A big elephant in the room in any discussion of oil and gas supplies is Iran. It has the world’s fourth largest oil reserves and is second only to Russia in reserves of natural gas. But of course we have been sanctioning the heck out of Iran, and the world does not have full and ready access to Iranian oil and gas, which the Iranian government would be happy to pump and sell lots more of. Admittedly, substitutions for European energy supplies cannot always be made quickly and easily, because of how distribution networks are laid out (in the case of gas) and refineries are set up (in the case of oil). Nonetheless, unshackling Iranian hydrocarbons would be one of the best medium-term solutions to any European energy pinch, whatever its cause. An existing pipeline to carry Iranian gas to Turkey could be the first stage in further distribution of that gas elsewhere in Europe. Such arrangements, in addition to any exports of LNG from Iran, would increase options and lower risk for the West in any sanctioning, or threat of sanctions, against Russia. Increased Iranian export of oil, which is a more globally fungible product with worldwide prices, would reduce Russia’s revenue because of downward pressure on the price of its oil, even without any sanctions.
The sanctions campaign against Iran, which has gone on so long with such automaticity that means have become confused with ends, has been carried out with little regard for the damage the sanctions inflict on our own interests. Now with the standoff against Russia over Ukraine, another form of such damage should be noted: the sanctions against Iran reduce our leverage against Vladimir Putin.
At the convergence of issues involving Russia and Iran, there has been misplaced fear about how any Russian weakening or evasion of anti-Iranian sanctions would supposedly weaken the West’s position in bargaining over Iran’s nuclear program. We ought to be worried instead about the opposite: that Russia might, in the interest of preserving its own export earnings and leverage in the energy sector, be tempted to screw up the negotiations so that sanctions stay in place and Iran is kept out of full participation in the oil and gas markets. Fortunately, so far Russia has not succumbed to any such temptation, evidently continuing to see that conclusion of a nuclear agreement with Iran would be in its own larger interests as well as everyone else’s.
The United States and its western partners already had good and strong reasons to see the negotiations through to a successful conclusion, especially because a negotiated agreement with Iran provides the best assurance that its nuclear program will stay peaceful. Now the impasse with Russia over Ukraine has provided an additional reason.
It is hard to try to wage economic warfare against two different adversaries at once. The United States should have learned that lesson when Thomas Jefferson imposed an embargo in 1807 on both Britain and France, thinking that this would get the two warring European powers to leave the United States alone. The embargo was a miserable failure, causing significant damage to the U.S. economy while having little desired effect on British and French behavior. Some things never change, even after growing to a superpower and becoming allies of the Europeans.
*This article was first published by the National Interest and was reprinted here with permission.
]]>by Shireen T. Hunter
Not long after the outbreak of the crisis over Ukraine and Crimea, many observers began asking the following question: what impact could renewed Russo-Western tensions have on the fate of the ongoing negotiations with Iran over its nuclear program? Will the Russians encourage Iran to become more obdurate [...]]]>
by Shireen T. Hunter
Not long after the outbreak of the crisis over Ukraine and Crimea, many observers began asking the following question: what impact could renewed Russo-Western tensions have on the fate of the ongoing negotiations with Iran over its nuclear program? Will the Russians encourage Iran to become more obdurate and change its current and more flexible approach to negotiations with the P5+1 countries (the US, Britain, France, China, and Russia plus Germany), stop complying with sanctions on Iran, or even help it financially and militarily, for example by delivering the promised-but-withheld S-300 air defense system or even shipping the more advanced S-400?
Other questions are also important. Notably, what impact has the West’s treatment of Iran had on Russia’s ability to pressure Ukraine and in general to regain its influence in independent states of the former Soviet Union, including the Caucasus and Central Asia? Indeed, the Western policy of containing Iran and excluding it from many regional and transnational energy and other schemes has facilitated Russia’s policy of consolidating its position in the former USSR.
A major tool that Russia has used in its quest to regain influence over its former possessions has been its vast oil and gas reserves. This is quite evident in Ukraine’s case, where Russia has switched the gas spigot on and off as a way of pressuring Kiev. Iran is only second to Russia in its gas reserves and could have been an alternative to Russia in many countries of the former USSR, including Ukraine. Yet the Western policy of preventing any foreign investment in Iran’s energy sector, coupled with preventing any transfer of Iran’s oil and gas to Europe via various pipeline routes, has meant that Russia has gained an excessive share of the European energy market. Iranian gas could have easily been transported to Europe, especially the East European countries, through Turkey, Bulgaria and so on. Even Ukraine could have satisfied some of its energy needs through Iranian gas.
