The Iran Momentum: Hard to Slow, Hard to Control

Iranian officials are now beginning the suspension of production of 20% enriched uranium, under a six-month agreement that will give Iran increased access to funds held overseas (over $4 billion out of some $100 billion in foreign exchange assets) and lead to the easing of restrictions against the petrochemicals and auto industries.

The US and EU on Monday approved the easing of some sanctions against Iran, including the suspension of some trade and other restrictions. Canada has not followed suit, promising Israel that it would leave full sanctions in place for now. Specifically:

•    US and EU-based companies can now buy, import, insure and transport petrochemicals from Iran
•    EU-based companies can resume their trade in gold and other precious metals with Iran
•    The EU has significantly eased restrictions on money transfers for trade and remittances
•    The US will gradually unfreeze $4.2 billion in Iranian oil revenues frozen abroad
•    The EU will stop trying to push countries still buying crude from Iran to reduce purchase volumes
•    The embargo on Iranian oil remains in place
•    Trade with 500 companies believed to be connected in some way to Iran's nuclear program remains blocked
•    More than half of Iran's banks are still blocked from EU financial transactions and 150 Iranians are still on the EU blacklist

Further to this, Japanese purchasers of crude oil will be returning to private insurance providers for transportation of Iranian oil once the easing of EU sanctions is put into effect, suspending the ban on insuring and transporting Iranian oil.  In order to keep the oil trade with Iran afloat, Japan has been providing up to $7.6 billion in sovereign guarantee liability PER TANKER, and will now be allowed to switch to normal coverage in theory, though given the six-month time frame for this sanctions-easing deal, this may only be temporary and may not have any immediate impact on the situation.

Since late last year, we have watched European and Asian companies and government groups shuffling back and forth from Tehran as the potential to revive old pre-sanction contracts, or bring new contracts into force, is closer to becoming a reality. Absent for the most part from all this air traffic are Americans, but not entirely.  

In terms of oil, Iran has reportedly formally invited British BP and Royal Dutch Shell to return, while Iranian officials have listed seven oil firms they claim will return to Iran and begin investment as soon as April, if sanctions are lifted. The names on that list, published by Azerbaijan's Trend news agency include the above-mentioned, along with: France's Total, Norway's Statoil and US companies Exxon Mobil and Conoco Phillips. We also hear of Asian delegations hitting up Tehran of late, but Iran's public tone is one that seems to be focusing solidly on the Europeans for right now.

"We had no limitations for U.S. companies. Twenty years ago there were limitations against them from their own administration. For doing projects in Iran, we have no limitations," the Iranian Oil Minister recently said.

Asked whether he would like to see Asian, Indian or Chinese companies coming to Iran as well, he said: "Yes, but now we are discussing with European (firms)".

The Minister also indicated that contractual terms would be better than in post-war Iraq, which offered companies operating fees without production-sharing contracts.

The "Iran hawks" in Washington are highly critical of all this traffic and the eagerness to get back to business with Iran. From their perspective, this was the only thing keeping Iran in check, and the only negotiation point over its nuclear program.

Within six months, the deal with Iran could be renewed, but the road ahead will be a complicated one. The next talks with Iran will be held in February. And this road is paved with a Senate bill to tighten sanctions on Iran further-a move some say would destroy the talks completely and possibly lead to war.  The Senate bill is essentially the work of the American Israel Public Affairs Committee, which is hoping that the deal reached with Iran in Geneva will fail before the six months are up. The deal with Iran is the worst case scenario for Israel and Iran hawks in Washington because it makes it impossible for Israel to attack Iran as long as the deal is on the table-as long as talks are underway meaningfully.

Hawkish 'Fears' Aside …

The new Iranian president, Rouhani, is single-mindedly geared towards re-entering the global marketplace, and towards this end he has a Petroleum Minister, Bijan Zanganeh, who is an extremely adroit strategist. It is under his guidance that Iran is likely to unveil a new contractual regime intended to be rather attractive to international oil companies. According to Chris Cook, former director of the International Petroleum Exchange, we should see these new regulations governing foreign involvement in Iran's oil and gas sector revealed some time in the spring, perhaps in the early summer at the latest. We do not yet know what Iran will come up with, but we do know that it has to be attractive. It won't likely be production-sharing contracts (PSCs) that the supermajors get away with in other countries, but it will have to be a decent compromise over the past, when Iran dealt only in "buyback" contracts.

Conclusion/Recommendation

How far will the thaw progress? There are plenty of potential spoilers, but there is a certain momentum that will be hard to slow at this point. The atmosphere inside Iran is one of cautious excitement for businesses, but tentative deals can be discussed and plans put in place and they will go nowhere as long as financial transactions with Iranian banks remain blocked. On a political level, the thaw is extremely significant, but on a business level, it is still only symbolic.

One potential spoiler we are watching closely is a Russian oil-swap deal with Iran that plays right into the Iran Hawks' hands in Washington and could provide them with ammunition to demonstrate that Iran is violating the sanctions deal, if not in terms of nuclear downsizing efforts, then in terms of overstepping the sanctions that remain in place.

Under this nascent oil-swap deal, Russia could buy up to 500,000 barrels per day of Iranian oil in exchange for equipment and other goods-a deal Washington has warned is "inconsistent with the terms of the P5+1 agreement with Iran and could potentially trigger US sanctions". Russian purchases of 500,000 bpd of Iranian crude would lift Iran's oil exports by 50% and infuse the struggling economy with some $1.5 billion a month. But there has been no final agreement on this deal, and the Iran Hawks in Washington are eyeing this suspiciously, we do not believe this deal will go through before a final agreement is reached over Iran's nuclear program. In fact, the prospect of the deal itself could push Iran to more compromises in the end; or it could be used by Moscow to pressure compromise from Washington. We are inclined to believe both: that the talk of this deal will apply pressure to both sides to move faster.