’s principal port on the Indian Ocean. For years, Iran has hoped to develop Chahabar into a major entrepot. Iran signed a deal with India in 2016 to develop industries in the Chahabar Special Economic Zone. Worth $8 billion, the deal offered India access to a port which could, in time, provide a way to expand trade with Central Asia. Investment in Iran’s Chahabar port formed part of the International North-South Transport Corridor project, connecting Central Asia to the Indian Ocean and drawing economic activity away from China’s Belt and Road Initiative.

More significant support for Chahabar could be in the offing, however. On July 13, Iran and China revealed they were in the midst of talks to complete a major economic and military agreement, including $400 billion in Chinese investment. Once concluded, the agreement would dramatically increase China’s involvement in internal Iranian affairs and potentially bolster Chinese support for Iran, at a time when the regime in Tehran faces rising internal dissent, an inflation-wracked economy, and a tense stand-off with the United States and regional adversaries Saudi Arabia and Israel. Projects for the Chahabar port are included in the agreement.

For Iran, the move to expand Chahabar is driven by economic policy as well as strategic concerns. Iran remains locked in a battle with the United States, following the U.S. withdrawal from the Joint Comprehensive Plan of Action in 2015. While the U.S. has relied upon economic sanctions to exert maximum pressure on the Iranian government, it waived sanctions on the Chahabar port in 2018, citing hopes that the port would be beneficial in supporting economic growth in neighboring Afghanistan. The port is thus something of a lifeline for Iran, an area where the government has succeeded in attracting foreign investment despite U.S. sanctions. While Iran has historically enjoyed close economic relations with Europe, the imposition of U.S. sanctions has encouraged it to look East, rather than West, for its economic future.

Building up the port is also a strategic move designed to reduce Iran’s vulnerability to attack from its Persian Gulf neighbors, which include adversaries like Saudi Arabia and the UAE. Should the port become the new export terminal for Iranian crude oil (90 percent of which departs the country from Kharg Island in the Persian Gulf), it would greatly reduce the risk of oil exports being disrupted by military attacks, as was the case during the 1980-1988 Iran-Iraq War.

It is also designed to enhance the credibility of Iran’s occasional threats to close the Strait by military force.

It is also designed to enhance the credibility of Iran’s occasional threats to close the Strait by military force. Like other Persian Gulf oil producers, Iran would be harmed economically if the Strait were to close. Sanctions have reduced Iran’s oil exports to almost nothing, and Iran has stated in the past that it would close the Strait if it’s ability to export oil was impeded. While it has conducted tit-for-tat attacks on its regional foes, mining Emirati tankers and staging a dramatic drone and missile strike against the Saudi oil facility at Abqaiq in September 2019, it hasn’t followed through on its threat.

Nevertheless, possessing a lifeline for oil exports beyond the Gulf could increase the credibility of Iranian threats. The agreement with China forms part of that equation. China is the world’s largest oil importer, and it currently relies on oil exports from the Persian Gulf. For a time, China continued to buy Iranian oil in defiance of U.S. sanctions. Those purchases came to an end in March 2020. In return for Chinese investment, Iran has pledged to sell China large quantities of oil over a twenty-five year period, reportedly at a steep discount.

For now, China is moving slowly, feeling out closer ties to Iran while continuing to buy Saudi oil in large quantities. However, should China be able to rely on non-Persian Gulf oil sources from Chahabar and Russia, its willingness to back Iran against the rest of the GCC would increase. A slow shift in Chinese imports, away from Saudi Arabia in favor of Russia, could offer clues of future changes to Chinese energy policies, which may help Iran.

The Iranian decision to move closer to China is years in the making.

That, at least, is what Rouhani hopes. The Iranian decision to move closer to China is years in the making, but the recent flood of new developments may be linked to Tehran’s simmering conflict with the United States, which is itself tied to the U.S. domestic political situation. Should Donald Trump win re-election, Iran would face four more years of maximum pressure. Democratic presidential candidate Joseph Biden has suggested the U.S. re-enter the JCPOA, a move which would possibly reduce U.S. economic pressure.

For now, Tehran is hedging its bets. While the Chahabar port is a gamble, it looks like a good one for Iran in the long-term, as it seeks to strengthen its regional position and increase its ties to potential allies to the East. That comes with increasing volatility in the geopolitical situation in the Persian Gulf and a slightly higher chance that Iran may, at some point in the future, carry out its threat to close the Strait of Hormuz. Such an event would have a dramatic impact on global oil prices.

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