The same has been true in the Caucasus. Both Georgia and Armenia have wanted more energy cooperation with Iran. However, they were discouraged by the West and, in the case of Armenia, also pressured by Russia. The result has been their greater vulnerability to Russian pressure.
Meanwhile, preventing any of the Central Asian energy sources to pass through Iran, the only country with common land and sea borders with these countries (with the exception of Uzbekistan, which is a land-locked country), has made it more difficult for countries like Georgia to get, for instance, Turkmen gas. In other areas, too, excluding Iran from regional energy schemes, and discouraging Central Asian and Caucasian countries from cooperating with Iran, has worked either in Russia’s favor or created opportunities for China.
Even in the areas of security and conflict-resolution, Iran’s exclusion and the West’s encouraging regional countries to adopt anti-Iran policies has had negative effects. This has even given rise to new tensions and problems, for instance, between Iran and the Republic of Azerbaijan, as well as exacerbated sectarian tensions. For example, Azerbaijan’s resulting animosity to Iran has led it periodically to favor Sunni radical Islamists. Consequently, today Azerbaijan has a serious Salafi problem, and sectarian tensions in the country have been on the rise.
The experience described above provides important lessons for Western policy towards Iran and regional issues in Central Asia, the Caucasus, and South Asia. The first lesson is that a policy of containment on several fronts is not practicable, at least not in the long run. For twenty years, the US has tried to contain both Russia and Iran in these regions and to bar Iran’s interaction with these regions, while also looking askance at China’s progress.
A second lesson is that excluding Iranian oil and gas from global markets inevitably limited Europe’s and Central Asia’s energy choices, making both more vulnerable to Russian pressures since, with the exception of Qatar, the Persian Gulf oil giants are not major players in the gas market.
The last and the most important lesson is that the West should press forward with negotiations with Iran, toward a satisfactory conclusion to the nuclear dispute. This should be followed by lifting sanctions, encouraging the return of Western energy companies to Iran, and planning new networks of energy transport which would include Iran. In the long run, this kind of engagement would also translate into better political relations between Iran and the West and produce a positive impact on Iran’s political evolution and hence issues of human rights and other freedoms in Iran.
With regard to broader regional security issues, the West should work with Iran on a case-by-case basis wherever this serves Western interests, rather than making all aspects of relations with Iran hostage to its stand on the Palestinian question. As shown by the example of Afghanistan — where Iran supported US interests in toppling the Taliban, only to be deemed part of an Axis of Evil — isolating and excluding Iran harms the West as much if not more than it does the Islamic Republic. Right now, the only real winner is Vladimir Putin’s Russia.
]]>Iran’s oil sector is like an ageing wrestler who could still surprise opponents with a show of strength. With this essential industry currently flat on its back, President Hassan Rouhani’s team has to find a way to get their champion back on its feet. Meanwhile, international oil companies are looking on from [...]]]>
Iran’s oil sector is like an ageing wrestler who could still surprise opponents with a show of strength. With this essential industry currently flat on its back, President Hassan Rouhani’s team has to find a way to get their champion back on its feet. Meanwhile, international oil companies are looking on from the sidelines, and whispering some encouragement.
Iran’s revival would have a significant impact on global oil markets — and, in the longer term, on gas. Oil minister Bijan Zanganeh has predicted exports of 1.4 million barrels per day (bpd) this year, up from 1.15 million bpd in 2013.
Recent reports have indicated that Russia would swap equipment and goods for up to 500,000 barrels per day of Iranian oil, and that Chinese state trader Zhuhai Zhenrong was negotiating for a new contract to purchase condensate (extra-light oil). China currently accounts for about half of Iran’s reduced volume of exports. Although cracks may be appearing in the sanctions edifice, a full and rapid recovery will require the removal of sanctions, not just loopholes.
In such an eventuality, there will have been some permanent loss of capacity because of lack of investment but a re-emergent that Iran might be able to produce around 3.6 million barrels per day, compared to over 4 million bpd in 2010. This would equate to some 1.9 million bpd of exports, almost double current levels. With the US’s Energy Information Administration forecasting the call on OPEC to fall by 0.5 million bpd in 2014, and Iraq likely to grow by 0.3-0.5 million bpd, other OPEC members — notably Saudi Arabia — would have to cut back significantly.
