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With an end to sanctions in sight, one of the world’s richest oil and gas prizes is about to open up. That makes some nervous, but has oil majors and energy-hungry countries rubbing their hands in anticipation.
The future of Iran’s nuclear weapons program is the biggest question mark looming over the final negotiations between Tehran and global powers this week in Vienna. But almost as important, and with huge implications for the United States, Europe, Russia, and OPEC, is the breakout capacity of Iran’s straitjacketed energy sector, if and when sanctions are lifted as part of the nuclear deal.
The prospect of an end to sanctions, which have targeted Iran’s energy sector and have sharply curtailed oil exports, have raised hopes inside the country and fears without that the long-shunned Persian giant will storm back onto global energy markets. Other oil producers inside OPEC — as well as U.S. oil producers working in the shale patch — fear that quick sanctions relief could unleash a glut of Iranian oil, which would push already low prices down even further.
But there could be a flip side to the end of Iranian sanctions. Economies like Europe’s, which are desperately searching for new sources of supply, are rubbing their hands at the prospect of unlocking Iran’s true potential, especially to produce and export natural gas.
In reality, what many observers see as the likely short-term impact of sanctions relief — namely, a flood of Iranian oil into an already well-supplied market — is more likely to happen over the medium term. That’s because it will take well into next year or even later to unwind the web of financial and energy-related sanctions and ramp back up Iran’s anemic oil production.
And the Iranian energy revolution hoped for by many, from international oil companies like Shell to European technocrats hankering after an alternative to Russia, is less a medium-term goal than a long-term pipe dream. It will require billions of dollars in investment, a complete overhaul of the Iranian energy sector, and a breathtakingly audacious infrastructure construction program to link Iran’s gas fields to thirsty markets thousands of miles away.
“Overall, there is great excitement over Iranian oil and gas prospects, but huge question marks remain when it comes to energy-sector fundamentals,” said Andreas Goldthau, who studies the geopolitics of energy at Harvard University’s Belfer Center for Science and International Affairs.
It’s easy to see why all eyes are on Iran’s energy sector in the homestretch of nuclear negotiations between Tehran and the P5+1 powers. Iran holds the world’s fourth-largest reserves of oil and the largest reserves of natural gas; combined, it has the world’s largest oil and gas reserves, outstripping titans like Saudi Arabia, Russia, and even the United States.
Simply put, there is no bigger prize on Earth than an Iranian energy sector that again opens its doors to international investment.Simply put, there is no bigger prize on Earth than an Iranian energy sector that again opens its doors to international investment.
That helps explain why major oil companies are champing at the bit to get back in. Their hungry eyes come despite Iran’s hostile relations with Arab neighbors, Israel, and the West; continued blacklisting and sanctions; and decades of less-than-attractive terms for foreign investors. In early June, international firms including Shell, BP, Total, and Eni expressed interest in pouring money into Iran’s oil and gas fields as soon as sanctions are lifted. After meeting Iranian energy officials in Vienna this month, Shell’s boss told Bloomberg that Iran is a “wonderful country with a fantastic resource base”; Total’s chief simply declared, “We like Iran.” Shell has also trekked to Tehran to talk business. Iranian officials themselves are even courting U.S. firms, which unlike their European rivals, have kept Iran at arm’s length so far.
To get that investment, Iran will likely have to sweeten the terms for big oil companies. Ever since the 1950s, Iran’s relationship with international oil companies has been fraught, and that only intensified in the wake of the 1979 Iranian revolution. Today, recognizing the need to attract billions of dollars in capital and advanced technology, Iranian officials are mulling new, more attractive contract terms for oil and gas projects.
“International oil companies in the past have never received an overly warm welcome in Iran,” said Goldthau. “It remains to be seen whether Iran is ready to offer attractive enough deals to get the BPs, the Exxon Mobils, and the Shells into the country,” or whether Iran will turn instead to companies from China and Russia, he said.
The immediate concern, both among Iran’s peers inside OPEC and in the U.S. oil patch, is that sanctions relief will lead to a flood of Iranian oil. The country has about 40 million barrels of oil stored on tankers just waiting for an immediate buyer. And Iranian officials have touted the prospect of ramping up oil production and exports as soon as the United States and Europe lift the export limitations, which have kept Iranian crude exports at about 1.1 million barrels a day since 2012. (Before sanctions, Iran exported about 2.5 million barrels a day.)
