Iran Regaining Oil Power Through Active Diplomacy – Analysis

By Mohammad Khajouei*

Following a short period of stagnation, Iran’s oil and gas industry has come to life again and is rapidly moving toward reviving its golden days. During the latest meeting of oil ministers of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna on November 30, Iran was not only excluded from implementing the organization’s decision to cut oil output, but was also allowed to continue crude production at the highest level that it has experienced during the past 16 years. However, restoring Iran’s oil power has not been achieved easily and has been the result of a continued and calculated effort.

When President Hassan Rouhani came to office as Iran’s chief executive in August 2013, the Iranian oil and gas industry, was suffering from paralyzing conditions. The biggest industry of Iran had practically run aground as a result of weak management as well as crippling sanctions. Not only Iran’s crude output had fallen, but the country was also facing sales restrictions and problems for foreign exchange transfer when it came to selling even the same small amount of oil, which was produced at that time.

Putting in charge an experienced person like Bijan Zangeneh as the new oil minister, was the first step that the administration of President Rouhani took to revive Iran’s oil power, because there was no more time for trial and error and experience should have had the first say.

The first and foremost problem facing Iran’s energy industry was the existence of sanctions. Therefore, in order to do away with those sanctions, nuclear talks between Iran and the P5+1 group of countries started the same year and reached their final result following two years of intensive diplomatic efforts.

Since June 2014, however, and in the heat of nuclear negotiations, global oil prices took a nosedive at a high pace. The reason behind the global oil price fall was a policy of increased production, which at that time was supported by such heavyweight producers like Saudi Arabia, which is the world’s biggest crude producer. Of course, supporters of that policy claimed that its main goal was to undercut such oil rivals as the shale oil, which was produced by the United States, but Iran strongly opposed that policy and described it as a “plot.” Finally, that policy led to an unprecedented reduction in oil prices and various oil producing countries, including Saudi Arabia, saw themselves face to face with severe budget deficits.

The final conclusion of Iran’s nuclear deal and subsequent dismantling of nuclear-related sanctions, gave new breathing space to Iran’s economy, including its most important sector, that is, oil and gas. Professional and efficient managers at Iran’s Ministry of Petroleum took advantage of this opportunity and the country’s oil output has continued to rise since that time. As a result, during the first month after removal of sanctions alone, Iran’s crude oil exports exceeded 400,000 barrels per day. According to global figures, the country is currently producing close to four million barrels per day of crude oil.

On the other hand, unveiling the new format of Iran’s oil and gas contracts, which is generally known as Iran Petroleum Contract (IPC) and is aimed at attracting foreign investment to the sector, has been an important step taken to further reinvigorate Iran’s oil and gas industry. In the most recent case, French oil giant, Total, joined hands with its Chinese and Iranian partners to develop one of the phases of the South Pars gas field.

However, under conditions when Iran saw the way paved for increasing its oil output, the country faced a new challenge due to a change in the viewpoints of countries, which had supported output rise in past years, after they came up with an “oil freeze” plan, which they claimed aimed to push up the oil price in international markets. However, Iran’s oil diplomacy managed to overcome this impediment at that juncture. On the one hand, Iran indicated its conditional support for the oil freeze policy, while, on the other hand, announced that the cost of this policy should be undertaken by countries, which once supported oil output hike, not Iran, which only sought to raise its oil production to the level it had before sanctions were imposed on the country’s energy sector.

Iran’s insistence on increasing its oil output to the pre-sanctions level was faced with Saudi Arabia’s opposition, but after about eight months of consultations, the member states of OPEC had to announce the launch of their oil freeze policy during their 171st meeting after excluding Iran from that policy. It has been said that consultations between presidents of Iran and Russia and subsequent convincement of Saudi officials by Russians have been effective in paving the way for the recent agreement among OPEC members. Many analysts have described the recent OPEC agreement as the “oil JCPOA [in reference to Iran’s successful nuclear deal, which is also known as the Joint Comprehensive Plan of Action (JCPOA)] and a “win-win” deal.

Now, the world’s biggest oil producers have reached a decision to keep their output at 32.5 million barrels per day from the beginning of 2017, which means they have slashed OPEC’s overall production by 1.2 million barrels per day.

OPEC’s recent decision will not only boost the oil price, but will also improve the organization’s international standing. During recent years, OPEC’s role in regulating the oil market had been greatly downplayed and the organization was in some sort of isolation. This point is very important as it shows that while having their own rivalries and even despite severe political differences, member states of OPEC can still cooperate and interact with one another.

In the light of suitable technical plans and active diplomacy, Iran’s oil industry has experienced a new spurt. During the five months that preceded Rouhani’s election and by August 2013, Iran’s crude oil production stood at 2.7 million barrels per day, but the figure has currently reached about four million barrels per day. In other words, Iran’s oil production has almost doubled.

As put by Zangeneh, according to Iran’s Sixth Five-Year Economic Development Plan, the country’s oil industry needs about 200 billion dollars in investment up to 2021, 134 billion dollars of which is to be spent on oil and gas projects. In the meantime, in order to develop 49 oil and gas fields, Iran is getting ready to launch a tender bid. The country’s petrochemical and refinery industries will also need 52 billion dollars and 15 billion dollars in investment, respectively, over the next five years. Tehran is planning to double the capacity of its petrochemical industry during the same period as well. All these facts prove beyond any doubt that Iran has regained its oil power.

* Mohammad Khajouei
Senior Middle East Analyst