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Why OPEC deal is double-edged sword for Iran

While the OPEC deal to cut oil production will have tangible positive effects for Iran, it’s far from likely that the accord will fundamentally transform global energy dynamics.
Iran's Oil Minister Bijan Zanganeh arrives for a meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna, Austria, November 30, 2016. REUTERS/Heinz-Peter Bader - RTSTZ64

OPEC finally agreed to cut oil production at its Nov. 30 meeting in Vienna. The decision was preceded by months of intense negotiations against the backdrop of dramatically declining oil prices since mid-2014. The talks in Vienna were complemented by intense telephone diplomacy involving Iran and Saudi Arabia as well as major non-OPEC producer Russia.

Overall, the cartel’s members pledged to cut production by some 1.2 million barrels per day (mbpd) from January onward. Several non-OPEC producers are joining the endeavor, with Russia and others adding some 0.6 mbpd to the cut.

Iranian officials have welcomed the outcome of long months of negotiations. Oil Minister Bijan Zanganeh praised how OPEC members managed to reach a deal despite many political differences and economic competition. Though repeatedly asked to cut production, Iran was able to negotiate an exemption, the minister noted. Iranian newspapers have enthusiastically celebrated the deal, with some outlets referring to it as a new Joint Comprehensive Plan of Action.

Iran will certainly benefit from the deal in several respects. Its reference production quota — the base against which production cuts are measured — has been set at just below 4.0 mbpd, which is effectively the level prior to the imposition of Western sanctions from 2011 onward. This figure reflects recognition of the fact that Iranian output in recent years, which according to official numbers was at times as low as 3.1 mbpd due to sanctions, was a deviation from traditional levels. For Iran, whose officials have time and again argued that the sanctions were unfair, this exemption is of great symbolic importance, as fellow OPEC countries acknowledged what many in Tehran argue are Iran's traditional rights. Iran’s defiance appears to have paid off, especially in the face of political pressure by its archrival Saudi Arabia, which advocated for the production cut and called upon OPEC members — including Iran — to join in reducing output.

Beyond the optics and the politics, the OPEC deal presents clear economic advantages for Iran. The accord allows for a modest increase in Iranian oil output. With current production at 3.7 mbpd, Iran does not have to cut production but can slightly raise its output to almost 3.8 mbpd while several other OPEC members will need to cut production. While expanding its output and market share, Tehran will also likely be able to take in more revenue per barrel as the Nov. 30 deal has sent oil prices up by 10%.

The deal also enables Iran to continue inviting foreign companies to invest in its energy sector. Since the lifting of nuclear-related sanctions in January, Western energy companies have begun trickling back into the country. A multibillion-dollar preliminary agreement has been reached with a consortium led by France’s Total. Several memoranda of understandings have been signed, including with Germany’s Wintershall, Holland’s Schlumberger and Norway’s DNO. From Iran’s perspective, these are only the first steps toward more international cooperation as the country seeks investment totaling $150 billion in its energy sector.

Had Iran agreed to reduce output to achieve a deal in Vienna, operations would have needed to be scaled down or work at some of the fields currently in production effectively halted. This would have reduced the scope for engagement at those fields in Iran that have already been highly processed and require advanced technologies to maintain output levels.

However, while the OPEC deal will have tangible positive effects, Iran’s overall outlook will not be greatly affected by it, particularly because it’s far from likely that the accord will fundamentally transform global energy dynamics.

With the exception of Angola and Iran, the reference production quotas of OPEC members were set at the output levels in October. Comparatively high production levels are now the benchmark, since many cartel members have substantially increased output in recent years. Thus, while indeed cutting production, these producers are in the grander scheme of things merely scaling back some of the output that they have added in recent years.

For instance, Saudi Arabia’s reference production quota under the Nov. 30 accord is set at 10.5 mbpd. That is 800,000 barrels more than the country’s production level as recently as 2014, when it was producing 9.7 mbpd. While the deal obliges Riyadh to cut output to 10.1 mbpd, it is evident that even under the accord, Saudi output will remain significantly above that prior to the past two years.

Moreover, while OPEC’s production cut is rather modest, more supply is likely to soon enter global markets. Two OPEC members that were able to secure exemptions under the Nov. 30 accord — Libya and Nigeria — can be expected to expand production in the near future, partly neutralizing the overall cuts. On the other, as prices increase, more expensive competition is likely to become commercially viable, especially from North America.

As for Iran, the OPEC deal’s definition of its reference production quota at close to 4 mbpd is not only a recognition of its pre-sanctions output as being the "normal,” but also of post-1979 maximum production. Iran can stay under this ceiling without any sacrifice. Ramping up production beyond this level would require massive new investment, which can in any case only materialize in the long run. Here, rather than current OPEC quotas, it is the overall attractiveness of Iranian energy that matters, which is a function of not only energy economics but also the complex workings of both domestic and international politics.

With regard to Iran’s role within OPEC, it should be kept in mind that the Nov. 30 deal is only a success on the surface. The brunt of production cuts — almost two thirds — is taken by Saudi Arabia, the UAE and Kuwait. The remainder is distributed among seven other members. Thus, while Saudi Arabia was only able to convince two fellow Gulf Cooperation Council member states to make significant production cuts, it was the GCC that made the deal happen.

In the future, Iran can be expected to join other OPEC countries in calling for higher prices. When it comes to concrete action, however, as Iran is keen to expand its profile in international energy, it is unlikely that there will be much appetite in Tehran to follow more Saudi-led initiatives — especially maneuvers that will involve cuts in Iranian output.