It’s unclear just how fast Iran could throttle up oil production. The years of sanctions and curtailed exports have curbed the country’s ability to pump oil, let alone sell it. Starry-eyed Iranian officials talk of producing an additional 1 million barrels a day in a matter of months, which many experts say is overly ambitious. More realistically, the International Energy Agency predicts that it is theoretically possible for Iran to boost oil output from 2.8 million barrels a day now to about 3.5 million barrels a day “within months of sanctions being lifted.”
But just the prospect of fresh volumes of oil hitting the market and pushing prices down has big players nervous — and not just inside OPEC, whose members are already grappling with shrinking revenues and tighter budgets. U.S. shale oil producers generally require higher prices than big producers elsewhere, such as those in the Middle East. That’s why the 50 percent plunge in crude prices from last summer through the first part of 2015 spooked drillers in North Dakota and Texas. The U.S. Energy Information Administration, an arm of the Energy Department, figures that a new gusher of Iranian oil could depress global crude prices by between $5 and $15 a barrel, which could push many U.S. oil rigs into the red.
Sen. Lisa Murkowski (R-Alaska), the chair of the Senate Energy Committee, this week released a report warning that fresh Iranian oil exports would come at the expense of already beleaguered U.S. producers. She says Iran should not get sanctions relief until U.S. producers are able to export their own oil onto the global market, which they haven’t been able to do since an export ban was put into place after the 1973-1974 OPEC oil embargo.
“By maintaining the crude export ban, we’re putting sanctions on our own oil producers, effectively,” she told Foreign Policy. She’s advancing legislation in Congress that would roll back the ban and allow U.S. drillers to sell crude in the global market.
“There’s this economic opportunity that we are just handing Iran on a platter, while at the same time we’re tying our hands and really penalizing the American economy,” she said.“There’s this economic opportunity that we are just handing Iran on a platter, while at the same time we’re tying our hands and really penalizing the American economy,” she said.
But while American and Saudi oilmen look warily at the prospect of an Iranian renaissance, plenty of others are all but banking on it. Europe, for example, has spent years trying to wean itself off reliance on Russian natural gas. That was already a concern in 2006 and 2009, when Russia cut off gas supplies to Europe during disputes with Ukraine. After Russia’s takeover of Crimea in 2014 and continuing invasions of eastern Ukraine, that energy insecurity has only intensified. And now that Europe’s domestic production of natural gas is wheezing, finding big, alternative sources of supply other than Moscow is a priority.
“Russia’s Gazprom has really been very problematic throughout the last decade,” said Sijbren de Jong, an analyst at The Hague Centre for Strategic Studies. “If Europe is serious about diversification, it will have to look closely at Iran. If European companies, governments, and the EU don’t get in the fast lane now, then other nations will beat them to it,” he said, noting recent talk of increased energy trade between Russia and Iran.
Indeed, the European Union’s energy commissioner, Miguel Arias Cañete, this year openly talked up the prospect of tapping into Iranian gas fields once sanctions are lifted. He said if a final agreement with Tehran happens, it “opens new possibilities” to potentially import Iranian gas as part of the long-planned Southern Corridor pipeline linking Central Asia and the Caucasus to Europe.
If all concerns over Iran’s nuclear program are fully addressed, Arias Cañete told Foreign Policy, “there is potential for growing cooperation between the EU and Iran, including on energy matters.” That would open the door to investment in Iran by EU firms, he said, “and would of course open up additional sources of energy supply.”
Such talk privately worries policymakers in the United States, who are eager to see Europe reduce its reliance on Russian gas, but at the same time would prefer that the EU not leap immediately into Iran’s arms. U.S. officials have repeatedly touted the prospect of U.S. gas exports serving the European market, for example.
But from Europe’s point of view, lining up a potentially huge, long-term supply of gas from anywhere other than Russia is appealing, especially given Moscow’s recent threats to cut off gas supplies during the dispute over Ukraine.
“Given Europe’s precarious energy situation, that would be an invaluable, alternative source of energy,” said Vessela Tcherneva, an analyst at the European Council on Foreign Relations in Bulgaria.
But regardless of the outcome of the nuclear talks, and even with an influx of Western money and know-how, Iranian gas won’t be flowing to Europe anytime soon. As Arias Cañete conceded, “It is too early to give estimates of first deliveries.”
And there’s the rub. Iranian energy officials talk of the need for $100 billion in foreign investment to juice their natural gas production. That’s because, for all its resources, Iran punches below its weight as a gas producer, churning out just 173 billion cubic meters (bcm) a year. That’s a far cry from the 728 bcm produced last year by the United States, the world leader, and little better than China’s 135 bcm.
