ENERGY INTERNATIONAL RISK ASSESSMENT (EIRA)
AN INDEPENDENT MONTHLY REVIEW
February 2014
VOLUME 2
ISSUE 2
 
Iranian Oil: Prêt A Manger

Tehran ready to storm global markets

How strong are wishful thinking illusions among the Iranian high-ranking mullahs born out of the interim six-month agreement which limited the controversial nuclear program and mitigated the international sanctions regime? Judging by the fidgety activities of Iranian top officials that coincided with the partial lifting of legal curbs on 20 January, Tehran clerical elite is consumed with anticipation of a major breakthrough in relations with the West and the USA in particular. “The implementation of Geneva deal… will bring with it great economic achievements for Iran in all fields, especially the attraction of giant oil companies,” Jalil Jafari, head of the Foreign Investment Committee in the Iranian parliament, professed without giving any details.

Concurrently, addressing the World Economic Forum in Davos, Iranian President Hassan Rouhani attempted to sound convincing to lure foreign investors to his country by hinting Iran might soon turn into a promising emerging market. “I see the status of Iran pursuing policies of moderation, prudence and hope in the future global economy,” his upbeat statement articulated. “Iran's economy has the potential to be among the world's top 10 in the next three decades.”

The expectations of President Rouhani have an upside and a downside. True enough, in terms of GDP Iranian economy is the second largest in the region. The place is home to the world’s fourth largest oil reserves and second largest natural gas reserves. The abundance of mineral resources coupled with the workforce potential of an almost 80-million nation serve as essential prerequisites for a successful growth strategy. Yet, the immediate impediments to this trade and economy acceleration scenario are no less formidable.

For the start, the actual damage to the Iranian economy caused by the sanctions has not been properly calculated by anyone with access to genuine proved data. Experts assume that direct losses are around $80 billion (15% of annual GDP) with $100 billion frozen in foreign bank accounts with access denied to Iranians. Then, how outdated and obsolete are oil and gas extracting technologies and standards of this crucial for Iran revenues-earning industry? Invigorating the production tempo would require a significant amount of investment but where might it come from?

The answer, or at least a hint of the new thinking mode in Tehran was provided by President Rouhani and his oil minister Bijan Zanganeh at an ice-breaking meeting with CEOs of energy majors in Davos. There, at the summit gathering of the formal and informal rulers, the Iranians pledged an almost ‘most favoured nation’ regime for those Western companies who would brave the odds and enter the Iranian market, bringing along advanced technology and money.

In fact, what the two representatives of the seemingly moderate and mild wing of the political class in Tehran signaled was their readiness to ‘open up’ and proceed with rapprochement with the West triggered off by the Geneva P5-plus-1deal.

But will the “call of the mild” be enough to assure the international oil majors, at least from the West, that the investment climate in Iran was freed from risks? Pretty doubtful. Some strategic risks, now placed in shadows, still remain.

First of all, the patching up of the great quarrel with the West will be sustained only if the Iranian clerics profit substantially and, more importantly, personally.

There are some signs that this might be the case, as reported by Reuters (Khamenei's business empire gains from Iran sanctions relief, 22 January, 2014). It came to pass that the Supreme Leader Ayatollah Ali Khamenei is in control of a diversified multifaceted business empire called Setad with a fair share of investments in Iran's petrochemical industry. Although the official spokesperson of Setad vehemently denied it saying “Our investment... in the petrochemical sector is minimal.” Even if the involvement is “minimal”, Setad will definitely capitalize on the easing of sanctions and the permit to resume exports.

Once again, if the top mullahs have assumed control of some lucrative sectors of the economy, which looks like the most probable outcome of the “consolidation” of elites in a closed society subject to pressure from the outside, then their personal greed (“Greed is good” as postulated by Gordon Gekko in the movie Wall Street) will make them more susceptible to the lure of big money coming in the form of foreign investments. This will add fuel to the rapprochement with the West.

To some extent, the USA after the Geneva deal seems to be pursuing more subtle tactics grounded in the time-honored Western foreign policy named “positive engagement” based on betting on the human basic instincts. Should the mullahs fall prey to their own gluttony and voracity rooted in the newly acquired wealth, they will be no more in the position to command moral authority with the public.

More relevant to the interests of the West, the mullahs will be vulnerable to manipulation to the same extent as the Ukrainian oligarchs who stashed away their dirty money in Western bank accounts for fear of punishment for crimes at home. “Opening Iran to exposure to the world will, in the medium term, so dramatically erode the power of the clerics in Iran that they will have difficulty in retaining power, at least in the way they now exercise it,” analyst Gregory Copley noted.

The second factor to be included into the geopolitical equation is the deeply-rooted distrust by the Iranian political and business elite of the West in general. They may be ready for mutually beneficial interaction but the legacy of the Islamic Revolution and the Cold war waged by Iran against the West, and vice versa, will set limits to both sides cooperating fully and in good faith. Besides, Iran is a dainty prize for other global actors too, like China and Russia.

While the USA was evidently behind the decision to hold the next round of negotiations with Iran in the P5-plus-1format in New York, it was Moscow who was the first to jump on the band wagon. Iran and Russia conducted talks on an antique trade model (barter deal) to swap oil for goods. If signed, the deal would create a flow of Russian consumer commodities to Iran to the tune of $1.5 billion per month in exchange for oil. US President Obama spokesman Jay Carney immediately said Washington had “serious concerns” about the deal.

Moreover, it is hardly conceivable that Tehran will place all bets on the prospect of becoming a partner to the United States. Given the previous overtures by Beijing (it once promised to invest $40 billion into the Iranian energy sector), and the looming confrontation between China and the US over access to energy resources, it is unlikely that Tehran will not play this card to its full advantage. Noteworthy, Iran has not withdrawn from the waiting list of the Shanghai Cooperation Organization (SCO) hoping to become a member of an alliance on the rise where China has been calling the shots.

To wrap it up: first, if sanctions’ lifting does not create a powerful stimulus for further amelioration of tension with the West for the ayatollahs in their personal capacity, and second, if other international actors, predominantly China do not seize the opportunity to forge an alliance with Iran to gain access to its hydrocarbon riches, then Western energy majors will not have the fundamental motives to plunge headlong into the unfriendly waters of the Iranian sector of the Persian gulf.

In the meantime, the wind seems to blow into the sails of the embattled ship called Iran. The economy is on the move with unemployment slightly diluted and trade in non-oil goods between Iran and more than 150 other countries filing the coffers. In the time span since the start of the Iranian year on 21 March (9 months’ statistics), this trade has accounted for $62.5 billion while export of petrochemical products brought another $8.1 billion, according to OPEC data. Will the arrival of Iranian o

l to the world market en masse become a gamer changer? There are two conflicting views: no and yes. The naysayers claim that after the supply disruptions in 2013 due, in particular, to the embargo on Iranian oil, more than 2 million barrels per day were taken out of the overall balance, but the global markets adjusted to the “new realities” and made up for the deficit. In other words, there is no demand for extra Iranian oil.

The other school of thought insists that Asian dragons are on the rebound, as well as the economy of the United States while the heralded North American oil glut due to shale production will not last long. It amounts to a simple verdict: there is certainly a niche, wide enough, for the Iranian black gold substance.

The latter forecast fuels optimism in Tehran which believes that despite all the setbacks its oil industry survived the embargo and is still making a slow but steady progress. Iranian leadership strongly believes that its oil reserves is a commodity prêt a manger, and its mere size and quality is an appealing property no responsible and business-oriented entity, like energy majors, can ignore.

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