Back in March, Saudi and Iran announced they had agreed to restore diplomatic ties in a deal brokered by China, ending a seven-year rift. The Saudi Arabia-Iran deal–one of the latest in a series of geopolitical realignments that have lately been going on in the Middle East–has been widely lauded, with the U.S. National Security Council spokesman John Kirby saying, "To the degree that this arrangement can lead to an end to the war in Yemen, to the degree that it can help prevent Saudi Arabia from having to defend itself against attacks, to the degree that could deescalate tensions - all that's to the good side of the ledger." Tensions between Saudi Arabia and Iran reached a fever pitch in 2019 after an assault claimed by Iran-backed Yemeni fighters on Saudi Arabia's Abqaiq facility temporarily knocked out half the production capacity. Last year, Saudi Arabia sounded the alarm for an imminent Iranian attack, eliciting a swift response from the United States. And now it has emerged that the two nations are willing to take their newfound friendship to a new level. The head of the National Iranian Oil Company (NIOC), Mohsen Khojastehmehr, has told Tasnim News Agency that preliminary work for bilateral cooperation between the two countries in the oil industry has already kicked off. The two will now explore oil and gas fields they jointly own but have neglected for years due to previous animosity.
Iran and Saudi Arabia share more than 28 oil and gas fields which have never been exploited due to disagreements in terms of the amount of exploitation and level of access. The two share Farzad A and B and Arash gas fields, with the Arash field also extending to Kuwait. The Farzad field holds ~23 trillion cubic feet of natural gas reserves and gas condensates of 5,000 barrels per billion cubic feet, while the Arash field holds ~20 trillion cubic feet of gas reserves, with the potential to produce one billion cubic feet per day.
Iran Oil To Flood The Markets
These are some of the latest developments that suggest the oil markets will have to deal with a potential influx of large volumes of oil from Iran.
Even as an OPEC member, Iran can still flood global markets, given that the country is able to export so much clandestine oil under various cloaking techniques. Iranian crude exports exceeded 1.5 mb/d in May, the highest level since 2018, despite the country still being under U.S. sanctions. Last month, Tehran said it has boosted crude output to above 3 million bpd, again the highest since 2018. There's probably room for more considering that Iran's current production is still lower than the 2018 peak at 3.7 mb/d.
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But boosting production from the current level to anywhere close to Iran's ambitions (former Iran oil minister Bijan Namdar Zanganeh once said that his biggest dream was to increase Iran's oil output to six million barrels per day) is likely to take years at the very least, thanks in large part to years of underinvestment. Over the past four decades, Tehran has failed to adequately re-invest its oil income into its production capacity or diversify its economy. In fact, since the 1979 revolution, the Islamic Republic has never at any point in time been able to produce more than 4 million bpd.
To complicate matters further, foreign investors have mostly stayed away from Iran's economy in the four decades since the Islamic Republic was established. Part of the problem here is that the state-controlled economic model wastes more than $50 billion a year on oil and gas subsidies to keep its citizens docile. The result is that Iranians enjoy the cheapest gasoline and electricity prices of anywhere on the globe, but have to contend with high unemployment and inflation due to an economy that relies too heavily on petrodollars. Raisi's administration has set about major reforms in the country's subsidies system, but has conceded that runaway corruption has been blunting his efforts.
Then there are growing doubts that Iran and the U.S. will even be able to strike a new nuclear deal, with an alarming report claiming that Iran is close to testing its first ever nuclear weapon. Separate intelligence reports published by Germany, the Netherlands and Sweden during the first half of this year have said that the Iranian regime "...has consistently sought to obtain technology for its illegal nuclear program and ballistic missile apparatus," with the Netherlands General and Intelligence Security Service claiming that Tehran's nuclear advancements, including the enrichment of uranium "brings the option of a possible [Iranian] first nuclear test closer."
The Netherlands' intelligence agency has determined that Iran is "deploying increasingly more sophisticated uranium enrichment centrifuges [and] enlarging its enrichment capacity." That view is corroborated by Swedish intelligence authorities, which have claimed that, "Swedish technology as products with dual uses and critical cutting-edge products for both civilian and military use is of interest to Iran. Iran procures both technology and knowledge through illegal methods, and develops its own ability through Swedish universities and research institutions."
Prospects of reviving the Iran nuclear deal have swung dramatically, from near-certain in March 2022 to almost nil by the end of 2022, and now the outlook is bright again. There are reports that the Biden administration's strategy on Iran's nuclear ambitions has shifted from prevention to containment, making the path for a new deal easier five years after former U.S. President Donald Trump infamously ditched Obama era's JCPOA. Heshmatollah Falahatpisheh, formerly the head of the Foreign Policy and National Security Committee in the Iranian parliament, has claimed that the Biden administration, "will close its eyes to some of Iran's energy deals, and [allow] the release of some of Iran's frozen funds in return for Iran refraining from expanding its nuclear program more than the current level." Iran's supreme leader, Ayatollah Ali Khamenei, has said that a deal with the West is acceptable as long as it doesn't touch the Iranian nuclear infrastructure, a rhetoric similar to the one he voiced when the first deal was signed in 2015.
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That said, it's doubtful whether the Biden administration will be willing to look the other way if Iran goes ahead and conducts a nuclear test.
By Alex Kimani for Oilprice.com
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The first tale refers to years of duplicity by the United Sates since the days of the late Shah portraying Iran as a threat to Saudi Arabia’s security and oil interests in order to sell hundreds of billions of dollars of weapons to the Saudis. In fact tensions between Saudi Arabia and Iran reached a fever pitch in 2019 after an assault by the Houthis, Iran-backed Yemeni fighters on Saudi Arabia's Abqaiq facility temporarily knocked out half its production capacity. The Saudis and the United States both accused Iran of being behind the attack but the United States never came to the aid of Saudi Arabia by retaliating against Iran. This was a turning point in Saudi relations with the United States.
The second tale refers to the agreement reached between Iran and Saudi Arabia in March this year to restore diplomatic relations in a deal brokered by China in Beijing ending seven years of rift between the two countries. This deal transformed the two neighbours from what was portrayed by Western media as two arch enemies into two neighbouring countries willing to take their newfound friendship to new levels.
Now it emerged that preliminary work between Iran and Saudi Arabia for bilateral cooperation in the oil industry has already kicked off. The two will now explore oil and gas fields they jointly own but have neglected for years due to previous animosity.
The United States and its Western allies made the Shah’s Iran the policeman of the Gulf and nurtured fears among Saudi Arabia and the Arab Gulf countries that Iran has designs on their oil wealth.
Now China has turned Western duplicity on its head with both Saudi Arabia and Iran cooperating and jointly becoming the policemen of the Gulf.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert