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Cyril Widdershoven

Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle…

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Trump Just Made Iran A Wildcard

South Pars oil field

American President Donald Trump has officially decertified the Joint Comprehensive Plan of Action (JCPOA) Iran deal, while hitting Iranian power players—especially the Islamic Revolutionary Guard Corps (IRGC)—with a new list of sanctions.

Trump’s long-awaited statement on his confrontation with Iran could cause a watershed in the regional power structure of the Middle East. After calling the Iranian nuclear agreement the “worst deal ever”, Trump has now followed through on his statement by decertifying the JCPOA agreement and supporting the anti-Iran coalition in the Arab world.

The new strategy toward Iran is largely designed to target Tehran’s main power player, the IRGC, a branch of the armed forces that controls between 30-60 percent of the country’s economy via ownership of many businesses, including some in the oil industry.

Trump’s decision will also impact America’s European partners. The majority of European countries still want to support the JCPOA, as European partners try to protect the multibillion-dollar deals between European companies and Iranian counterparts.

Until now, Trump’s rhetoric has been mostly symbolic, leaving enough room for discussions between Washington and his EU partners. This latest statement, however, has upped the ante, with the Washington administration targeting the imposition of full economic sanctions, leaving less room for Iran to access international trade and finance options.

Analysts remain unclear about the overall effect of Trump’s statements; most critics see it as a new step to isolate the U.S., while others see it as Trump’s move to increase pressure on Iran to comply to a much stricter implementation of the JCPOA agreement, while also constraining the Islamic regime’s capabilities to expand and project power onto other countries in the region.

In a long address, Trump painted a picture of Iran as a supporter of international terrorism, destabilizing the region, especially in Syria, Iraq and via its proxy Hezbollah. At the same time, he questioned the rationale behind the lifting of sanctions and allowing Iranian financial assets to be repatriated to Tehran.

According to Trump, the Obama administration allowed over $1.5 billion of blocked reserves to be transferred to Iran and used for military expansion and international armed conflict in Syria, Iraq and Yemen. He declared that Iran’s official enemies are still the U.S. and Israel, and reserves should be blocked.

These views are only partly supported by the findings of the UN inspectors, who have repeatedly stated that Iran is complying with the agreement. Opponents, however, have released harsh reports by the U.S. Central Intelligence Agency (CIA) and Germany’s Federal Intelligence Service (BND), claiming a multitude of violations of the agreement by Iran. Related: Mass EV Adoption Could Lead To $10 Oil

Last week, the BND published a report purporting to have evidence of over 30 attempts by Iran to acquire nuclear (weapons) technology. The report should be seen in the light of the ongoing U.S.-North Korea confrontation. The North Korean regime and Iran have cooperated on weapons technology since the beginning of the Khomeini-led Islamic Revolution, mainly working with ballistic missiles and nuclear. Considering that North Korea already has nuclear weapon capabilities, the threat of Iran acquiring them has increased substantially.

Tehran’s leadership should now put all their energy into reassessing their position. Trump’s decertification of the agreement still needs to be implemented by the U.S. Congress. Due to Congress’s current power vacuum and instability, there’s a slight chance that a full anti-Iran confrontational course will be voted in without any obstacles.

The UN reports are a possible stumble block for Trump to push his ideas forward in Congress. At the same time, most of the Democrats in Congress fear that the current course will heighten economic tensions with Europe.

American companies are also eager to block Trump’s current geopolitical course. Companies such as Boeing are vying for multibillion contracts with Iran. Boeing’s $3 billion commercial aircraft deal is now under severe threat. Even within the Washington administration, support for Trump’s Iran strategy is split. It’s known that Secretary of State Rex Tillerson isn’t fully supportive of the move to undermine the agreement. However, Trump and his hardliners aren’t willing to budge, seeking an implementation of a new sanctions regime that could block not only Iran’s military capabilities but also its economic sectors.

Defense analysts are concerned about Iran’s growing ballistic missile capabilities, which undoubtedly should have been included in the JCPOA agreement. At the same time, Iran’s IRGC military power has increased, threatening not only stability in Iraq, but also actively fighting for Syria’s president Bashir Assad. For Iran’s Arab neighbors, its growing military capabilities and expanding network of proxy militias and friends (Turkey, Qatar) are a threat not to be taken lightly.

Iran’s cooperation with Russia is another major thorn in the side of the Trump administration. By decertifying the agreement, Trump is also trying to constrain the growing cooperation between Tehran and Moscow. Without access to international financial centers or trade lanes, Iran will be less able to acquire the much-needed technology and hardware for its military and economic projects.

The real effects of Friday’s watershed speech will remain unclear the coming weeks and months. Even if Trump gets Congress behind him, the effects of new sanctions and military pressure won’t be immediately felt.