Worse yet, from the point of view of potential customers already counting on pipes full of Iranian gas someday soon, Iran gobbles up at home nearly everything that it produces and today exports only small volumes to Turkey. Although it has talked since the 1970s about building a terminal to liquefy gas and ship it around the world — much like neighboring Qatar does today in massive quantities and as the United States is preparing to do — Iran has yet to build one.
The world’s biggest holder of natural gas accounts for less than 1 percent of the global gas trade — and not just because of sanctions.The world’s biggest holder of natural gas accounts for less than 1 percent of the global gas trade — and not just because of sanctions. Iran has to reinject almost 30 bcm a year into old oil fields in order to maintain production there; that figure will likely more than double over the next decade. Another 17 bcm or so — 10 percent of annual production — are simply burned off and wasted because Iran lacks the pipeline infrastructure to do anything useful with the gas.
Hopes rest with the giant South Pars offshore gas field, which already accounts for a big chunk of Iranian gas production. Ambitious development there is expected to add another 140 bcm or so over the next decade to Iran’s gas output. If Iran’s own oil fields and energy-gobbling domestic economy don’t eat all that up, that would potentially leave big volumes for export.
But would that gas go to Europe? Iran is already planning on gas export deals to near neighbors such as Oman and Pakistan, in addition to increasing trade with Turkey. That, notes Harvard’s Goldthau, could cut into any volumes available for export to Europe.
Moreover, Europe’s track record with completing massive energy infrastructure projects is not heartening. Since the 1990s, the European Union has tried to build pipelines to tap into huge gas fields in places like Azerbaijan and Turkmenistan and to bring fuel back to the Old Continent via Turkey. Those projects have advanced only in fits and starts. By the time the trans-Anatolian pipeline connecting Azerbaijani gas with Europe is finally completed in 2018, it will have taken two different pipeline projects almost two decades to make the linkup. And that involved countries that welcomed foreign capital and faced no financial or energy-sector sanctions.
“Getting gas from Iran is likely to be a long-term process, but that is all the more reason why it should be taken seriously today,” de Jong said.
Photo credit: ATTA KENARE/AFP/Getty
The Next Iranian Revolution | Foreign Policy
The future of Iran’s nuclear weapons program is the biggest question mark looming over the final negotiations between Tehran and global powers this week in Vienna. But almost as important, and with huge implications for the United States, Europe, Russia, and OPEC, is the breakout capacity of Iran’s straitjacketed energy sector, if and when sanctions are lifted as part of the nuclear deal.
The prospect of an end to sanctions, which have targeted Iran’s energy sector and have sharply curtailed oil exports, have raised hopes inside the country and fears without that the long-shunned Persian giant will storm back onto global energy markets. Other oil producers inside OPEC — as well as U.S. oil producers working in the shale patch — fear that quick sanctions relief could unleash a glut of Iranian oil, which would push already low prices down even further.
But there could be a flip side to the end of Iranian sanctions. Economies like Europe’s, which are desperately searching for new sources of supply, are rubbing their hands at the prospect of unlocking Iran’s true potential, especially to produce and export natural gas.
In reality, what many observers see as the likely short-term impact of sanctions relief — namely, a flood of Iranian oil into an already well-supplied market — is more likely to happen over the medium term. That’s because it will take well into next year or even later to unwind the web of financial and energy-related sanctions and ramp back up Iran’s anemic oil production.
And the Iranian energy revolution hoped for by many, from international oil companies like Shell to European technocrats hankering after an alternative to Russia, is less a medium-term goal than a long-term pipe dream. It will require billions of dollars in investment, a complete overhaul of the Iranian energy sector, and a breathtakingly audacious infrastructure construction program to link Iran’s gas fields to thirsty markets thousands of miles away.
“Overall, there is great excitement over Iranian oil and gas prospects, but huge question marks remain when it comes to energy-sector fundamentals,” said Andreas Goldthau, who studies the geopolitics of energy at Harvard University’s Belfer Center for Science and International Affairs.
It’s easy to see why all eyes are on Iran’s energy sector in the homestretch of nuclear negotiations between Tehran and the P5+1 powers. Iran holds the world’s fourth-largest reserves of oil and the largest reserves of natural gas; combined, it has the world’s largest oil and gas reserves, outstripping titans like Saudi Arabia, Russia, and even the United States.