Technically speaking, Iranian oil production might return much quicker than most observers expect. If the fields were shut down in an orderly manner — and the Iranians had plenty of warning — there is no reason why the closure should have permanently damaged them. Quite the opposite: a period of reduced production from some of the old fields may have allowed pressure to recover and more oil to drain into layers from where it can be recovered.
But the process of unpicking the multi-layered sanctions — US, EU and UN — will be lengthy and complicated. Different sanctions cover financial transactions, access by Iran to its overseas funds, trade in precious metals and petrochemicals, investment in the Iranian oil industry, the supply of refined products, the provision of technology, shipping and insurance, imports of Iranian oil by the US or EU, and dealings with numerous designated entities. Some of these sanctions date back well before the current nuclear crisis, and are predicated on support for terrorism or human rights violations.
So even a comprehensive deal over the nuclear program will not remove all sanctions, and certainly not all at once. President Barack Obama may have considerable discretion to waive the application of some sanctions, but it would be disconcerting for long-term buyers to know that a change in the political winds might again cut off Iranian oil at short notice.
To get much beyond 3.6 million bpd of oil output, and to continue the expansion in gas required to meet domestic demand and some ambitious export plans, the industry requires a comprehensive overhaul. Lists released so far seem more of a miscellany of favoured projects, with no clear prioritisation. Given other calls on the government’s budget, in a post-sanctions phase of economic recovery, external financing is likely to be required. Even more than that, international technology and expertise will be key.
With more than a hundred announced projects, the organisational capacity of the National Iranian Oil Company (NIOC) will be tested to the limit, after a long period of brain drain, underinvestment and politicisation. As the experience of Iraq shows — admittedly under less favourable circumstances — effective delivery of multiple megaprojects in collaboration with international oil companies can drag if the state company and ministry lack capability.
Stated priorities include the development of shared fields with Iran’s neighbours – Iraq, Kuwait, Saudi Arabia, Qatar and the UAE – to avoid hydrocarbons being drained across the international border. It has even been suggested that production-sharing contracts might be offered for such fields – which the international industry prefers to the ‘buybacks’ offered by Iran in the late 1990s, and the technical service contracts used in Iraq.
Iran’s production plans hinge particularly on a few large projects — the Azadegan and Yadavaran oil fields near the Iraqi border, which could produce 900 000 barrels per day; the completion of Phases 12, 15 and 16 of the giant South Pars field; and the Kish and Salman gas fields in the southern Persian Gulf, with potential output of 2.7 billion cubic feet per day, almost a fifth of Iran’s current production.
Salman is a cross-border field with the UAE, and its gas was intended to go to the Emirate of Sharjah, but the deal fell apart over allegations of corruption, under-pricing and Iranian failure to complete infrastructure. Kish has for some years been targeted for export to Oman, which has played a quiet but critical role in behind-the-scenes nuclear diplomacy. Qatar, with whom Iran shares South Pars (Qatar’s North Field), recently offered technical assistance on the field.
But NIOC also needs to consider how to sustain and revive output from its mature fields, including managing massive gas reinjection projects that will take years to show results. At the same time, it needs to explore for new fields with the modern technology and geological concepts that have been so successful just over the border in Iraqi Kurdistan.
Iran has long been working with Chinese companies on Azadegan, Yadavaran, and the Iran LNG (liquefied natural gas) project, part of South Pars. But it has become frustrated by what it sees as their low technical competence and foot-dragging over full-scale investments. Western companies are back in favour. Firms such as ENI and Shell have already, with surprising alacrity, held some discussions with Mr. Zanganeh. During an initial phase of sanctions removal, international companies may seek short-term technical assistance deals — building goodwill and positioning themselves, without making major commitments until they can judge to which side the political tussles, internal and external, incline.
International companies — mostly Western, but also including firms such as Malaysia’s Petronas — bring skills in megaprojects, managing mature fields, and exploration. But Iran should think not only in terms of attracting industry titans — it has plenty of smaller fields where nimble newcomers and private Iranian companies can perform better.
With such assistance, the champion can still return to the fray at something like its former strength. Increased oil output challenges Iran’s Arab neighbours, while gas exports allow it to build ties with the UAE and Oman, as well as with Iraq, Turkey and Pakistan. That will be essential for President Rouhani’s administration, giving his team the muscle to revive the economy. Recapture of the commanding heights of the oil industry and its finances — plundered and obscured under President Mahmoud Ahmadinejad — is essential in the country’s byzantine factional contests. As usual, this slippery liquid is the way to keep a firm grip on the economy and body politic.
