Rotten to the Core?
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Since its announcement in early April 2015, the interim agreement on the Iranian nuclear program has yielded some $7 billion in sanctions relief for Iran, even though core U.S. and EU sanctions blocking Iranian imports remain in place. Although U.S. President Barack Obama faces tough opposition on the deal from Congress, his EU partners are eager to get back into Iran’s market of nearly 77 million people.
To that end, top-level Iranian decision makers, including the minster for business and industries, Mohammad Reza Nematzadeh, will meet next month to discuss future business opportunities for European investors at a conference organized by the Austrian Federal Economic Chamber. Germany, one of Iran’s oldest trading partners and an exporter of nearly $3.86 billion to Iran in goods and services in 2012, may well reach over $11 billion in exports per year if and when the sanctions are lifted.
Iran’s untapped energy reserves represent some of the most attractive opportunities, both for the leadership in Tehran and European businesses. With gross natural gas production of almost 8.2 trillion cubic feet per year, Iran is the world’s third-largest producer after Russia and the United States. Despite its vast resources, Iran only accounted for one percent of global gas trade in 2012. Its domestic gas market, too, remains underdeveloped as a result of sanctions, representing only five percent of the estimated $231 million per day in global crude oil revenues.
Russian conflict with Ukraine has thrown Europe’s energy supply into disarray, endangering the steady flow of oil that flows through Ukrainian pipelines.The fall in global oil prices has thrown the Iranian federal budget into disarray, opening a window of opportunity for negotiation: Iran is likely to use oil and gas contracts as incentives to resolve its nuclear dispute with the West, while persuading countries to be more flexible with negotiations for the sake of their national oil industries. Russian conflict with Ukraine has thrown Europe’s energy supply into disarray, endangering the steady flow of oil that flows through Ukrainian pipelines. Potentially favorable pricing also makes new deals with Iran more appealing than ever as the continent looks to diversify its suppliers to meet its increasing demand for energy. Iranians see this opportunity for what it is, and will attempt to lobby for a better sanctions relief package on two fronts: First, the commercial front, in collaboration with EU energy companies seeking increased market shares. And second, with European policy makers who are consciously attempting to decouple their nations from dependency on Russian gas.
FRIENDS IN HIGH PLACES
Iran has a track record of lobbying energy firms to put pressure on the West. In 1991, Tehran reached a pre-agreement with Conoco, granting the U.S.-based oil company the right to develop gas and oil fields in Iran. Through these efforts, Iran sought to entice U.S. oil companies to pressure U.S. authorities into altering their approach toward Tehran’s leadership. These efforts resulted in a discreet campaign by oil giants to improve Iran’s public image in the United States and led to lobbying efforts to get Washington to promote business with Iran. When Mohammad Khatami began his term as Iranian president in 1997, he sought to soften Western attitudes toward Iran. His policies prompted the creation of a number of lobby groups across the United States. At the same time, the National Foreign Trade Council, a representative group for major U.S. corporations, started its own lobbying initiative called USA*Engage. Other major U.S. business lobbies followed suit, establishing the American Iranian Council (AIC) with a governing board comprised of former U.S. diplomats and executives from Chevron, Exxon Mobil, and Halliburton. The AIC, which enjoyed financial support from the Iranian regime, was designed with a singular goal: altering U.S. policy priorities with regard to Iran in order to lift sanctions and create possibilities for lucrative business enterprises in the country. Not to be left out, EU countries also faced similar pressures from businesses with a stake in an Iranian détente. When the White House scrapped the $1 billion deal between Conoco and Iran in 1995, Iran shifted its focus to major European oil companies such as Eni, Royal Dutch Shell, and Total. These companies had to abandon lucrative arrangements with Iran by 2000 when a new set of sanctions took effect, but President Hassan Rouhani’s government knows the benefit of having powerful EU oil companies as lobbyists for lifting sanctions on Iran.
The importance of Iran’s energy sector in foreign negotiations cannot be underestimated: Tehran sees how oil development can provide it with financial leverage to end sanctions.Indeed, the efforts to restore the oil trade with Europe began soon after Rouhani was elected. He held closed-door meetings with executives from BP, Eni, Shell, and Total at the margins of the 2014 World Economic Forum in Davos. The meetings focused on how Tehran can attract foreign investment in his nation’s gas and oil production sector. Rouhani was careful to link these opportunities to the potential lifting of sanctions following a nuclear deal.