Simply put, there is no bigger prize on Earth than an Iranian energy sector that again opens its doors to international investment.Simply put, there is no bigger prize on Earth than an Iranian energy sector that again opens its doors to international investment.
That helps explain why major oil companies are champing at the bit to get back in. Their hungry eyes come despite Iran’s hostile relations with Arab neighbors, Israel, and the West; continued blacklisting and sanctions; and decades of less-than-attractive terms for foreign investors. In early June, international firms including Shell, BP, Total, and Eni expressed interest in pouring money into Iran’s oil and gas fields as soon as sanctions are lifted. After meeting Iranian energy officials in Vienna this month, Shell’s boss told Bloomberg that Iran is a “wonderful country with a fantastic resource base”; Total’s chief simply declared, “We like Iran.” Shell has also trekked to Tehran to talk business. Iranian officials themselves are even courting U.S. firms, which unlike their European rivals, have kept Iran at arm’s length so far.
To get that investment, Iran will likely have to sweeten the terms for big oil companies. Ever since the 1950s, Iran’s relationship with international oil companies has been fraught, and that only intensified in the wake of the 1979 Iranian revolution. Today, recognizing the need to attract billions of dollars in capital and advanced technology, Iranian officials are mulling new, more attractive contract terms for oil and gas projects.
“International oil companies in the past have never received an overly warm welcome in Iran,” said Goldthau. “It remains to be seen whether Iran is ready to offer attractive enough deals to get the BPs, the Exxon Mobils, and the Shells into the country,” or whether Iran will turn instead to companies from China and Russia, he said.
The immediate concern, both among Iran’s peers inside OPEC and in the U.S. oil patch, is that sanctions relief will lead to a flood of Iranian oil. The country has about 40 million barrels of oil stored on tankers just waiting for an immediate buyer. And Iranian officials have touted the prospect of ramping up oil production and exports as soon as the United States and Europe lift the export limitations, which have kept Iranian crude exports at about 1.1 million barrels a day since 2012. (Before sanctions, Iran exported about 2.5 million barrels a day.)
It’s unclear just how fast Iran could throttle up oil production. The years of sanctions and curtailed exports have curbed the country’s ability to pump oil, let alone sell it. Starry-eyed Iranian officials talk of producing an additional 1 million barrels a day in a matter of months, which many experts say is overly ambitious. More realistically, the International Energy Agency predicts that it is theoretically possible for Iran to boost oil output from 2.8 million barrels a day now to about 3.5 million barrels a day “within months of sanctions being lifted.”
But just the prospect of fresh volumes of oil hitting the market and pushing prices down has big players nervous — and not just inside OPEC, whose members are already grappling with shrinking revenues and tighter budgets. U.S. shale oil producers generally require higher prices than big producers elsewhere, such as those in the Middle East. That’s why the 50 percent plunge in crude prices from last summer through the first part of 2015 spooked drillers in North Dakota and Texas. The U.S. Energy Information Administration, an arm of the Energy Department, figures that a new gusher of Iranian oil could depress global crude prices by between $5 and $15 a barrel, which could push many U.S. oil rigs into the red.
Sen. Lisa Murkowski (R-Alaska), the chair of the Senate Energy Committee, this week released a report warning that fresh Iranian oil exports would come at the expense of already beleaguered U.S. producers. She says Iran should not get sanctions relief until U.S. producers are able to export their own oil onto the global market, which they haven’t been able to do since an export ban was put into place after the 1973-1974 OPEC oil embargo.
“By maintaining the crude export ban, we’re putting sanctions on our own oil producers, effectively,” she told Foreign Policy. She’s advancing legislation in Congress that would roll back the ban and allow U.S. drillers to sell crude in the global market.
“There’s this economic opportunity that we are just handing Iran on a platter, while at the same time we’re tying our hands and really penalizing the American economy,” she said.“There’s this economic opportunity that we are just handing Iran on a platter, while at the same time we’re tying our hands and really penalizing the American economy,” she said.
But while American and Saudi oilmen look warily at the prospect of an Iranian renaissance, plenty of others are all but banking on it. Europe, for example, has spent years trying to wean itself off reliance on Russian natural gas. That was already a concern in 2006 and 2009, when Russia cut off gas supplies to Europe during disputes with Ukraine. After Russia’s takeover of Crimea in 2014 and continuing invasions of eastern Ukraine, that energy insecurity has only intensified. And now that Europe’s domestic production of natural gas is wheezing, finding big, alternative sources of supply other than Moscow is a priority.