Tehran has already received most of the benefits from the lifting of sanctions. It received the billions of dollars that were blocked in foreign accounts, and widely spread these funds under its own IRGC or regional proxies. The first negative effects will be seen outside of Iran, as it will endanger the billions of dollars in potential investments and deals currently being brokered between Iran and European, Western and Asian companies.

Some analysts argue that Trump had no real choice here, and most Arab countries currently support him. Possible renegotiation of the deal also isn’t feasible. Iran has openly refused any change to the agreement. An inclusion of restrictions on ballistic missiles or an end to support to proxy forces is out of the question for Iran. Related: OPEC To Take Drastic Action Despite Shale Slowdown

Iran now faces a renewed U.S. blockade. Trump ordered the Treasury Department to put new sanctions on the IRCG, based on the latter’s involvement in Syria and Iraq, while directly supporting terrorist groups around the world. Washington is also urging its Western allies to put the IRGC on the international sanctions list. Until now, most refused, as this would directly block almost all commercial deals with Iran. The U.S. Congress now has 60 days to decide whether to re-impose economic sanctions on Iran, including all former sanctions that were lifted under the nuclear agreement.

Trump’s statement will have a negative effect on oil markets and Iran’s E&P future. Over the coming weeks, international investors, operators, and service providers will—if they’re smart—be reluctant to discuss or implement projects with Iranian counterparts.

Even during the first 60 days of decertification (which could officially begin on Sunday October 15), Tehran will feel the heat. The threat of being confronted by U.S. sanctions during this period or after will keep most companies at bay. The proposed sanctions on the IRGC are a major stumbling block. If the IRGC is sanctioned as a terrorist organization, all possible deals with IRGC companies or subsidiaries, maybe even linked parties, are out. This means a vast majority of Iran’s economy will be off limits. Even for non-U.S. based companies, a designation as a terrorist organization of the IRGC is a no-go area.

The sanctions won’t be a major threat to Iran’s current oil production levels; operations will continue for the foreseeable future. However, new technology, spare parts, or hard-needed investments will be out of reach.

The move won’t immediately curb the flow of some 2.3 million barrels of daily Iranian crude exports—more than three times the amount of oil the U.S. has sold abroad over the past year. The situation could become even more complicated if the U.S. expands its sanctions on financial dealings with the Iranian regime or Iranian counterparts. The latter could potentially put all deals, even non-oil related ones, on ice.

Iranian crude oil sales won’t be rapidly hit, as long as Asian consumers are willing to confront the U.S. in the coming months. Former U.S. sanctions were partly successful due to the fact that Asian and European partners restricted their Iranian oil imports. This may not be the case this time. If Washington goes for full confrontation—including its Western allies—on Iran, a new situation could emerge. A possible move could be U.S. restrictions in the Gulf region of Iranian oil shipping. Some analysts even expect that this could become a fact very soon, as Washington could try to get its Arab allies onboard, especially Saudi Arabia, the UAE and Egypt.

Trump won’t confront Western governments, but he might address his Iranian strategy options to international energy companies. Washington still has the tools to increase the pain for Western and Asian energy related companies if they deal with Iran. Sanctions could be put on their U.S. operations or access to American financial markets.

The real issue for Western operators and financial institutions will be the need for increased due diligence of their Iranian counterparts. Possible sanctions or a terrorist designation of the IRGC will block current discussions full stop. Due diligence will be needed for all contracts, oil and non-oil related, as the IRGC octopus has its assets everywhere. Until now the only IOC in bed with Iran is French oil and gas major Total, holding a development agreement for Iran’s South Pars offshore gas field, with an initial investment need of $1 billion. Other IOCs shortlisted already are ENI, Rosneft and Shell.

Though he stopped short of abandoning the nuclear deal altogether, Trump’s move has reshuffled the cards dramatically. Most analysts didn’t expect such bold steps. The future is unclear and increasingly dangerous for investors and operators. Iran’s oil and gas future is in doubt, or even in shambles. A possible production expansion of Iran, which was counted in by most financials in their prediction of oil prices, needs to be reassessed or put on ice.

If Iranian threats become reality then oil markets may see an even more significant change. On October 8, Iranian Major General Mohammad Ali Jafari stated to the media that "if the scattered news about the stupidity of the U.S. government regarding the IRGC as a terrorist group is correct, the Guards will also consider the American military all over the world, especially the Middle East, as equal to Daesh".

A potential military confrontation in the Arab/Persian Gulf should not be ruled out. It will unquestionably block oil and gas lanes, and spike oil prices to unknown levels.

By Cyril Widdershoven for Oilprice.com

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Leave a comment
  • Procivic on October 15 2017 said:
    No country has created more chaos in the Middle East than the U.S.; no country has fought terror more than Iran.
  • Vishwas on October 15 2017 said:
    Obama policies almost destroyed American pride and its fear in the minds of rogue leaders. Trump is doing it right. He should take further step and give real final ultimatum and them simply attack and finish at least one such country. It will make the world much more peaceful.

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