The geopolitics of US sanctions against Iran's energy sector
Recent developments in US energy have had a direct impact on the changing outlooks of both energy-producer and consumers. Any crisis that has a direct impact on the production and supply of oil and gas, not to mention their transit to the market, is bound to shift the shape of regional and global alliances, given how critical security of supply is to every major actor in international affairs.
US exports of domestic energy still need to find a place on the market, with promises of LNG supplies only now beginning to have an impact.
Sanctions against Iran and Venezuela have provided the United States with a sizeable number of consumers in need of alternative suppliers, perfectly placing it ready to pick up the slack.
Moves towards further Saudi-Russian co-operation in boosting oil production in response to the second round of sanctions against Iran indicates the joint US-Russian-Saudi benefits that can be reaped from keeping Iran out of the market.
New sanctions against Iran's oil industry, aimed at achieving zero oil exports, are still expected to bring a major shock to the oil market nonetheless.
|New sanctions against Iran's oil industry, aimed at achieving zero oil exports, are still expected to bring a major shock to the oil market nonetheless|
The changing face of US energy relations
The Obama Administration had two major goals in its boycott of Iran which aimed to bring pressure against the country's nuclear programme. Obama hoped to reduce Iran's exports of grain and prevent the transfer of Iranian oil money through the international financial system.
The Obama Administration was the first to limit Iran's use of the Swift payment system. Later, it became clear that limiting Iran's transfer of oil money through Swift had a greater impact than sanctions on Iran's oil industry alone, as no matter how much the country managed to export in the face of sanctions, it could not receive any direct revenue.
Iran seeks to increase its political influence in the region by exchanging oil, gas and petrochemical products.
Over the course of the Obama Administration, Iran's fledgling LNG sector suddenly had the plug pulled on it with the eventual evacuation of all international energy companies from the country. Although the effect of this was devastating for Iran, a more major shift in the international energy market came with the advent of US shale gas over the same period.
In 2011, America's "blue print for secure future energy" relied significantly on increased shale production, claiming that the development of this energy source would help the United States provide its own future energy.
Before Obama's presidency, US energy security strategy had already signalled that reduced gasoline consumption and diversification of fuel types would be beneficial to the country, but had not seemed to envision a situation in which the US could become a supplier herself.
Even before the onset of Obama's sanctions, Iran lacked the means and investment to develop its energy productivity – even to meet its own domestic consumption. Most of Iran's oil wells are in the second half of their lives and their annual production capacity is slowly decimating.
|Iran seeks to increase its political influence in the region by exchanging oil, gas and petrochemical products|
Despite the window provided in the years following the Nuclear Deal in 2015, not much headway was made before the Trump Administration sought to reestablish sanctions, thereby further delaying the Iranian energy industry's ability to attain the capital and expertise it desperately seeks to make headway in production and its much-desired LNG facilities.
Also, due to the current saturation of the LNG market, partly thanks to the massive headway made by the United States, Iran has little chance of active participation even if it can magic up the funds required.
Although opposed to the nuclear deal, one of Trump's goals in imposing new sanctions on Iran is undoubtedly to provide the necessary conditions for more energy exports and help boost the US energy industry. The hunt for new markets for US LNG exports can easily be cut short by leaving consumer markets with a deficit in supplies lost by their custom with Iran.
In 2018, the United States exported more than three million barrels of oil and condensate per day. Obama could not export LNG to South Korea, but by forbidding allies trade with Iran, the US is ready to take up the mantle of LNG exports to South Korea, and will likely attempt to do so with long-standing deals.
It should be kept in mind that the chemical specifications of Iranian crude oil are different from US crude oil, however, and thus US crude oil may only serve partly as an alternative to Iranian stock.
|In 2018, the United States exported more than three million barrels of oil and condensate per day. Obama could not export LNG to South Korea, but by forbidding allies trade with Iran, the US is ready to take up the mantle of LNG exports to South Korea, and will likely attempt to do so with long-standing deals|
The stability of the world oil market is currently in the favour of the US. Any increase in the oil market will directly affect the energy security in the US. The US government has often declared its intention to reduce Iran oil export to zero to fully capitalise on this position, yet in the short term it will not be as easy as hoped.
Iran's role in world oil market may decrease, but Iran will be determined to maintain its share in regional market at least. Iran needs to play active energy diplomacy if it means to ensure this as current forecasts suggest a 50 percent decrease in sales since the period following the nuclear deal.
For a better understanding geopolitics of US sanctions against Iran energy sector one must also look to the outlooks of other major energy producers, Russia and Saudi Arabia, as a counterpart in the world energy market.
|Iran needs to play active energy diplomacy if it means to ensure this as current forecasts suggest a 50% decrease in sales since the period following the nuclear deal|
Russian double play
Russia, as one of the largest producer of gas and gas in the world and thus a beneficiary of Iranian sanctions, has, nonetheless invested in the Iranian fields as recently as 2017, specifically the Aban and Far Aban fields with the help of Zarobzhanga.
The purpose of the contract was to increase the production and Russian companies have pledged to invest $50 billion in oil and gas fields. This move is purely a diplomatic gesture, as Russia invests in fields that do not threaten its share of production.
China is one of Iran's main clients in terms of oil. In 2017, China imported around 780,000 barrels per day from Iran daily. The growing Chinese economy relies on reliable sources and Chinese companies have enjoyed a major presence in Iran's energy sector in line with its strategic interests.
