Rising oil exports give Iran taste of potential gains

Crude oil and condensate sales reached 1.41m b/d in February, the highest level for a year, in a sign the economy is benefiting from the limited sanctions relief contained in November’s interim nuclear deal. Countless trade and diplomatic missions have already made their way to Tehran to discuss future energy co-operation. Published in Gulf States News, 17 April 2014

The latest round of talks between Iran and the P5+1– that is China, France, Germany, Russia, the United Kingdom and the United States, led by European Union foreign policy chief Catherine Ashton – took place in Vienna on 8-9 April, and when the parties next meet, in Vienna on 13 May, it will be with a view to start drafting a permanent nuclear deal. Many differences remain. Iranian foreign minister Mohammad Javad Zarif told reporters after the Vienna talks that there was agreement on 50-60% of issues, but that the remaining issues were “important ones and diverse”. “Even 2% can torpedo all of it,” he said.

Certainly, the chances of a comprehensive deal remain finely balanced, but there are signs that the Iranian economy is already benefiting from the limited sanctions relief contained in the interim accord signed in Geneva in November.

That took effect on 20 January and the impact appears to have been almost immediate. The state-owned Irna news agency said that Iranian crude oil and condensate sales reached 1.41m b/d in February, the highest level for a year, citing data from the International Energy Agency.

Exports to Asia look particularly strong. The Fars news agency said crude sales to the country’s four largest customers – China, India, Japan and South Korea – reached 1.16m bbls/d in February. Exports to China accounted for just over 502,000 b/d of the total, which Fars said took the trade back to pre-sanctions levels.

The growth looks even more impressive in terms of dollar values. According to the Korea Customs Service, Seoul bought $853m worth of goods from Iran in February, up from $217m in January and the highest level since April 2012. Almost all of the February trade, worth $850m, was crude oil.

As part of the interim nuclear deal, the US said it would stop pressuring these four Asian countries along with Taiwan and Turkey to halt their Iranian crude purchases. They are not, however, meant to increase their imports above the average levels before the deal was stuck, which would mean combined sales of around 1m b/d over the course of the six-month interim deal, so sales may have to fall back. Even so, the figures offer a taste of what Iran could gain from a comprehensive nuclear deal.

Visitors to Tehran

There is certainly no lack of potential customers for Iran’s energy exports. Countless trade and diplomatic delegations have arrived in Tehran since the Geneva accord was signed, and oil and gas have been a key draw. The recent crisis over Russia’s annexation of Crimea has added a new dimension, with European governments keen to wean themselves off their reliance on Russian gas. The countries in central and south-east Europe are particularly exposed to Moscow and have been eyeing up the potential for alternative supplies from the Gulf ’s energy giants, including Iran and Qatar.

Among the most recent visitors to Tehran was Greek foreign minister Evangelos Venizelos, who was there in mid-March and, among other things, discussed energy co-operation with Zarif. Bulgarian President Rosen Plevneliev (who also recently visited Qatar) has mooted the idea of Iranian gas sales through a new pipeline being built from Azerbaijan to Greece, via Georgia and Turkey. “That might also be a game-changer because… from Turkey we might get gas from Azerbaijan, Iran or Qatar,” he told an audience at the London think tank Chatham House on 19 March.

Closer to Iran, Armenia’s minister of energy and natural resources Armen Movsisyan has said his country wants to buy 2bcm/yr of natural gas from Tehran. The two countries are due to hold talks in May to discuss this and other matters. There have also been discussions between Iran, India and Oman to develop a deep-water pipeline which could carry Iranian gas to India.

Potentially even more significant is a barter deal being discussed between Russia and Iran worth up to $20bn. According to media reports in early April, this would involve up to 500,000 b/d of Iranian crude being swapped for industrial goods and food from Russia over the course of two or three years. If such a deal went ahead, it could seriously undermine the P5+1 negotiations, or at least strengthen Tehran’s hand at the negotiating table.

Need for expertise

However, in the longer term, the health of the Iranian economy relies on having access to global markets and being able to attract investment and world-class expertise. That is particularly true for its energy industry, and Tehran has appeared increasingly impatient with the shortcomings of some of its current partners.

There have been repeated grumblings in the local media about the slow progress made by Chinese oil companies, in particular. Tehran has promised to offer more flexible contracts to international oil majors if and when they are allowed back into Iran. But, despite the interest shown – by Shell, Eni, Total and others – no long-term deals can yet be signed, for the oil industry or any other part of the economy.

“Economic activities with European companies have not yet started,” said Akbar Torkan, an aide to President Hassan Rouhani, in late March, in quotes carried by Irna. “Of course the European companies are willing for trade ties with Iran and they have maintained their relations and they continue technical talks, but the practical stage will be when they are free from US pressures.”

The promise of international investment in Iran cannot come soon enough for a country that continues to grapple with considerable economic woes. The latest stage in the subsidy reform plan is due to take effect in May, reducing cash payments to many Iranians at a time when inflation and unemployment are already high. That will give the Iranian public another reason to hope for a lasting nuclear deal.