Iran and GCC verge upon new era of oil ties
Al-Monitor Pro Members
Dr. Bijan Khajehpour
Managing Partner, Eurasian Nexus Partners, Vienna, Austria
April 24, 2023
The argument that Iran and its Arab neighbors will never cooperate in the field of petroleum because they are competitors is outdated. A new era of cooperation is slowly emerging, yet the state structures that have been shaped based on a win-lose mentality will not transform overnight. Shifting political wills and increasing commercial rationales will shape the new patterns of interaction between the petroleum sectors of Iran and the GCC, but it will be a slow process.
- The Persian Gulf hosts more than 50% of the global oil and gas reserves, and thus it is clear that the petroleum sector would play an important role in the relationships between its littoral states, i.e., GCC nations, Iraq and Iran.
- Five of these nations are members of OPEC — Saudi Arabia, Iran, Iraq, the United Arab Emirates and Kuwait — and historically they have cooperated in OPEC despite deep political divisions.
- In the past, when the bulk of their petroleum sector production and exports was crude oil, there was little scope for collaboration as they were all focused on selling their crude product to international customers. However, as most of the key players — especially Saudi Arabia, the UAE and Iran — are producing an increasing volume of refined petroleum and petrochemical products, the commercial equation is changing, i.e., there is increasing room for trading in the mentioned products.
- At the same time, tense political relations between Iran on the one side and the GCC on the other had prevented the realization of the commercial potential of a greater cooperation between the petroleum sectors of these countries.
- The recent Iran-Saudi Arabia rapprochement has laid the political foundation for a new relationship. Even Iran and Bahrain are working toward reconciliation, which is important to create a political atmosphere to maximize the economic benefits to the region.
- There are experts who view Tehran’s de-escalation with Riyadh as “motivated in part by the escalatory pattern between Iran and Israel and the United States.” However, there are also clear values in the field of security and economic imperatives.
- As such, it is not a coincidence that Iran and Oman have revived an old plan to take Iranian gas to Oman. Oman has generally remained constructive in its relationship with Iran, including functioning as a hub for Iranian petroleum products exports.
- Iran has already proven to be a valuable gas and energy exporter to Iraq, and under an improved political climate, Iranian gas could also flow to other regional markets.
- One key obstacle has always been US sanctions. However, all signs indicate that these attempts are going against the commercial and political realities that wish to facilitate such trades.
- For example, Iran and the UAE target reaching $30 billion in annual trade by 2025, and there is little doubt that petroleum products will be an important item in growing the volume of interactions.
- The improved political climate will also help Iran and GCC manage their shared fields. For example, the three-way shared Al Dorra gas field can be developed efficiently. This shared interest will further be facilitated by the Iran-Kuwait border talks.
- One facilitating factor in the process is the increasing role of Russia’s trade with the GCC countries — the logical transit route for such trade is Iran. As Moscow and Tehran are also engaged in product swaps, experts believe that the Russia-Iran-GCC triangle will lead to greater cooperation in swaps of petroleum and petrochemical products between the GCC and Iran as well.
Scenario 1: Extra-regional relations cause complexities for developing ties.
One scenario is that extra-regional pressure, especially connected to the US sanctions on Iran, prevents a meaningful growth in trade and investment in the petroleum sector between Iran and the GCC. As the case of Iraq shows, even securing sanctions waivers from the United States to import energy from Iran will not stop US banking sanctions from undermining the relationship. There have been many instances of sanctions on companies trading petroleum or petrochemical products originating in Iran. The only event that could change this dynamic would be a revival of the 2015 nuclear deal and the lifting of US sanctions on Iran, which is unlikely at this stage.
Scenario 2: Petroleum sector partnerships grow rapidly.
The least likely scenario is that there is a fast-paced forging of petroleum sector partnerships between the two sides. Even though political reconciliation will help focus on a cooperative attitude, there are far too many operational, business, cultural and legal barriers that will prevent meaningful commercial partnerships. There are enough common interests, not only on commercial matters, but also on environmental and climate change topics, but such partnerships will take time and will need to be preceded by confidence building on all sides.
Cooperation and de-escalation seem to be the new trends among the Persian Gulf countries. In the petroleum sector, this atmosphere will lead to pragmatic deals involving trade, investment, and co-development of petroleum and petrochemical products. However, it will be a slow process. One should not lose sight of the fact that the technocratic bodies of these countries need to adjust to new political, geopolitical and commercial realities. This means that there will be gradual schemes initially looking at trade and product swaps and then moving toward more sophisticated joint projects including co-investments. The needed confidence for such joint projects will be vulnerable, but as long as the political will persists, the technocrats will move toward a new era of cooperation that could be further consolidated through the facilitating roles of other international partners such as China, Russia and India. Furthermore, if Iran and the GCC wish to strengthen their cooperation in the petroleum sector, there will be a need for enterprises and financial institutions that can manage the risk of US sanctions. Finally, the key to success will be the ability of Iran and the GCC to develop a positive competition in the petroleum sector and move away from the zero-sum competition of the past.
Bijan Khajehpour is the managing partner at Eurasian Nexus Partners - eunepa.com - a Vienna-based international consulting firm. He also sits on the board of the Europe Middle East Research Group. He is considered an expert on geopolitics of energy and the Iranian economy and energy sector.
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