Given the importance of energy security for China's economy and foreign policy, the country will tend to continue to import oil from Iran, but this does not been it will not seek other alternatives so as not to antagonise the United States.
Chinese energy firms have agreed to stay in Iran despite sanctions, taking over from Total, who have abandoned intentions to develop Phase 11 of the South Pars Field.
China firms have, however, been known to delay projects to no end in Iran, whilst moving considerably more proactively on neighbouring projects. Also, it is questionable as to how financially and technologically capable Chinese firms are in aiding Iran.
In recent years, China has made it possible for Iran to give its oil and gas to China in exchange for yuan to help channel
away from the US-sanctioned SWIFT system.
|In recent years, China has made it possible for Iran to give its oil and gas to China in exchange for yuan to help channel away from the US-sanctioned SWIFT system|
The EU bind
The EU's energy security has been of fundamental importance over the last decade. The United States, as an ally of the union, has always supported the policy of diversification on the continent to reduce its dependence on Russian energy sources.
On average, European countries imported 500,000 barrels of gas a day from Iran before the Obama administration's sanctions. And despite EU enthusiasm for the nuclear deal as a means of pathing the way for further diversification, companies have once more been excluded for seizing the opportunity diplomatic ties allow for.
The European Union has faced difficulties in finding a member state that is willing to host a new financial channel to protect trade with Iran against US sanctions and may have to settle for merely helping Iran to continue to sell oil indirectly.
India is the second largest oil customer of Iranian resources and has continued to import oil from Iran. Between April and August, India imported 658,000 barrels of oil per day from Iran.
In September, India shipped 528,000 barrels of crude per day, thus showing the result of US pressure despite a limited exemption offered by the US. In addition to importing oil from Iran, India is also interested in participating in Iran's oil and gas projects.
India is interested in investing in the Farzad Field, and, in 2017, offered $11 billion in investment, one of the best offers given to Iran in recent years, despite lack of progress due to international factors.
|Between April and August, India imported 658,000 barrels of oil per day from Iran|
Saudi Arabia has an active diplomacy in the Indian energy market too, and will use its investment capacity to influence India's foreign policy to reduce reliance on Iran.
By early 2018, Saudi Arabia had 50 percent of shares worth up to $44 billion in refineries and the capacity to refine 60 million tons of crude oil. India imports oil from the United States too, with imports averaging to 228,000 barrels per day in June, compared to 98,000 per day in September 2017.
The United States is trying to reduce India's share of Iran by exporting oil to the South Asian country. The US energy minister said American oil exports to India will increase in the future. The two countries also signed a 20-year contract for US LNG exports to India to increase US oil and LNG share in India's energy basket and sustainability.
Sanctions will reduce Iran's oil exports to India inevitably, despite Iran's offer of discounts and to deliver using Iranian tankers, thereby lowering oil tankers insurance costs for India. This is likely to help maintain Iran's share in the Indian market in the mid-term.
Economic and political benefits for the US
The shale gas revolution has transformed the United States into an oil, natural gas and LNG exporter. The flaring gas has turned not only into the American economic prosperity, but also as an effective tool in US foreign policy.
In the short term, the United States will not need to import oil from the Middle East while increasing its oil exports. Shale oil production in the mid-term has led to a serious excess of supplies.
Sanctions against Iran, matched in intensity with diplomatic moves to divert the custom of client states, simultaneously has a devastating impact in terms of leveraging US economic might over Iran.
Sanctions against Iran's energy industry have not only reduced Iran's oil and gas production capacity, but also reduced Iran's share of the global energy market.
The rising lack of investment in the Iranian oil and gas industry is one particularly immediate result of the renewed sanctions.
|Sanctions are one political instrument which will help the US to gain an immediately higher share of the world energy market and more economic and political benefits|
In fact, Iran must now choose between its short-term and long-term interests: either the price of oil will go up so that foreign exchange earnings remain untapped or encourage other sellers to increase production and lower prices, so that US crude oil does not replace fossil fuels.
OPEC member states may prefer to maintain market stability. The strategic purpose of the Iranian oil and gas industry in the next two decades can be summed up as to "gain a greater share of global energy demand".
This means maximising the benefits of international energy markets and increasing other countries' dependency on Iranian oil and finding a strategic position for Iran in the global energy market. Maximising oil income requires the adoption of coordinated measures, increasing export volume and stability, or increasing the price of oil.
Under sanctions, Iran has little chance of earning capital and foreign technology, to the detriment of its share in the energy market, not to mention the shape of its economy in general.
Energy will continue to play an important role in US foreign policy, with implications not only on relations with designated rivals but also allies across the world. Sanctions are one political instrument which will help the US to gain an immediately higher share of the world energy market and more economic and political benefits.
Sanctions against major oil and gas producers would help the US to export more energy. Iran, for its part, needs to engage in more active energy diplomacy and adapt its foreign policy in the region if it hopes to mitigate the effects of US sanctions against its energy sector.
Omid Shokri Kalehsar is a Washington-based senior energy security analyst.
His primary research interests are in the field of energy diplomacy, US energy policy, the geopolitics of energy, Iran-Russia relations and Iran-Turkey relations.
Follow him on Twitter: @ushukrik