How Would the Iran Nuclear Deal Impact on Oil Prices & the Geopolitics of the Arab the Gulf Region?
From a peak production of 6 million barrels a day (mbd) and crude oil exports of 5.7 mbd in 1974, Iran in 2014 was struggling even to produce 3.00 mbd with net exports down to 1.00 mbd. And if the current trend continues, Iran could cease to remain an oil exporter altogether by 2030. For the last fifteen years Iran has failed miserably to achieve its OPEC production quota of 4 mbd.
The decline in Iran’s oil exports over the last few years was not solely due to tighter sanctions but mainly to fast-depleting old oilfields whose reservoirs were damaged in the 1970s from excessive production under the Shah. Since then Iran has never had the chance to repair its damaged oil industry what with war with Iraq from 1980-1988 followed by stringent sanctions because of its nuclear programme.
Iran’s final nuclear deal will eventually lead to the lifting of almost all the international sanctions against it within a few months. This means that Iran could in the fullness of time be able to attract badly-needed foreign investment and import advanced Western oil & gas technology such as enhanced oil recovery (EOR) needed to repair the damage at its reservoirs and raise crude oil production.
However, even if sanctions were lifted today, it will take Iran more than 3-5 years to deploy new technologies and it will need more than $200 bn of investments in its oil and gas industry according to Dr Fatih Birol, chief economist at the International Energy Agency (IEA) in Paris.
Moreover, given current market conditions, only limited international investment will likely be available to help increase Iran’s production. At today's oil prices, investors are cutting back everywhere. Global investments have already been cut this year by $100 bn or 20%. Investors are concerned about investing money due to the simmering geopolitical tensions, especially in the Middle East and the Ukraine. The economic crisis in Europe is another reason for the investors to be wary of reconsidering their decisions to park their money in troubled regions. Such realities cast major doubts on Iranian oil minister Bijan Zanganeh's recent claim that if sanctions were to end, "Iran will double its oil exports within two months.“ He claims that Iran will be able to raise its production to 3.8 mbd by the end of this year and 4.8 mbd by June 2016. Yet, Iran has only managed to produce 2.78 mbd in April this year and exported 756,000 barrels a day, down from 1 mbd in 2014, according to the Iranian oil minister.
Iran could add no more than 300,000-500,000 b/d a day to its production but even this may not translate into added exports because of the steeply-rising domestic consumption.
As a result, lifting the sanctions against Iran will hardly affect the global oil prices or the global oil market in the long-term. Any initial impact could be the result of Iran releasing some of its alleged stored crude oil on tankers or floating containers to the market, but the impact will be short-lived and very limited. However, Iran might benefit from the development of its huge natural gas reserves.
And whilst lifting the sanctions on Iran will facilitate its efforts to remedy its ailing oil industry, raising its crude oil production and exports would in the future be influenced by factors beyond Iran’s control such as the glut in the global oil market and the curtailment of global investments resulting from the current low oil prices as well as geological factors.
However, with technology and investments Iran could substantially raise its natural gas production and export a sizeable amount of it to Europe in the form of natural gas and LNG thus competing directly with Russian gas supplies to Europe and with Qatar’s LNG exports.
Moreover, Iran could demand that OPEC allocate a bigger production quota for it. However, in the light of the current declining oil prices, Saudi Arabia, UAE, Qatar and Kuwait will not accede to Iran’s demand. They could easily argue that Iran has never been even able to meet its OPEC’s production quota of 4 mbd since 2000.
What will actually continue to impact adversely on oil prices is not lifting the sanctions on Iran but OPEC’s refusal to cut production. If OPEC under pressure from Saudi Arabia continues to refuse to cut production by at least 2 mbd in its upcoming meeting, then oil prices will continue to hover around $50/barrel and everybody from the global economy to the Arab Gulf oil producers, Russia and US shale oil production will continue to suffer with the Arab oil producers suffering most. OPEC members are projected to lose some $350 bn in oil revenues this year according to US estimates. This represents the largest one-year decline in their history.
Even Saudi Arabia could do with a cut. However, for the Saudi oil minister Ali Nuaimi, “pride comes before a fall” as the English proverb says. He will resist such a cut and thus prevent OPEC from taking such a decision because it will be a tacit admission that his original decision by not cutting Saudi production and by forcing OPEC not to cut production last November, was the wrong decision.
However, it is in the geopolitical sense that the Iran nuclear deal will have its most adverse impact on the Arab Gulf region. The Gulf Cooperation Council (GCC) Countries (Saudi Arabia, UAE, Kuwait, Qatar, Oman & Bahrain) see Iran as a great threat to their regional autonomy and political stability. They also view Iran’s nuclear programme as a smoke screen for developing nuclear weapons. This, they believe, poses the greatest challenge to their oil wealth and security. The biggest threat of a nuclear-armed Iran is that it will change the balance of power in the Gulf region and enable Iran to emerge as the pre-eminent power in the region and that is a situation that the GCC leaders do not want to envisage.