Photo: Iran’s Oil Minister, Bijan Zanganeh
]]>by Robin M. Mills
Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.
Much outside attention has been paid to the impact of sanctions on Iran [...]]]>
by Robin M. Mills
Hassan Rouhani is known as a man who sprays air-freshener in the room before a meeting. When it comes to Iran’s oil industry, Iran’s fastidious president-elect may have a great deal of spring-cleaning to do.
Much outside attention has been paid to the impact of sanctions on Iran and global oil markets. There has been less discussion of what Iranian policymakers should be doing with their oil, and what effect different policies would have within the country. Turning around the petroleum sector is crucial to Iran’s economy, and in turn, to the success of the centrist-reformist current that the pragmatic Mr. Rouhani is now representing.
During the phase of post-war reconstruction under Akbar Hashemi Rafsanjani, oil production rose by more than 3 percent annually and grew by more than 1 percent per year under Mohammad Khatami as major foreign investment flowed in from European, Russian and Asian companies. In 1995, Bill Clinton vetoed a contract for US oil company Conoco to develop the offshore Sirri fields, which allowed France’s Total to step in. The National Iranian Oil Company (NIOC) as well as domestic engineering and service companies also significantly improved their technical capabilities.
In contrast, the economic consequences of Mahmoud Ahmadinejad were oddly similar to those of Hugo Chávez in Venezuela — the replacement of skilled oil technocrats by less qualified allies, leading to stagnant output. Two giant oil field discoveries of the early 2000s, Azadegan and Yadavaran on the Iraqi border, have barely been developed.
Driven by South Pars, the world’s largest field — shared with Qatar — natural gas production continued to rise impressively under Ahmadinejad, albeit at a slower rate than with his predecessor. But with lines being drawn all over the map like spaghetti, minimal progress was made on gas export plans — to Turkey and Europe; Pakistan and India; the UAE, Bahrain, and Oman — and as liquefied natural gas. The country that, according to British Petroleum, now has the world’s largest reserves, is barely a net exporter of gas.
Development of the oil sector was, of course, hampered by increasingly tight sanctions. Western companies essentially suspended new activities by 2008, while Chinese and Russian firms did no more than keep a foot in the door. But bigger barriers — already apparent during Khatami’s second term — were unattractive contract terms, interminable negotiation periods and decision-making paralysis.
Three of Ahmadinejad’s nominees for oil minister were rejected by the Majlis in 2005; in 2011 he attempted to act as his own oil minister, again ruled out by parliament. As Kevan Harris has documented, from 2006, Ahmadinejad accelerated a process already underway since the 1990s — the pseudo-privatisation of a wide range of state-controlled entities, including oil development and engineering companies and petrochemical plants. In a process reminiscent of the “nomenklatura capitalism” of post-Soviet Russia, many of these companies have fallen under the control of regime insiders and government bureaucrats.
High and rising oil prices permitted complacency as Iran received more oil revenues than in the entire previous century of production during Ahmadinejad’s two terms as president. An increasingly overvalued exchange rate made domestic industry uncompetitive and attracted a flood of cheap imports in a vain attempt to keep down inflation sent soaring by excess liquidity. In a curious reversal of monetary orthodoxy, Ahmadinejad insisted that interest rates not exceed the inflation rate.
The main positive achievement of Ahmadinejad’s administration was reforming Iran’s ruinous energy subsidy scheme, which was replaced by direct cash payments to families. The plan was conceptually sound and surprisingly well-executed; consumption fell and the basic income provided made a substantial difference for poorer Iranians. But the scheme stalled as a result of further infighting between the Majlis and president, the sanctions-induced collapse in the rial, severe inflation and the failure to compensate affected businesses.
The administration did not anticipate how successful the US would be, from early 2012 onwards, in cajoling both allies and rivals to eliminate or cut oil purchases from Iran, as well as targeting insurance, shipping, financial transactions and exports of other Iranian products. Iran’s oil sales fell by a million barrels per day, while increased output from Saudi Arabia and from the US itself prevented global prices from rising too far.
