Going to Tehran | May 19th, 2014
Introduction by Flynt and Hillary Mann Leverett
Ongoing nuclear diplomacy between the Islamic Republic and the P5+1 has both Iranian and non-Iranian players in the international oil market focused on the prospects for Iran’s re-emergence as a major oil producer and exporter.
–For most market players, the ideal scenario is one in which conclusion of a comprehensive nuclear deal between Iran and the P5+1 leads to a lifting of all sanctions against the Islamic Republic.
–Of course, even if a deal is reached, its implementation—especially in terms of sanctions relief—could be messier and more protracted than this ideal scenario would posit.
–And, as we’ve argued previously, if negotiations fail to produce a final nuclear agreement, Tehran calculates that Iranian willingness to conclude what the rest of the world besides America, Britain, France, and Israel would consider a reasonable deal will make it easier for other countries to rebuild and expand economic ties to the Islamic Republic—and make those countries less willing to continue accommodating U.S. demands for compliance with its (grossly illegal) secondary sanctions.
In any event, it seems likely that Iran will be putting more of its oil onto international markets. Against this backdrop, we are pleased to publish below a piece by Erfan Ghassempour, “The Geneva Nuclear Deal and Its Effect on Iran’s Approach in OPEC.” Erfan is a young Iranian lawyer who studied at Tabriz University and is now finishing his masters in international law at Allameh Tabatabai University in Tehran. He works for Sinopec International Petroleum Exploration and Production Corporation and also writes as an independent energy analyst. We are pleased to welcome him as an Going to Tehran contributor.
How the Iran Nuclear Deal May Impact Iran’s Approach in OPEC
by Erfan Ghassempour
Iran is thinking seriously about how to put its crude oil back on the market, and—following the November 2013 Geneva interim agreement on Iran’s nuclear program—is planning for a future when sanctions no longer hamper its oil industry. The country is changing its contracts for the exploration, development, and production of its oil and gas resources to tempt major international oil companies to return to its petroleum sector. Iran’s Petroleum Minister, Bijan Namdar Zanganeh, has expressly invited seven oil giants to invest in Iran after sanctions are lifted.
Iranian ambitions are also reflected in Tehran’s approach to the Organization of Petroleum Exporting Countries (OPEC). At the most recent OPEC meeting, held in December 2013—in the wake of the Geneva nuclear deal—Zanganeh made a powerful impression, warning other members to make room for Iranian crude. One way or another, he declared, Iran plans to increase its oil output to four million barrels per day (bpd), even if prices decrease to twenty dollars per barrel. (Some analysts think that the highest output Iran could achieve in the near-to-medium term after the lifting of sanctions would be 3-3.5 million bpd—but even that would mean a significant increase in Iranian oil exports, which, according to Zanganeh, are now at 1.5 million bpd.)
Iran’s reemergence on the international oil scene comes at a time when developments in other OPEC member states are increasing the likelihood of an appreciable rise in Middle Eastern oil production—e.g., Iraq’s security is improving, and strikes and rebel attacks seem to be ebbing in Libya. Zanganeh argues that, even in this context, Iran’s return to the oil market should have no negative impact on prices. As he told the OPEC Bulletin, over the years other OPEC members had “gone out of the market” for some time, “but when they returned to the market, OPEC knew how to deal with the situation—to create room to maintain the extra capacity, so that these countries can have a good return and for it not to have a bad impact on prices.”
At least on the surface, other OPEC players responded positively to Zanganeh’s message. OPEC’s secretary general, Abdalla el-Badri, welcomed Iran’s return to the market, denying any concern at this prospect. Even Iran’s biggest political and oil rival, in the region, Saudi Arabia (the biggest oil producer in OPEC), welcomed an increase in Iranian production. Saudi Arabia’s Oil Minister, Ali Naimi, told reporters that he did not see a price war on the horizon: “They are welcome, everyone is welcome to put in the market what they can; the market is big and has many variables—when one comes in, another comes out.” Mr. Naimi also stated, “I hope Iran comes back [and] produces all it can.”
Iran is also stepping up its cooperation with Iraq on oil issues. At the December 2013 OPEC meeting, Iraq vigorously defended Iran’s plans to raise oil production, while also making clear that Iraq would remain outside OPEC’s quota system and that other members should decrease their production, if necessary, to make room for both Iran and Iraq. (Iraq’s Deputy Prime Minister for Energy, Hussein al-Shahristani, has announced that his country intends to increase its oil output to nine million bpd by 2020, partly through cooperation with Iran.) Recently, Iraq has been helping Iran to develop new contracts to attract more foreign investment to its oil sector. Baghdad and Tehran have also established a committee to oversee the joint exploitation of fields lying astride the Iranian-Iraqi border. Some analysts think that the two countries are drawing closer to maximize their relative power and influence—on oil-related issues as well as on strategic and political matters—vis-à-vis Saudi Arabia.
As the six-month deadline for the Geneva interim deal approaches, Iran’s determination to produce more crude becomes stronger. If a permanent nuclear deal is reached at the end of six months (that is, on or around July 20), it would mean that sanctions will be lifted and Iran will renew its upstream and downstream activities.
So far, the interim deal has been well implemented. The International Atomic Energy Agency affirms that Iran is fulfilling its commitments; the West has returned some of the Iranian funds that have been frozen in Western banks and has eased some sanctions. None of the parties has been motivated to breach the interim agreement. On the Iranian side, the political and economic atmosphere in Iran suggests that Iranian officials are willing to continue this approach; Supreme Leader Ayatollah Seyed Ali Khamenei has publicly expressed his support for the ongoing nuclear negotiations. On the American side, while some political factions in the United States want President Obama to increase pressure on Iran, this seems more a matter of political posturing than serious action. At this point, there is little appetite in the United States for torpedoing nuclear diplomacy with Iran.
Iran knows that any improvement in its oil industry is dependent on the nuclear talks. As the negotiations progress, Iranian officials are playing a bolder role in the region and in international organizations to which Iran belongs. At the next OPEC meeting in June, Zanganeh is likely to take an even tougher approach than at the previous meeting in December. It seems that other OPEC states are progressively accepting the inevitability of Iran’s return to the international oil scene.
There are two ways in which OPEC can handle prospective increases in Iranian, Iraqi, and Libyan output: other members—especially Saudi Arabia—can decrease production to make room for increased production by others, or the organization can raise its current 30 million bpd production ceiling. Politically as well as economically, much will hinge on what OPEC decides.