The position of oil and gas as the most valuable commodity in international trade and the strategic significance of access to its supply sheds new light on the geographical position of Iran. Situated between the Caspian Sea and the Persian Gulf, Iran serves as the most economically viable outlet for the export of the ample hydro-carbon resources of Iran's newly emerging, though landlocked, northern neighbors Kazakhstan, Azerbaijan and Turkmenistan. These three nations alone, who, with a combined total of 30 billion barrels of oil reserves and 220 trillion cubic feet (tcf) of gas reserves, are destined to become major players on the international market provided that proper export routes and markets are developed.

Kazakhstan, Turkmenistan and Azerbaijan are interconnected to Iran via the Caspian Sea and in the case of Turkmenistan and Azerbaijan by shared borders as well. To the south, Iran has the longest coastline along the Persian Gulf and controls half of its body of water providing access to global markets and 65% of the world's oil reserves. As such, the positioning of Iran as the only geographic land mass bridging the gap between two of the globes most important oil regions has highlighted its critical role in the adequate development of these nations hydrocarbon resources. In light of the above, cooperation with Iran for the export of oil and gas through the utilization of Iranian territory would seem to be the most viable option for the development of the hydro-carbon resources of these nation's and the full utilization of market potential in the region. These factors are further highlighted by:

Oil Cooperation: One of the most viable options for short term regional oil cooperation has been the prospect of "oil swaps'. Densely populated northern Iran serves as a natural market for refined oil products. At the present time, oil is pumped from Iran's southern oil fields and then sent via pipeline to northern points such as Tabriz, Arak and Tehran for refining and distribution. With a minimal investment encompassing some 160km. of

pipelines, Azerbaijan, Turkmenistan and Kazakhstan can ship their oil to Iran's northern Caspian port of Anzali and link this port into Iran's pipeline network so as to feed Iran's northern refineries. In turn, Iranian oil which was previously shipped from southern Iran to its northern refineries would instead be delivered to Iran's Persian Gulf oil terminal Khargh Island and sold in lieu of Turkmen or Kazakh oil, hence the term "swap". Such 'swaps' would represent savings of considerable transportation and storage costs to both parties involved. Following the testing of samples of Kazakh and Turkmen oil for compatibility with Iranian refineries, in January, 1997 the first trial delivery of Kazakh crude arrived via Neka Port for subsequent blending with Iranian light crude at Iran's Tehran and Tabriz refineries. Due to the fact that Kazakh crude has higher salt and nickel content than that of Iranian crude, it is expected that deliveries will remain at a steady 40,000 bpd. for a period of two years and then gradually be increased to 120,000 bpd. In turn, Kazakhstan is entitled to the same value of Iranian crude at Iranian export terminals in the Persian Gulf or at Iranian storage facilities in Europe such as Rotterdam. Following closely behind Kazakhstan, Turkmenistan has also initiated several successful trial runs with the first 3,200 ton cargo of Turkman oil taking place in early 1995 and by which swaps are now taking place on a regular basis (see sidebox). It is of note that the preliminary success of these transactions has attracted the attention of the globe's multi-national oil companies who have undertaken large-scale regional investments in Central Asia and have now been faced with export strangleholds due to lack of adequate infrastructure. The pressures brought about by these strangleholds has led American companies such as Chevron and Mobil who face restrictions due to the imposition of unilateral sanctions against Iran by the United States, to actively lobby their Government so as to tap be granted exemptions and actively tap into Iran's transit potential.

In the long term, Iran's crude oil pipeline network could be utilized so as to bring Azeri, Turkmen and Kazakh crude to Iran's southern oil loading terminas in the Persian Gulf. By way of example, the Neka Pipeline Project, A three phase plan is currently under implementation to bring such plans into fruition comprising of:

Phase I: Crude Oil for Tehran & Tabriz Refineries: The combined processing capacity of these two refineries currently stands at 350,000 b/d which are primarily supplied by Iran's northern oil fields and further supplanted by a 40,000 b/d pipeline directly linked to the Tehran Refinery from Neka port in the Caspian Sea. In this phase it is

foreseen that a 390km., 32 inch diameter pipeline with a capacity of 370,000 b/d will be constructed from Neka directly to Tehran and subsequently be connected to the Tabriz refinery. This plan also foresees the construction of oil storage facilities and the reconfiguration of the Tehran and Tabriz refineries so as to be able to effectively refine Caspian crude. It is foreseen that the project will take two years to implement. International Tender documents were released concurrently in Tehran and London and evaluations are now under way.

Phase II: Refinery and Pipeline Modifications: In this phase it is foreseen that the refineries of the cities of Isfahan and Arak would also be geared towards the processing of Caspian crude. To achieve this objective, the following steps are foreseen:
(I) Reversal of the flow of the existing pipeline between Tehran to Isfahan and Tehran to Arak.
(ii) Transfer of oil from Northern Iran to Tehran via a new line from Neka, originating from Kazakhstan and Turkemenistan and/or a new route from the Port of Anzali or Baku, depending on the oil swap applications.

It is thus foreseen that in Phase II, the capacity for crude oil transfers could rise by 450,000 b/d. Investment is foreseen to take place concurrent with development within the region.

Phase III: New Pipelines: In this phase it is foreseen that Caspian Oil would be fully capable of being transferred to Iran's southern oil terminals after full utilization of Iran's northern refineries as well as existing lines from Isfahan and Arak having a capacity of 800,000 b/d. This can be achieved by:

(i) Reversal of the flow of the existing pipelines of Isfahan and Arak to

Iran's southern oil terminals.
(ii) The implementation of new pipelines from Kazakhstan, Turkeminstan or Azerbaijan linked to Isfahan and Arak.
It is of particular note that this Third Phase require minimal investments in Iran's southern infrastructure as there already exists a proven capacity to unload over 5mb/d of oil.

In sum, the implementation of the above three phases can enable the transfer of over 1.6 mb/d of Caspian oil with minimum delay and expense .

Gas Cooperation: As the world approaches the 21st century, emerging trends have shown that natural gas will play an integral role as key energy source in the future. Iran as well as Turkmenistan, Azerbaijan and Kazakhstan have all embarked on ambitious gas development projects aimed at cultivating market share. Iran's geographic position and

existing gas pipeline network denote the key role of Iran in the regional development of gas resources, as it is expected that most regional gas pipeline projects will either pass through Iran or its regional waters. Iran is already connected to the Republic of Azerbaijan and additional linkages are under different stages of implementation with Turkey, in which a $20 billion agreement covering a 23 year supply of natural gas has been signed, and includes the construction of a pipeline from Tabriz to Ankara; Turkmenistan, where a 200 km. pipeline connecting the national networks of the two states commenced operation in 1997; Armenia where initial memorandums have been signed ; India which is to be linked via underwater pipeline or land route depending on the outcome of a joint working commission (see related sidebox) and Europe which is to be connected via a joint 4000 km. pipeline with Turkmenistan. The effective linkage of nations such as Azerbaijan, Turkmenistan and Kazakhstan to Iran's network is at least twenty five percent shorter in length and encompasses much lower costs than that of alternative proposals to the Black Sea and the Mediterranean.