The path of Iran’s oil industry under Dr. Rouhani will depend on progress made in nuclear negotiations and the easing of sanctions, as well as his administration’s domestic policy choices. A military conflict with the US and/or Israel would have highly unpredictable but damaging effects on Iran’s oil industry and possibly those of its neighbours.
If the current sanctions regime remains in place, Iran’s new administration will have to do its best to survive on a severely diminished income. As the Mossadegh government did in the early 1950s under somewhat similar circumstances, it can reorient the economy further towards domestic production and consumption, eliminating the luxury imports that boomed over the past decade. Better management and tackling corruption would reduce the social impacts and inequality — at the potential cost of harming some leading regime figures.
Bringing back Iran’s capable technocrats — and some of its talented diaspora, with more relaxed social conditions, as under Khatami — would keep oil production steady. Two candidates helped manage Rouhani’s campaign – former deputy oil minister Akbar Torkan and former refining and petrochemical chief Mohammad Reza Nematzadeh. Discounts, loopholes and disguised shipments can maintain exports, even at a reduced level. Over time, the enforcement of the sanctions can be eroded.
But, with the demand for OPEC oil set to be stagnant or falling over this decade, the prospect of lower oil prices, and Iraq’s taking an increasing share of the pie, the path ahead could be hazardous. Iran’s purported ally Russia has no interest in encouraging a competing oil and gas exporter. Given the Islamic Republic’s paranoid (if not unjustified) suspicion of the West, it would be ironic if it ended up yet more dependent on the Kremlin and China.
In the event of a breakthrough on the nuclear issue, and a lifting of most oil-related sanctions, the stage would be set for a pragmatic, Rafsanjani-style reconstruction. If the shutdown could be managed correctly, oil production could bounce back to near pre-2012 levels quite quickly.
But fully realising Iran’s petroleum potential requires foreign investment and expertise, ideally including Western companies. This will have to be under better contractual terms than the “buybacks” offered in the early 2000s that provoked so much nationalist debate within Iran.
Giving international companies a long-term stake in fields can be done with modern contracts that still provide Iran with full sovereignty and control over its industry. This would achieve two objectives. First, it would ensure efficient operations and maximum recovery from the country’s mature fields while encouraging technology transfer. Second, it would give momentum to the removal of remaining sanctions and create a barrier against their reinstatement.
In the same way, gas exports — to the GCC, Turkey and Pakistan — would anchor Iran more tightly within the regional economy and make it indispensable to its neighbours. The window for major exports to Europe has probably closed, with Azeri and Iraqi Kurdish gas set to flow. But Iran could still resurrect its liquefied natural gas plans, where it has fallen infinitely behind Qatar.
Domestically, Iran’s subsidy reform needs to be revived — more propitious when the economy is growing and government finances are increasing. The web of pseudo-privatisation also needs to be untangled and replaced by a balance of true private investment and commercially focused state enterprise.
The sine qua non is a resolution to the nuclear issue and an end to the major sanctions. A whole-hearted pursuit of these policies would amount to a revolution in Iran’s energy affairs — likely to provoke major domestic opposition and run into significant international hurdles. But even a pragmatic, technocratic house-cleaning of Iran’s oil sector would help set the economy on a path to recovery and give hope for the success of Dr. Rouhani’s tenure.
– Robin M. Mills is Head of Consulting at Manaar Energy and author of The Myth of the Oil Crisis and Capturing Carbon. Email him or follow him on Twitter.
]]>Iranian oil expert Dr. Sara Vakhshouri, featured this week at the Atlantic Council, asks whether the world can live without Iranian oil and if Iran can survive under further severe economic sanctions. The answer, she says, depends on the timeframe in consideration and a multitude of other factors, [...]]]>
Iranian oil expert Dr. Sara Vakhshouri, featured this week at the Atlantic Council, asks whether the world can live without Iranian oil and if Iran can survive under further severe economic sanctions. The answer, she says, depends on the timeframe in consideration and a multitude of other factors, such as how Iran responds to present and upcoming challenges — like the international sanctions regime and domestic instability – that drive potential customers and investors away.
At present, Iran would seriously struggle to keep its head above water if the price of oil dropped substantially below $100 per barrel where it’s remained mostly constant, says the former advisor to the National Iranian Oil Company International (NIOCI). As to the question of whether the world can survive without Iranian oil, Vakhshouri suggests it likely will in the near future; it has already started adjusting accordingly with increased Saudi output and Iraqi production, Canadian and US domestic production, and other factors such as a global decrease in demand.
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