Iran tries to regain status as oil power

Iran is seeking to change its oil-related policy to strengthen its economy, while trying to overcome the repercussions of the recently reduced international sanctions.

al-monitor Workers load equipment onto a truck to be transported to a ship for a delivery to oil rigs, at a port on Malaysia's island of Labuan, Feb. 7, 2012. The Naftiran Intertrade Company (NICO), an oil-trading firm owned by the Iranian government, indicated it would move to Labuan, after it dissolved its base on the British tax haven of Jersey. Photo by REUTERS/Bazuki Muhammad.

Topics covered

sanctions, oman, oil contracts, oil & gas, opec, iraq, iran, hassan rouhani, economy

Feb 17, 2014

Iran is trying hard to establish a new oil-related policy in light of the Western openness to the nuclear issue. Reportedly, the oil sector, along with other economic sectors, has suffered in the past two years due to the sanctions that the West imposed on Tehran. As a result, in 2013, oil exports dropped from 2.5 million barrels a day to around 1.1 million barrels a day. The value of annual oil exports decreased to around $45 billion instead of $100 billion. Meanwhile, the rate of inflation witnessed a yearly increase of around 40%, and unemployment affected around 10% of the workforce.

Faced with economic pressure and public restlessness, Iran accepted to participate in the negotiations on the nuclear issue. The Geneva interim agreement consists of partially lifting the ban on an estimated $7 billion of Iranian money abroad and allowing some Asian countries to import limited quantities of Iranian oil. In return, Iran would have to make concessions regarding its nuclear program.

The Middle Eastern experience has shown that it is not easy to quickly overcome the repercussions of sanctions. Stability is required to restore trust among international companies and set new policies to deal with these companies and encourage them to operate in the country again. This requires laborious negotiations, even with oil-rich countries. International oil companies have many opportunities to invest billions of dollars in other promising regions.

First, Iran stands before the challenge of changing the quality of oil production contracts that it will sign with the companies. The current contracts allow international companies to explore and drill oil in return for certain payments. In accordance with these contracts, once the companies discover an oil field, they start producing for a short while. Then, they have to hand over the field to the National Iranian Oil Company or to companies affiliated with the Islamic Revolutionary Guard Corps’ organizations, which take charge of the said field and the production. This means that the international companies will not play any role in the production phase during which profit is made. Their role is limited to exploring oil in return for certain payments.

At first, European companies accepted these agreements. However, after the West boycotted Iran, they had to pull out of the country and were replaced by Asian and local companies. This policy and its effects rendered Iran incapable of increasing its production capacity to attain a goal estimated at 4 million barrels a day. Instead, production hung between 3 million and 3.5 million barrels a day. Moreover, the Western boycott and the instability of supplies led to the collapse of markets that import Iranian oil, while its export to the United States has been banned for over two decades. European companies also reduced the import of Iranian oil. Therefore, most Iranian exports were channeled to Asian countries such as Japan, China and India. Clearly, Tehran will try to overcome these challenges, but it is difficult to address them quickly, despite what official statements claim in this regard. Iran has to compete with other producing countries with stable and sufficient supplies that will be available in global markets in the long term.

Iran has the second-largest proven natural gas reserves in the world, following Russia. However, Iran has not succeeded in implementing a project to liquefy gas despite repeated attempts. In addition, Iran exports gas through pipelines to neighboring countries such as Turkey, but the supplies are intermittent due to disagreements over quality or price.

A project to export gas through pipelines to Turkey and India has been on the table since the 1990s, yet all attempts to reach consensus between the concerned countries have failed. Iran even built a pipeline on its own land to export around 750 million cubic feet of gas daily. Work is finally underway to inaugurate the pipeline in Pakistan, which is trying to get funding for the project — an issue that remains pending. In July 2013, Iran agreed to export around 850 million cubic meters [30 billion cubic feet] of gas daily to Iraq for four years to provide fuel to power stations. Iraq has huge gas reserves, but their development has been delayed. This transitional agreement will cost Baghdad around $3.7 billion yearly.

Remarkably, last summer, after President Hassan Rouhani came to power, a project to export gas to Oman was announced and set to be completed by 2015. The Sultanate of Oman exports liquefied gas, but at the same time, it imports gas from Qatar through the Dolphin Gas Project. Evidently, Iran will give priority to oil exports, as there are broader opportunities in this field. In fact, some countries in the region need to use gas as fuel for power stations, petrochemical plants or desalination stations. Expanding the circle of trust with international companies needs more time to bear fruit, as is the case with oil exports. 

Iran is trying to regain the oil status it lost due to previous sanctions and policies. It is also competing with Iraq over production quotas in the Organization of Petroleum Exporting Countries (OPEC). The two countries will try to achieve a production rate of around 4 million barrels a day by the end of 2014 to support their negotiation stance. Still, Iran and Iraq are facing difficulties to increase their production or build the necessary facilities such as pipelines, pumping stations or reservoirs, which are necessary to keep up with the increasing production and export. Moreover, Iran is trying to raise its production capacity quickly.

Oil Minister Bijan Zanganeh confirmed this during the last OPEC conference, when he stated that Iran intends to increase production, even if this means decreasing the price to $20 a barrel. He added that Iran is very interested in raising its production despite the negative effects it might have on the market. This statement was a mere publicity stunt, because observers are well aware of the limitations of the Iranian economy. It is obvious that oil countries such as Iran, which set its annual budget for 2014 based on the price of $100 a barrel, cannot settle for $20 a barrel, out of respect for their local and foreign commitments.

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More from  Walid Khadduri

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