A few months prior to Davos, Rouhani met with Europe’s private-sector executives and told them that in “the present situation, after the foreign minister, the oil minister with a very active energy policy will play the role of the second foreign minister.” Then, in September 2014, Deputy Minister Ali Majedi was appointed Iran’s ambassador to Germany. Majedi is one of Iran’s leading specialists in international oil and gas trade, and signalled that alongside the nuclear talks, Europeans and Iranians could also discuss various EU delivery routes for Iranian gas once sanctions are lifted. The importance of Iran’s energy sector in foreign negotiations cannot be underestimated: Tehran sees how oil development can provide it with financial leverage to end sanctions, and is happy to have companies lobby their home governments to ease trade restrictions.
In turn, European energy firms have stressed the importance of redesigning Iran’s buy-back contracts—agreements that give outside firms a pre-arranged rate of return. These agreements only permit investors to operate as contractors within Iran, forbidding them from having rights to oilfields or ownership over Iranian assets. The ban on foreign ownership of oil assets has been in effect since before the 1979 Iranian Revolution, but may be relaxed if a nuclear deal gives way to renewed investment in the nation’s energy industry. In February 2015, Iran’s Oil Minister Bijan Zanganeh announced that new oil contracts would allow for the formation of joint ventures, long-term investments spanning 10 to 25 years, and a flexible fee structure that offers companies the option of accounting for the economic value of Iranian investments on their balance sheets. Under the proposed revisions, foreign companies can become involved in more than just oil exploration and development, restrictions that were put in place in 1979. Now, proposed changes to Iranian policy will allow investors to have a role in the production of oil, and they will be able to list profits from Iranian oil fields in their financial statements. With these new contracts, the Iranian government hopes to not only obtain the technology and expertise necessary to develop new fields, but also to use their new foreign partners as intermediaries in exporting gas and oil to global markets. These contracts are expected to attract more than $40 billion in foreign investment, with France’s Total and Italy’s Eni considered to be among the first energy companies to sign up. Total will have a strong interest in returning to Iran, particularly to the South Pars gas field, a territory shared by Iran and Qatar and considered to be the world’s largest, after it had to halt development there because of sanctions. Likewise, senior executives from Royal Dutch Shell recently met with Zanganeh in Vienna to discuss the repayment of debt stemming from undelivered oil as a result of sanctions. This is seen as crucial to future partnerships for the company in Tehran.
WHAT STATES HAVE TO GAIN
Whereas major EU oil and gas companies might be driven by private interests, the apparent readiness of state leaders to discuss of the possibility of importing Iranian gas indicates gradual changes in Europe’s approach to Tehran. European energy security, always a perennial challenge, became even more tenuous after Russia’s annexation of Crimea and the imposition of restrictive EU sanctions on Moscow. With 16 percent of Europe’s gas moving from Russia through Ukraine, Europe would be in trouble if Russia turned off the taps. Germany, in particular, is in danger; Russia supplies it with 40 percent of its natural gas. With the government’s post-Fukushima decision to end all nuclear energy production, Germany must fulfil even more of its energy demand with Russian gas, and has been on the brink of major gas supply shortages three times over the last ten years due to political instability between Russia and the Ukraine, bottlenecked supplies, and inaccurate gas storage forecasts. If Chancellor Angela Merkel does not work to diversify her nation’s gas supplies, the anchor of Europe’s economic stability may not be able avoid another gas crisis. And that makes the prospect of Iranian energy supplies, if sanctions are lifted, incredibly enticing.
The public debate over Iran’s nuclear program is focused on curbing nuclear proliferation, but there is much more to the story. Iran has much to offer the world in terms of its energy resources, and the world has much to offer Iran in helping to produce and export its vast oil reserves. Preventing Iran from establishing nuclear capabilities might be the most obvious driver for talks, but it is far from the only one. Oil companies have a vested interest in opening up shop in Tehran, and so do countries that need to diversify their energy suppliers in the face of global conflict.
Correction: A previous version of this article claimed that the IIC was an organization sponsored by Tehran. The IIC was an independent organization with no ties to the Irani government.
Disclaimer: The views expressed in this article are solely those of the author and do not express the views of the World Bank, its board of executive directors, or the governments they represent.