Twenty years of corruption and incompetence: The dark story of Crescent Petroleum contract
This giant political hot potato could cost Iran billions of dollars in penalties and fines, yet no one in Tehran wants to touch it. The 2001 contract for gas exports between the National Iranian Oil Company (NIOC) and the UAE-based Crescent Petroleum , has long been tarnished by allegations of bribery and corruption coupled with imprisonment and even reported murder of one of its Iranian middlemen. However, an international arbitration tribunal ruled this week in favor of Dana Gas (the parent company of Crescent Petroleum), awarding the company $607.5 million for compensation as the NIOC failed to deliver gas to the Sharjah-based firm under the contract signed in 2005. This initial ruling only covers the first 8.5 years of the contract, and the international arbitration tribunal will begin their hearing for the remaining 16.5 years of the contract in Paris next year, where the claim is expected to be in Billions of Dollars, with the final decision expected in 2023.
Under this 25-year gas sales agreement, Iran was to initially export 500 million ft3/d (~ 14 Million M3/d) of untreated gas from Iran’s Salman field in the Persian Gulf to Sharjah for sweetening and further treatment. The volume of sales was supposed to increase to 800 million ft3/d in later years. The gas price was initially set at $18 per 1,000 M3 of gas (equivalent to $0.5 per 1,000 ft3) and was supposed to increase in later years of the contract.
At first, the deal was hailed in Iran as a great success for the reformist President Mohammad Khatami, his Oil Minister, Bijan Namdar Zanganeh, and their policy of entente with Iran's Arab neighbors. It was expected to deepen economic ties with the UAE - already a key trading partner with Iran. But more importantly, the deal was seen as a bonanza for Iran, as Salman’s sour gas was being flared, which is a source of environmental damage and was effectively worth nothing to Iran. Subsequently, an expert committee formed by the then Oil Minister, Bijan Namdar Zangeneh, confirmed that the technical, economic, and political benefits of the deal were in line with national interests in a report to the Supreme National Security Council. The contract was also a big step up for Crescent, allowing the relatively small Emirate of Sharjah to bring fresh sources of energy to the UAE.
But as is often the case, corruption, mismanagement, and infighting within the Islamic Republic got in the way and spoiled this contract, which has since caused millions of dollars in legal fees. Not long after signing the Crescent deal, it was alleged that the company had bribed certain Iranian intermediaries, and the deal essentially became a political football.
In 2005 when the Iranian gas was supposed to be sent to the UAE, the then head of Iran's Supreme Court of Audit, Mohammad Reza Rahimi, delivered a crippling blow to the deal. Rahimi - who soon became the first deputy of hardliner President Mahmoud Ahmadinejad - called the agreement “treacherous”. He charged that the deal would cost Iran some $20 billion because the agreed gas sales prices were too low. Subsequent Iranian administrations from President Ahmadinejad to President Rouhani, both two-term presidents, essentially kicked the Crescent can down the road. The thorny contract was passed to the administration of president Ebrahim Raisi in August 2021.
For starters, after taking the case to an international tribunal in 2009, Crescent Petroleum won a verdict that obliged Iran to honor the contract. What was a killer blow for Iran’s legal argument in the Crescent dispute was the surprise return of Mr. Zanganeh to the key role of the oil minister in the Rouhani administration in 2013. Whilst Iran was claiming that it had rescinded the Crescent contract partly due to corruption and bribery issues and that this contract had been obtained through dishonest means, the Crescent lawyers argued that since Zanganeh was the same oil minister when the original contract was signed in 2001, corruption must not have been an issue as the same person has been appointed oil minister again. Crescent is seeking $18.6 billion in damages from NIOC. In 2016, under Zanganeh’s second term as oil minister, NIOC made a complete U-turn by declaring that it was willing to honor the deal, but Crescent rejected Iran's offer. NIOC then responded by yet another attempted court case. This time International law firm Eversheds Sutherland and Canadian consulting firm Sproule were hired by NIOC, to argue that Iran was ready and willing to supply the gas to Crescent and that the buyer was unwilling to receive the gas. However, NIOC lost this case as well because the judges voted in favor of Crescent and stated that gas projects have a timing element and a 10-15 years delay for delivering gas in an international contract is not acceptable.