“Russia’s Gazprom has really been very problematic throughout the last decade,” said Sijbren de Jong, an analyst at The Hague Centre for Strategic Studies. “If Europe is serious about diversification, it will have to look closely at Iran. If European companies, governments, and the EU don’t get in the fast lane now, then other nations will beat them to it,” he said, noting recent talk of increased energy trade between Russia and Iran.
Indeed, the European Union’s energy commissioner, Miguel Arias Cañete, this year openly talked up the prospect of tapping into Iranian gas fields once sanctions are lifted. He said if a final agreement with Tehran happens, it “opens new possibilities” to potentially import Iranian gas as part of the long-planned Southern Corridor pipeline linking Central Asia and the Caucasus to Europe.
If all concerns over Iran’s nuclear program are fully addressed, Arias Cañete told Foreign Policy, “there is potential for growing cooperation between the EU and Iran, including on energy matters.” That would open the door to investment in Iran by EU firms, he said, “and would of course open up additional sources of energy supply.”
Such talk privately worries policymakers in the United States, who are eager to see Europe reduce its reliance on Russian gas, but at the same time would prefer that the EU not leap immediately into Iran’s arms. U.S. officials have repeatedly touted the prospect of U.S. gas exports serving the European market, for example.
But from Europe’s point of view, lining up a potentially huge, long-term supply of gas from anywhere other than Russia is appealing, especially given Moscow’s recent threats to cut off gas supplies during the dispute over Ukraine.
“Given Europe’s precarious energy situation, that would be an invaluable, alternative source of energy,” said Vessela Tcherneva, an analyst at the European Council on Foreign Relations in Bulgaria.
But regardless of the outcome of the nuclear talks, and even with an influx of Western money and know-how, Iranian gas won’t be flowing to Europe anytime soon. As Arias Cañete conceded, “It is too early to give estimates of first deliveries.”
And there’s the rub. Iranian energy officials talk of the need for $100 billion in foreign investment to juice their natural gas production. That’s because, for all its resources, Iran punches below its weight as a gas producer, churning out just 173 billion cubic meters (bcm) a year. That’s a far cry from the 728 bcm produced last year by the United States, the world leader, and little better than China’s 135 bcm.
Worse yet, from the point of view of potential customers already counting on pipes full of Iranian gas someday soon, Iran gobbles up at home nearly everything that it produces and today exports only small volumes to Turkey. Although it has talked since the 1970s about building a terminal to liquefy gas and ship it around the world — much like neighboring Qatar does today in massive quantities and as the United States is preparing to do — Iran has yet to build one.
The world’s biggest holder of natural gas accounts for less than 1 percent of the global gas trade — and not just because of sanctions.The world’s biggest holder of natural gas accounts for less than 1 percent of the global gas trade — and not just because of sanctions. Iran has to reinject almost 30 bcm a year into old oil fields in order to maintain production there; that figure will likely more than double over the next decade. Another 17 bcm or so — 10 percent of annual production — are simply burned off and wasted because Iran lacks the pipeline infrastructure to do anything useful with the gas.
Hopes rest with the giant South Pars offshore gas field, which already accounts for a big chunk of Iranian gas production. Ambitious development there is expected to add another 140 bcm or so over the next decade to Iran’s gas output. If Iran’s own oil fields and energy-gobbling domestic economy don’t eat all that up, that would potentially leave big volumes for export.
But would that gas go to Europe? Iran is already planning on gas export deals to near neighbors such as Oman and Pakistan, in addition to increasing trade with Turkey. That, notes Harvard’s Goldthau, could cut into any volumes available for export to Europe.
Moreover, Europe’s track record with completing massive energy infrastructure projects is not heartening. Since the 1990s, the European Union has tried to build pipelines to tap into huge gas fields in places like Azerbaijan and Turkmenistan and to bring fuel back to the Old Continent via Turkey. Those projects have advanced only in fits and starts. By the time the trans-Anatolian pipeline connecting Azerbaijani gas with Europe is finally completed in 2018, it will have taken two different pipeline projects almost two decades to make the linkup. And that involved countries that welcomed foreign capital and faced no financial or energy-sector sanctions.
“Getting gas from Iran is likely to be a long-term process, but that is all the more reason why it should be taken seriously today,” de Jong said.
Photo credit: ATTA KENARE/AFP/Getty
The Next Iranian Revolution | Foreign Policy