The nuclear framework agreement reached with Iran in Lausanne, CH, was an important milestone. Now detailed negotiations will focus on Key details relating to safeguards and lifting international sanctions.
Ending the Western sanctions leads to another Key part of Iran’s energy equation, as new investments in its non-nuclear energy sector that could boost its Crude Oil and Nat Gas exports.
New investments and higher exports are big incentives for Tehran to reach a nuclear deal. The Iranian economy has been dampened under the Western sanctions, and it can recover only with increased Crude Oil and Nat Gas exports, even at lower prices.
Under favorable conditions, Iran could increase its sanctions-constrained Crude Oil exports of 1.2-M BPD by about 300,000 BPD, drawn from its floating storage. That could add 1-M BPD to global supply within 12 to 18 months. Low global growth forecasts indicate that this prospect will add to downward pressures on Crude Oil prices good news for consumers, not so good for producers.
For Saudi Arabia, the additional Crude Oil on the market would not be welcome. But the Kingdom can be expected to maintain its policy of defending its market share, even at lower prices.
Iran will likely accept lower prices in return for needed revenues and as a means to rebuild its share of the global Crude Oil market. Tehran would likely need an increase of tens of billions of dollars each year to reverse the 15% rate of decline in output from its aging, technology starved Oil fields and refineries.
The geopolitical consequences of ending sanctions against Iran are at least as important.
As Iran re-enters the non-nuclear energy market, its incentives to develop and defend its market share will increase. Also, its incentives to stick to a nuclear accord would also increase to avoid any possibility that sanctions could be reimposed.
Tehran makes it clear that ending sanctions has been the most important reason to making a nuclear deal. Any increased risk of sanctions being reimposed could have a negative impact on potential investors in its Crude Oil and Nat Gas sector.
Both Tehran and international Oil companies already are anticipating negotiations for lucrative business deals that have been banned under the Western sanctions.
For Tehran, this requires competitive commercial conditions going beyond its traditional revenue-sharing schemes.
For Oil companies, they would need to be satisfied that these conditions are viable and can translate into profitable investments that compare favorably with others on their business agenda.
The non-nuclear energy equation has a critical regional dimension too.
With the world’s 3rd-largest Nat Gas reserves, Iran has long proposed Nat Gas pipelines to alleviate severe shortages in India and Pakistan. Sanctions made this hard to execute, but these pipelines could become part of a Win-Win commercial-energy agenda for Iran and its neighborhood once restrictions are lifted. The pipelines’ feasibility could compare favorably with the longstanding proposal of a pipeline from Turkmenistan through Afghanistan to Pakistan and India.
Also, Central Asian Oil and Gas producers have long supported swaps whereby Oil and Gas supplies would go to Northern Iran and equivalent amounts would be shipped from its South.
Kazakhstan, in Oil, and Turkmenistan, in Nat Gas, see clear advantages in diversifying from the now dominant Russian and Chinese routes. Again, sanctions have hobbled these proposals. And their lifting could make them another positive part of a new regional commercial-energy agenda.
A 3rd regional dimension is the Caspian Sea, where Iran shares a coastline with 4 other nations.
Historically, Iran has opposed demarcation proposals that would correspond to its more limited shoreline on the Caspian. But a more positive regional energy context could induce Tehran to take another look at its effective veto of a demarcation agreement. A resource-sharing compromise could advance cooperation with Russia, Azerbaijan, Kazakhstan and Turkmenistan.
Then there is the EU, which has long sought to reduce its dependence on Russian Nat Gas.
Over time, Iran could supply increasing quantities of its Nat Gas through Turkey, adding to the supplies already reaching that country from Azerbaijan. Again, the prospects for Win-Win solutions would be enhanced by a successful nuclear deal.
It should also be recognized that Iran can use additional funds, as sanctions are lifted, to promote disruptive policies, including its support of Syrian President Bashar al-Assad and its help for Hezbollah in Lebanon and Hamas in Gaza.
Iran’s Revolutionary Guards are most associated with these policies, as well as with pushing a nuclear weapons option. To contain their influence requires a strong and long-term regional strategy that goes beyond energy, but which could also be facilitated by a new energy chapter, nuclear and non-nuclear in US-Iranian relations.
The current focus must remain on successful negotiations building on the framework agreement. Without success, the collateral non-nuclear-energy benefits would become questionable. In turn, continued nuclear progress can pay non-nuclear dividends, which would help to reinforce the durability of a nuclear accord.
|HeffX-LTN Analysis for OIL:||Overall||Short||Intermediate||Long|
|Neutral (0.14)||Bullish (0.31)||Neutral (0.19)||Neutral (-0.08)|
Have a terrific week.