After weeks of heightened tensions, including the build-up of American forces, the US and Iran are set to hold talks in Oman on Friday over Tehran’s nuclear programme. In geopolitical terms, a crisis in Iran could potentially have far greater consequences than Venezuela.
The US is using the threat of force to coerce Iran into a fundamental change of direction. Spot oil and gas prices will remain sensitive as the possibility of war still very much exists. If a conflict breaks out, Iran may attempt a blockade of the Strait of Hormuz, which would stop the flow of around 20% of the world’s oil and liquefied natural gas (LNG) from various Persian Gulf countries. If that happens, prices would spike to much higher levels, as that sort of volume cannot be replaced at short notice.
The military scenarios are difficult to predict, but if a blockade can be prevented or cleared quickly, prices would recede rapidly. Damage to production facilities in some Gulf nations could also occur, but it would be of a smaller magnitude and could be compensated for with other sources. OPEC and other countries currently have an ample surplus oil production capacity of 3-4 million barrels per day (bpd). Several new LNG supply projects will also come onstream in the near future in the US and elsewhere.
Iran is obviously important for oil and gas. How crucial is it in the current geopolitical context, especially compared to Venezuela?
Iran is of much greater consequence. It holds the world’s third-largest oil reserves, located strategically vis-à-vis Asian and European markets. Iranian oil is of good quality and can be produced using conventional techniques at low cost. Most Venezuelan oil, on the other hand, is a highly viscous sludge that requires expensive underground heating to flow.
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Iran has many highly productive “super-giant” oilfields containing many billions of barrels, with multiple reservoirs stacked above each other. Some, such as the Azadegan oilfield, stretch across the border into Iraq. Incidentally, several years ago at Shell, we had developed some of these fields on the Iraqi side. The big challenge was to safely find and neutralise thousands of unexploded landmines that had been buried since the 1980s Iran-Iraq war. Iran’s oil production before that war had exceeded 6 million barrels per day, but has stayed below 4 million bpd ever since.
Of even greater importance are Iran’s gas reserves, the second largest in the world. The South Pars field, which Iran shares with Qatar, is the largest gas field in the world, and holds over a thousand trillion cubic feet of gas. In the early 2000s, Iran came close to investing in four LNG plants to export that gas, two in partnership with European firms and one with a Chinese firm. Those plans never materialised because of concerns over its nuclear program and consequent sanctions. Qatar, meanwhile, has developed its side of the field, exporting gas worth over $40 billion last year alone, and is expanding production capacity.
What could be the US goal, in the context of Iranian oil and gas and more widely?
The US aims to secure its global petroleum dominance and its political primacy in West Asia.
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We must remember that the US is now the world’s top oil producer, consuming most of its output domestically, while Saudi Arabia is second. The US is also the world’s top LNG producer and exporter, with Qatar being the second. If the risk of Iran going nuclear can finally be eliminated, then US interests would be better served by ending sanctions and developing Iran’s petroleum resources. Iran’s petroleum industry needs major investments, infusion of new technology and access to global markets. The US would like to have its companies fulfil that role. If a stable legal framework that balances profit sharing between Iran and foreign investors can be achieved, then I believe international oil companies will invest.
China has grown close to Iran, given the US sanctions on the latter. China reportedly buys over 1.5 million barrels of Iranian oil per day, sanctions notwithstanding, and is Iran’s largest trading partner. The US does not wish to cede such space to its geopolitical rival in West Asia.
Iran could also be an attractive market for other goods and services if petroleum export revenues increase and are used for the welfare of its people. Iran’s population of 90 million is bigger than Germany’s, and half of it is younger than 35. But a stable, effective government and peace are a must.
Is regime change essential and likely in Iran, and what might be the nature of the new dispensation?
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It may be premature to draw any conclusions about that. There is, of course, much hardship and discontent among the Iranian people. And the US demands of the Iranian regime constitute a total reversal of its core policies. But Iranians are also a nation conscious of their civilisational power, unlikely to put up with foreign overlordship. They remember the overthrow of their democratically elected prime minister, Mohammad Mossadegh, in 1953, which the US later acknowledged it had engineered to protect Western oil and political interests. For any regime in Iran to succeed, current or new, it would have to rapidly deliver economic benefits to the people and be seen to be independent.
The history of neighbouring Iraq after the 2003 invasion offers a sobering warning. While glad to be rid of Saddam Hussein, the Iraqis did not take kindly to occupation by the US and its allies. On that occasion, the US had miscalculated, been overconfident and been misled by Iraqi exiles who fed it faulty intelligence for their own ends. The dissolution of the Iraqi army and Ba’ath party created a power vacuum into which all manner of sectarian factions, foreign actors and carpetbaggers waded in. Deadly mayhem ensued from which the Middle East is yet to recover.
Ajay Singh is a management advisor based in Tokyo. He is also a former Shell and Japan Petroleum Corporation executive with considerable experience in West Asia.