Their fears are justified. The final Iran nuclear deal with the P5+1 is a great triumph for Iran. Under the terms of the deal, Iran will limit its nuclear activities particularly in relation to enriching uranium and in return it will receive $120 billion of its frozen financial assets in the West and there will be a lifting of almost all economic sanctions against it within a few months. In real terms, the deal will only delay by a few years the day when Iran acquires nuclear weapons.
A nuclear Iran desperate for oil could grab some of its Gulf neighbours’ oil and gas assets such as the Majnoon oil field straddling the Iraqi/Iranian border (with estimated proven reserves of 17 billion barrels) or the Saudi Safaniya offshore oilfield (the biggest offshore field in the world) or Qatar’s offshore gas fields (the third biggest in the world). It could also hold its Gulf neighbours to ransom by threatening to block their oil exports through the Straits of Hormuz unless it shares in this wealth. The United States would not, for sure, come to the defence of its Arab allies against a nuclear Iran.
Iran is a hegemonic power by nature. Under the Nixon administration it had the backing and co-operation of the United States to establish itself as the custodian of the Gulf. A nuclear Iran aspires to resume that role independently from the United States.
Saudi leaders fear that Iran could seek to mobilize the Shiite minority in Saudi Arabia to create political turmoil and even, in time of great tension between the two countries, sabotage main oil and gas production assets in the eastern region of Saudi Arabia.
The UAE and Iran have a territorial dispute. The UAE claims ownership of three islands in the Gulf that are now under Iran’s control – Abu Musa, Greater Tunb, and Lesser Tunb – which were occupied by Iranian forces in November 1971. The UAE has requested that Iran resolve the dispute over the three islands through direct negotiations or by referring it to the International Court of Justice. Iran has so far rejected both direct negotiations and international adjudication.
How the Gulf States react to Iran nuclear issues will depend on the different scenarios that are most likely to emerge.
The best-case scenario is that a diplomatic breakthrough occurs that leads the major international powers (5+1) to conclude that Iran will have neither the intent nor the capability to acquire nuclear weapons in less than two years, and that this amount of warning time will be maintained indefinitely. This is exactly what the final nuclear deal has achieved. The UAE and Saudi Arabia say that they, like Iran, will seek to acquire peaceful nuclear technology.
However, were Iran to move clearly to acquire nuclear weapons, the US could attack Iran’s known nuclear infrastructure and military capabilities that could be used to retaliate against US interests in the region. The downside of this approach is that the United States can’t destroy Iran’s nuclear assets without using nuclear weapons, which is clearly a catastrophe in the making.
There is also the possibility that Iran actually acquires enough nuclear weapons with secure enough infrastructure that the United States concludes that military strikes would not effectively eliminate these capabilities for a significant duration, in effect acquiescing to a nuclear Iran.
However, the scenario of Iran acquiring nuclear weapons would leave GCC no choice but to respond.
The first option is to seek more formal security guarantees by the US. However, this option is fraught with complications and difficulties. Would the US, for instance, commit itself to intervene militarily on behalf of the UAE if Iran moved to annex the disputed Abu Musa and the Greater and Lesser Tunb islands? Would the United States be willing to extend nuclear deterrence to the Gulf States? It is very highly questionable if the US Congress and public would support a commitment by the US to risk nuclear war with Iran on behalf of Gulf States.
A second option is for the Gulf States to acquire their own nuclear deterrent. Saudi leaders are on record suggesting that the Kingdom would counter nuclear Iran by acquiring nuclear weapons too. The GCC countries could also submit a draft resolution to the UN Security Council calling for the Council to declare a nuclear-free Middle East. If the Security Council fails to agree on such a resolution, this would provide Saudi Arabia and UAE with diplomatic and moral cover in seeking their own nuclear deterrent.
A third option is for the GCC countries to try to settle their differences with Iran by negotiations and to build bridges of trust between them before brandishing the nuclear option. However, such negotiations could be initiated against a background of GCC countries building up deterrent conventional forces which could be more than a match for Iran’s forces and also seeking their own nuclear deterrent.
In the final analysis, the GCC countries are well advised to not overstate the Iran threat. With a combined GDP of $1.9 trillion which is which is five times Iran’s GDP and 29% of the global proven oil resources and 22% of the proven gas reserves, they are far more powerful economically and politically than Iran. Together, they can be a force to reckon with if they stand united.
**Dr Mamdouh Salameh is a Visiting Professor teaching on ESCP Europe's Executive Master in Energy Management (EMEM). To find our more about the EMEM programme and its individual modules please click here. Dr. Salameh is an international oil economist, a consultant to the World Bank in Washington DC on oil & energy and a technical expert of the United Nations Industrial Development Organization (UNIDO) in Vienna.