Meanwhile, the alleged corrupt brokers have either been released from jail after brief detention or are missing and presumed dead: Mehdi Hashemi, son of ex-president Rafsanjani who was the main power broker for the deal was thrown into prison for a few months in 2012; Abbas Yazdanpanah Yazdi, a British-Iranian businessman who had a long-standing business record with Mehdi Hashemi, was reportedly abducted in Dubai in 2013 and has been presumed dead by the Emirati authorities. Yazdi, and Hashemi were all brokers and middlemen. None of them were government officials or decision-makers whose signatures and approvals would have been needed for these deals to go ahead. None of the Iranian government officials have ever gone to jail in this corruption case.
There were supposedly charges brought against Zanganeh during Ahmadinejad’s government but a few years later the charges fizzled away and Zanganeh won the Majlis vote of confidence to become the oil minister under Rohani. Why has no senior Iranian government official lost his post, got fired, or been put in jail over this “treachery”?
In backing out of the Crescent deal, the Iranian authorities claimed that the gas price in the contract was too low, referencing much higher gas prices in Europe. However, gas prices are very localized and because of transport difficulties such as pipelines, one cannot compare imported gas prices in Europe or China with the transfer prices in the Middle East. A more realistic comparison perhaps could have been made to the Dolphin project, which was delivering treated and sweetened gas to the UAE at $1.3-1.4/1,000 ft3 (allowing for transport and treatment costs, the netback price of gas would be around $0.87/1,000 ft3 ). Considering that the UAE was getting gas from Qatar at a similar price and that Iran was flaring the gas, from a business point of view this was not such a bad deal for Iran. On the other hand, consider the consequences of the abrogation of this contract:
- Since 2005, the original date of the gas delivery, assuming the lower rate of 500 million ft3/d for the past 16 years, Iran would have had $1.5 Billion of lost revenue. Since the gas rate was supposed to increase and the price was also allowed to escalate after a few years, we could be looking at more than $2 Billion of potential lost revenue.
- This gas has been flared for the past 16 years and NIOC will continue to do so for many years to come. The problem with gas flaring has been previously discussed in IOD’s article dated 11th May 2021 (Flaring Billions Of Dollars Of Natural Gas In Iran’s Oil Fields, 11th May 2021), where gas flaring emits Carbon Dioxide as well as other gases such as Methane, Sulphur Dioxide, and Hydrogen Sulphide.
- The costs of lawyers, consultants, court fees, and foreign advisors for all these legal battles. In addition, the cost of sending NIOC lawyers and experts to attend these meetings and court cases abroad.
- Most of all, the reputational damage that this case has caused for Iran. Bear in mind that at the height of the disputes between Qatar and UAE in the past few years, when flights were blocked between the two countries, the gas from the Dolphin pipeline continued to flow from Qatar and the UAE continued to pay for it. Whereas Iran could not honor its only gas sales contract in the Persian Gulf region.
The Crescent contract was not the only major corruption scandal under the Khatami-Zanganeh era. There was a similar corruption lawsuit involving the Norwegian oil firm Statoil, which resulted in a massive court case in Norway. The court concluded that Statoil (now renamed Equinor) paid $15.2 Million to a consulting company with links to Mehdi Hashemi and Abbas Yazdanpanah Yazdi, two figures who are also closely associated with the Crescent deal. Statoil was fined 20 Million NOK ($2.3 Million at today’s exchange rates) and the director in charge of this deal, Richard Hubbard, was fined 200,000 NOK ($23,000). The corruption case was so severe that it led to the resignation of Statoil Chairman Leif Terje Løddesøl and its CEO Olav Fjell. The American authorities also took Statoil to court and the company paid $21 Million in fines to settle this case.
Two major corruption cases with international dimensions have occurred under Mr. Zanganeh's watch and have led to numerous court cases and huge fines, but nothing has happened to Iran’s former oil minister or the presidents to whom he reported to. This is perhaps a small example of corruption, mismanagement, and incompetence that have become institutionalized and accepted in the Islamic Republic.