Ministers meet to thrash out the Iranian nuclear deal. / Credit: U.S. Department of State
Ministers meet to thrash out the Iranian nuclear deal. / Credit: U.S. Department of State

A Re-emerging Power

Iran Stands to Regain Oil, Gas Prominence

By V L Srinivasan

A 12-year standoff between Iran and world powers over the Islamic Republic’s nuclear activities came to an end with the former agreeing to limit its nuclear program on July 14.

But Iran still has a long way to go before it can make a meaningful impact on the global oil and gas markets, not least because the accord has to be ratified by the U.S. Congress within 60 days, and must also be approved by Iran’s supreme clergy leader, Ayatollah Ali Khamenei.

Under the deal, Iran has pledged that it will not produce material to create a nuclear weapon for at least a decade and has agreed to the imposition of new provisions for the inspection of Iranian facilities, including military sites.

Undoubtedly, the deal will go down as one of the most important diplomatic achievements for U.S. President Barack Obama during his presidency; ensuring peace in the volatile Middle East – which provides energy security for America – has been one of his top priorities.

The landmark agreement will enable Iran to reclaim its frozen assets of about US$120 billion and attract foreign direct investments, which will result in recovery of trade, tourism, oil production and exports. It will also, importantly, boost private investment leading to higher GDP growth.

Many European countries, which are mostly dependent on gas supplies from Russia to meet their needs, will soon be able to look to Iran as an alternate source of energy once sanctions are lifted. Indeed, some European firms are already looking at Iran to invest in its oil and gas fields.

At the regional level, Iran will likely leave no stone unturned in its drive to re-establish its role in the region. But oil-dominant countries such as Saudi Arabia, the U.A.E., Qatar, Kuwait and Bahrain will want to restrain and counter Iran’s success.

The Jewish lobby in the U.S. is also against the accord and the U.S. Congress voted in May to tie any final agreement to a subsequent Congressional review, which could delay progress. However, President Obama has said that he would exercise his veto power if Congress votes against the deal in the House.

There are other hurdles such as the timing and mechanisms for lifting sanctions; how to prevent Iran from continuing its nuclear activities; the creation of an inspection regime to ensure compliance of the agreement; and when an international embargo on selling conventional arms to Iran might be lifted. These measures are expected to take time to resolve, leaving the country without access to the latest oil and gas technology needed to increase production.

According to experts, Iran needs at least US$200 billion invested in its oil and gas industry, including US$70 billion for its petrochemicals, to upgrade the technology and also repair its oil fields which were badly damaged during the eight-year war with Iraq in the 1980s. No new wells have been drilled in Iran since 2007.

‘Proven’ Reserves Dispute

Iran, which is the fifth-largest oil producer among the Organization of the Petroleum Exporting Countries, claims it has 157 billion barrels of proven oil reserves. However, this figure is disputed by many experts including two retired National Iranian Oil Co. experts, Ali Samsan Bakhtiari and Ali Muhammed Saidi, who estimate the figure is nearer to 37 billion barrels.

Iran also claims to hold the second-largest natural gas reserves of 29.6 trillion cubic meters or about 15.8 percent of world’s total reserves. The U.S. Energy Information Administration believes that Iran may be understating here, and puts natural gas reserves at 33.6 trillion cubic meters as of January 2013.

Just before the nuclear deal was clinched, Fatih Birol, chief economist and director of global energy economics of the Paris-based International Energy Agency, said there was a pressing need for investment in Iran’s oil and gas sector. He gave a timeline of three to five years before this technology could be brought up to speed.

Birol added that investment cuts from oil and gas firms in light of a weaker oil price would also stem Iran’s potential in the near term “In view of falling oil prices, there has been a decline in production and we estimate investments in oil upstream will go down this year by 20 percent which is more than US$100 billion, in the given market conditions,” he said.

However, Iran’s oil minister Bijan Namdar Zanganeh is brimming with confidence. Before the deal was concluded, he said his country would step up oil production within 10 days of sanctions being lifted. “Iran produced 2.78 million barrels per day in April this year, would reach 3.8 million bpd by December and 4.8 million bpd by June 2016,” Zanganeh said.

At its peak in 1974, Iran’s production stood at 6 million bpd with crude oil exports of 5.7 million bpd; it is struggling to produce 3.15 million bpd with net exports down to 1 million bpd this year. Iran has not managed to achieve its OPEC production quota of 4 million bpd since 2000.

The decline in Iran’s oil exports over the last few years was not solely due to tighter sanctions; it was also the result of fast-depleting old oil fields with reservoirs that were damaged from excessive production in the 1970s under its former Shah, Mohammad Reza Pahlavi.

Mamdouh G Salameh, international oil economist and consultant to the World Bank, said Iran could add no more than 300,000-500,000 bpd to its production and even if it did, that may not translate into added exports because of steeply rising domestic consumption.

