As the U.S. moves closer to pulling out of the Iran nuclear deal and re-imposing sanctions, Iran could see some of the recent progress in its energy industry being rolled back.
The Iran nuclear deal in 2015 was an economic windfall to the country, removing international sanctions and opening up Iran to greater engagement with the rest of the world. Crucially, the deal promised to pave the way for more investment from international oil companies, something Iran desperately needed in order to develop new oil and gas fields.
Yet, some lingering sanctions and uncertainty from U.S. policy clouded the prospects of investment in Iran. Most western oil companies stayed away even after the nuclear accord was signed. Only French oil giant Total SA rolled the dice, signing a deal to develop the next phase of the massive South Pars gas field in the Persian Gulf, in partnership with China's CNPC. It was the first oil agreement to be completed after the nuclear deal and the first under the Iran Petroleum Contract.
However, Iran had hoped to have made much more headway at this point. Several years on from the nuclear deal, much of the Iranian populace has grown impatient over the disappointing benefits stemming from the accord, which have fallen far short of its sky-high expectations.
Still, the past year saw some progress in Iran's energy sector, according to a new report from the Oxford Institute for Energy Studies (OIES). First, Iran began exporting natural gas to Iraq. This was a milestone for both countries, offering Iran some export revenues and greater influence in Iraq. From Iraq's standpoint, gas supplies could help cut down on blackouts and also free up crude oil for export. Related: Houthi Missile Hits Saudi Oil Tanker
Also, Iran claims that its gas output from South Pars has doubled in the past year, eliminating the need to import gas from Turkmenistan. Iran hopes to use these higher gas volumes to fuel a rise in its petrochemical industry.
Second, Iran inked two energy deals, including the aforementioned gas deal with Total and CNPC, plus a deal with Russian's state-owned Zarubezhneft to develop two oil fields. While these deals were significant, leading to a "better-than-average" year for Iran's energy sector, they do not amount to a major breakthrough that could significantly alter the trajectory of the country's oil and gas export levels, at least not in the short-term.
Fears of U.S. sanctions have continued to scare away international banks from offering finance to Iran or other oil companies to develop projects in Iran. "A major - if not the greatest - obstacle to post-JCPOA investments in the Iranian economy is the lack of access to international finance," OIES wrote. Total stands out as a unique case because it has a long history in Iran and is able to self-finance its natural gas project. In that sense, its decision to invest in the face of political risk was unique, and was not replicated by other companies.
Iranian officials have stated that they want to boost oil production capacity to 4.7 to 5.0 million barrels per day (mb/d) over four years, but for now, lacking much higher levels of investment and development from outside companies, that goal will likely remain out of reach. Iran was quickly able to add 1 mb/d after the removal of sanctions in early 2016, pushing production up just shy of 4 mb/d within a year. But absent much deeper levels of investment from outside oil companies, the country's production capacity remains "stuck" there today, OIES says. Related: Upstream Oil Investments Bounce Back
The modest progress from Iran's perspective is now being threatened by the Trump administration, which appears likely to pull out of the nuclear accord when it comes up for review in May. The appointment of CIA Director Mike Pompeo to lead the State Department and John Bolton to take over as National Security Advisor - two belligerent hawks when it comes to Iran - will effectively scare away any potential investment in Iran's oil sector.
Obviously, much of the focus from the oil market will be on the immediate impact to Iran's oil supply. The OIES report predicts that the lack of cooperation from the EU in Washington's quest to ratchet up tensions probably means that the withdrawal from the nuclear deal by the U.S. won't "directly translate into bringing Iranian oil exports down dramatically." A separate report from Columbia University's Center on Global Energy Policy from March predicted that U.S. action to re-impose sanctions might knock 400,000 to 500,0000 bpd of Iranian oil offline within a year.
Either way, the hawkishness from Washington will almost certainly block the long-term investment that Iran had hoped to secure to boost oil and gas production beyond current levels. And it could even scare away Total's planned investment, essentially putting a halt to the progress that Iran has made over the past year.
By Nick Cunningham of Oilprice.com
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Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. More
Comments
But I can’t agree with the arguments that US withdrawal will effectively scare away any potential investment in Iran’s oil industry and reduce Iran’s oil production by 400,000-500,000 barrels a day (b/d).
While the re-introduction of sanctions might scare away western investment, it can’t stop China’s and Russia’s investment in Iran’s oil and gas industry. Iran has a prominent place in China’s Silk Road & Belt Initiative because of its strategic position.
And contrary to claims by Colombia University’s Centre on Global Energy Policy, Iran will not lose a single barrel of oil exports from US sanctions. The reason the pre-nuclear deal sanctions against Iranian oil exports were effective was because of two things: one the imposition of sanctions by the European Union (EU) on insurance companies ensuring Iran’s oil cargoes, and the other the United States sanctions on banks dealing with Iran.
The EU is not going to re-impose sanctions on Iran since Iran has not violated any of the clauses of the nuclear deal. As for US sanctions on banks dealing with Iran, Iran will be using the petro-yuan as payment for its oil exports thus neutralizing US sanctions on banking.
All in all, new sanctions on Iran will hardly have any bite. However, they will escalate tensions between the US and Iran at a time when the United States has its hands full with a potential trade war with China with far more dangerous repercussions than those with Iran.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
We unleashed war on them by letting Saddam Hussain lose on them with Gas we sold him, shot down their passenger plain and killed 300 pilgrims, not to mention the 1953 regime change etc.
Lets face it, the longer this take to fix our relation with Iran, the worse it would be for us to even try to justify it to the world that we are on the right side of the history.