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Possible Iranian nuclear deal with US on the horizon

Problems still stand in the way, but the mood has shifted

The US and Iran are talking again. A deal on the nuclear file looks possible. Many obstacles stand in the way, including the opposition of Israel’s government, Iran’s enemies in the Gulf, and a multi-dimensional oil embargo that could prove hideously complex to unravel. But the diplomatic overtures from Iran have changed the dynamic. The US and its allies must seize the opportunity.

Three decades of mistrust between the West and Iran have left some commentators understandably sceptical that a negotiated settlement is likely. American neo-cons are appalled at President Barack Obama’s naivety. “Catnip for the gullible”, was how John Bolton, a senior Bush-era US diplomat described Rohani’s soothing words to the UN in New York in September. Benjamin Netanyahu, the Israeli prime minister who sees the quest to stop Iran getting the bomb as a career mission, said Rohani was a “wolf in sheep’s clothing”, who “thinks he can pull the wool over the eyes of the international community”. Iran still wants to build a nuclear weapon, he said, and Israel would “stand alone” to prevent it doing so.

Oil prices, still high enough to act as a headwind to the world’s economy, do not yet reflect the optimism, either. But they should. Many close Iran watchers say this time the deal is real. “Stars have never been better aligned” to end the decades-old standoff between the US and Iran, says Trita Parsi, head of the National Iranian American Council. Rohani and his foreign minister, Mohammed Javad Zarif, have long espoused more serious negotiations with the West and were involved in the 2003 offer to the US, which the Bush administration foolishly swatted aside. Crucially, Rohani is believed to have the backing of Supreme Leader Ayatollah Khamenei. Even the Revolutionary Guards have been muted in their appraisal. Notwithstanding the tossed shoe that greeted Rohani on his return to Tehran from New York, several prominent clerics have praised his diplomacy, including a phone call with Obama, as a victory for the Islamic state.

Why has the mood shifted?

The sanctions on Iran have bitten hard, wiping at least 1 million barrels a day (b/d) from Iranian oil production, decimating the value of its currency, and forcing widespread economic misery on citizens. Iran’s leaders are acknowledging the pain. The economic pressures have been a “key factor in Iran’s change in attitude”, says Sara Bazoobandi, a Chatham House analyst.

The rough shape of a deal is on the table, too, involving limited enrichment, onerous inspections of Iranian nuclear facilities from the International Atomic Energy Agency and, in exchange, the lifting of nuclear-related sanctions.

The implications for global energy markets are profound. Iranian production, now just 2.7m b/d, is a travesty for a country sitting on 150 billion barrels in reserves. A swift deal to end the sanctions and allow Western investment would transform the country’s output prospects, richly rewarding global oil consumers and the country, too. The International Energy Agency forecasts that neighbouring Iraq, riven by sectarian conflict, will double production to 6m b/d by 2020. Iran’s upstream holds at least as much promise. Its stagnant natural gas sector, sitting on the world’s second biggest reserves, would offer Europe and other importers a new source of supply.    

None of this would happen quickly. Lacking investment and technology, production was already declining, points out Barclays, a bank. Iran’s initial response to the embargo on its oil exports was to divert some production into floating storage. When it exhausted that capacity, it began shutting wells. Any swift restart of fields, Barclays says, would need natural gas-injection, pushing up the fuel’s demand beyond its output capacity, slowing the resumption of shut-in oil output. So the price impact of sanctions relief that allowed Iranian oil back onto the market would be considerable, but measured in years not months.

In any case, there are several obstacles that could yet derail the whole thing. The sheer breadth and intricacy of the sanctions means they will be difficult to unravel quickly, say some lawyers. The International Crisis Group says trading and consumption patterns established because of the embargo could also last beyond its end. So Iran will struggle to recover some of its market share. That will be especially evident in oil, given how some rival Opec members, such as Saudi Arabia, have stepped in to replace Iranian supplies. Would the kingdom surrender that business once its regional enemy returns to the market?

Some of the sanctions, such as the European and Swift-banking measures, could be removed relatively easily. But Congress has been behind many of the US sanctions. It will be a much more reluctant party to any deal brokered by the White House, which has only limited sanctions-relief at its disposal. Concessions from Iran, in other words, may not be easily and quickly matched by the US. 

Beyond Israel, Iran’s other foes in the Middle East will also resist a deal. As Toby Matthiesen, a Cambridge University academic, argues the Gulf states have invested much energy in their narrative of a sectarian region and the Shia bogeyman across the sea. The notion, however fanciful at the moment, that the US and Iran might resume their pre-1979 alliance, with international companies returning to one of the world’s most promising upstream plays, is anathema to them. Saudi Arabia will be as enthusiastic about the rapprochement as Israel.

But these are obstacles Iran and the West must overcome. To preserve the regime, Iran needs to end its isolation. For Western countries a deal could be equally rewarding. Removing the oil-price premium associated with the embargo on Iran and the nagging threat of conflict would be as good for the West’s consumers as sanctions relief would be for Iran’s. It would make the possibility of progress on other Mideast problems - Iraq and Palestine, for example - more plausible. It would be good for intrenational oil companies, whose technology and capital is craved in Iran, too. The US Congress, Israel, and the Gulf may find it hard to swallow a deal with Iran. But the alternative, a nuclear arms race in the world’s most important oil-producing region, is far worse.

Rohani, Iran and Obama deserve credit for the breakthrough. Let it be the beginning of the end of the impasse and the start of a new era in Iran’s oil sector.

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