He added that Iran used the equivalent of 610,000 bpd of oil and natural gas in 2012 to generate electricity. By end of 2015, Iran will need to use some 770,000 bpd for electricity generation. That said, Salameh believes nuclear power would enable Iran to replace at least 93 percent of the oil and gas used in electricity generation in 2020, thus adding around 1 million bpd to its oil and gas exports and earning it an extra $36 billion.

Iran electricity

“Lifting sanctions will hardly affect the global oil prices or the global oil market in the long-term,” he said. “Any initial impact could be the result of Iran releasing some of its alleged stored crude oil on tankers or floating containers to the market, but it will be short-lived and limited. However, Iran might benefit from the development of its natural gas fields.”

Salameh said that while the lifting of sanctions would facilitate Iran’s efforts to remedy its ailing oil industry, exports would be influenced by factors beyond Iran’s control, such as oversupply in the global oil market, and curtailment of global investments resulting from the low oil prices and geological factors. Iran could demand that OPEC allocates it a bigger production quota, but other members will unlikely accept this in the current climate.

Trade And Investment Opportunity

Nasser Saidi, founder and president of the Dubai-based Nasser Saidi & Associates, felt that the Iranian agreement would elicit a massive trade and investment opportunity on the global stage. Gulf Cooperating Council countries along with Iraq stand to gain economically in a post-sanctions era, as investors look to them to park their funds, he said. Iran could also utilize the expertise of these countries as it rebuilds its nation.

Describing Iran as a “giant” of the oil and gas sector in the Middle East, Saidi said that more investment would help Iran to take up new projects and to lay pipelines to link with energy-hungry economies such as India, China and Pakistan. He expects that the oil price will fall by around $10 per barrel as soon as Iran starts pumping oil into global markets, and the prices of natural gas are likely to be similarly impacted.

Iran oil

The deal has certainly created a storm in the Middle East, particularly in the GCC region, which views Iran as a significant threat to its regional autonomy and political stability. These fears are based in part on unrest in GCC countries. Iran has been accused of stirring up trouble, particularly in Bahrain, where Shias have been demanding more political power, and also in Yemen, which is the backyard of Saudi Arabia.

GCC member states are also wary of Iran because of its support of the Syrian government, led by Bashar al-Assad. Qatar, Saudi Arabia and the U.A.E. want to be shed of Assad and have been supporting the rebels for the last four years with limited success.

However, the U.S. administration has been quick to allay such fears and senior officials including Secretary of State John Kerry have visited the Gulf to cement the U.S. government’s backing of GGC member states. Kerry is eager to put the U.S. at the Gulf States’ disposal should the need arise, with offers of intelligence-sharing and Special Forces training.

Salameh said a nuclear Iran, desperate for oil, could try to poach some of its Gulf neighbors’ oil and gas assets such as the Majnoon oil field, which straddles the Iraqi/Iranian border (with estimated proven reserves of 17 billion barrels); the Saudi Safaniya offshore oil field (the world’s biggest offshore field); or Qatar’s offshore gas fields (the world’s third biggest).

“It could also hold its Gulf neighbors to ransom by threatening to block their oil exports through the Straits of Hormuz unless it shares in this wealth. The U.S. would not, for sure, come to the defense of its Arab allies against a nuclear Iran,” he said.

The Saudi leadership fears that Iran could seek to mobilize the Shiite minority in their country to create political turmoil and even, in time of great tension between the two countries, sabotage main oil and gas production assets in the eastern region of Saudi Arabia.

The U.A.E. claims ownership of three islands in the Gulf that are now under Iran’s control – Abu Musa, Greater Tunb, and Lesser Tunb – which were occupied by Iranian forces in November 1971. The U.A.E. has requested that Iran resolve the dispute over the three islands through direct negotiations or by referring it to the International Court of Justice. Iran has so far rejected both direct negotiations and international adjudication.

“In balancing Iran’s power, it is tempting for Saudi Arabia and the U.A.E. to turn to nuclear weapons as part of a larger strategy to counter Iranian influence. However, the GCC countries should try to settle their differences with Iran by negotiations and to build bridges of trust between them before brandishing the nuclear option,” Salameh said.

He feels the GCC countries should not overstate the Iran threat. “With a combined GDP of US$1.9 trillion – which is five times Iran’s GDP, 29 percent of the global proven oil resources and 22 percent of the proven gas reserves – they are far more powerful economically and politically than Iran. Together, they can be a force to reckon with if they stand united,” he said.

But the question is will they take a unified stand against Iran given their differences on regional developments?

This story was first published in the Sep|Oct 2015 issue of Breakbulk Magazine, a division of ITE Group.Breakbulk Magazine Covers