The Iran N-deal, sanctions and Western oil firms

The major fall in oil prices has been in West Texas crude, a local North American benchmark, not Brent. The high Brent price also reflects stronger growth momentum after the Chinese Communist Party’s Plenum and monetary easing by the ECB, Bank of Japan and the Federal Reserve. The fierce opposition to the Iran nuclear deal has also increased the post-deal geopolitical temperature in the Middle East at a time when supply shock risk from Iraq, Libya, Yemen and Nigeria is still very high.

The real significance of the Geneva nuclear deal is that it has enabled Iranian Oil Minister Bijan Zanganeh to publicly admit negotiations with European oil majors Royal Dutch Shell (UK/Holland), Total (France), Eni (Italy) and Statoil (Norway), the four multinational oil and gas companies who invested in Iran’s South Pars projects in the 1990s despite the Clinton-era US sanctions.

Iran is desperate for foreign exchange after a decade of financial and oil export sanctions. The IEA in Paris estimates Iran exported barely 1.1MBD in 2013, half its export figure three years ago. Despite France’s opposition to the Geneva deal, the chairman of Total has publicly promised to return to Iran once sanctions are lifted and its exploration/production executives have begun negotiations with the National Iranian Oil Company. A historic milestone will be reached if Exxon Mobil, Chevron Schlumberger and Halliburton begin their own “trek to Tehran” if the Geneva deal results in the end of US sanctions.

Iran’s South Pars — the world’s largest gas fields — and other elephant fields are obvious magnets for Western oil companies but it is far more attractive for oil companies to drill for shale oil in Texas, Ohio and North Dakota than negotiate unattractive oil services contracts in the Middle East. This is the reason Occidental Petroleum, an oil major who pioneered the great oil strikes, in Libya, Alaska and the North Sea, intends to sell its Middle East assets to focus on its oil and gas interests in the western United States. Occidental, the largest shale oil producer in Texas, has shown no interest in returning to Iran, where it was active during the reign of Shah Mohammad Reza Pahlavi. Iran is just not an attractive exploration prospect for many American multinational oil companies with shale assets. This is all the more true since Zanganeh has ruled out production sharing contracts.

The reformist oil minister, a key aide to President Rouhani, also faces opposition from hardline commanders in the Revolutionary Guard, who control significant oil smuggling and trading businesses. The Majlis, dominated by Supreme Leader Khamenei’s handpicked allies, is ultra-nationalistic. Iran’s economy is crippled by $80 billion in energy subsidies, hyperinflation and a collapsed currency. The populist legacy of the Ahmadinejad era has made Iran a high-risk investment.

The Iran nuclear deal is the greatest tangible diplomatic achievement for President Obama comparable to Clinton’s peace accords, Carter’s Camp David or Nixon’s surprise state visit to Chairman Mao in Beijing. It is nothing less than a new course in American foreign policy in a region where it has fought three costly, bloody land wars since 1991. The very fact that Washington and Tehran have signed a diplomatic accord, albeit an interim one, promises to reduce the violence level in Iraq, Syria, Lebanon, Gaza and Bahrain. So the Geneva accords are a seismic shift in the diplomatic history of the Middle East. It reduces the risk of another American war in the Middle East as Washington disengages from Iraq/Afghanistan and refuses to intervene in Syria. However, Saudi Arabia has made no secret about its unhappiness with American foreign policy in Syria, Iran and Egypt.

Will Saudi Arabia be as willing to raise its spare capacity to increase production and keep oil prices down, as it did in the past? In fact, given that the budget breakeven price of crude is $90 Brent for Saudi Arabia, can Riyadh even play its role as a swing producer?