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Opportunities will come if Iranian nuclear deal is reached

The possibility of an Iranian nuclear deal looms over the Gulf’s Arab states. It needn’t be feared, writes Robin Mills

Along most of the Arabian side of the Gulf, the desert slopes gently to the waters, ending in beach and marshes. On the Iranian side, the Zagros Mountains tower imposingly a short distance inland – barrier, sentinel, inescapable presence. In the same way, Iran, sundered from its Arab neighbours and yet linked to them, looms over both the region’s politics and its oil industry.

Prospects for a deal between the P5+1 negotiating group and Iran over Tehran’s nuclear programme remain uncertain. After two previous extensions, the two sides are working towards an outline deal by 31 March, which would then lead to a fully termed agreement by 30 June. This would impose restrictions on Iran’s nuclear programme, in particular its uranium enrichment, in return for a progressive lifting of the various UN, EU and US sanctions.

The P5+1 comprises the five permanent UN Security Council members plus Germany, but the US is the key player. The Gulf states are not directly represented, but have made their positions abundantly clear to the US, mostly in private.

They, and in particular Saudi Arabia and the United Arab Emirates (UAE), are worried about Iran’s growing regional clout. This includes its strong influence within Iraq, particularly over the Shiite militias, one of the most effective fighting forces against the Islamic State (IS), but also accused of war crimes. They are also angry at the persistent Iranian support for Bashar al-Assad in the Syrian civil war, directly and via Lebanese proxy Hezbollah. Most recently, the collapse of the shaky Yemeni government and the takeover of the capital Sanaa by the allegedly Iran-backed Houthis, a Shiite group (though a different sect from Iran’s Twelver Shiism) has raised Saudi fears of a threat on their southern border.

Of course, this growing power is partly illusory. Iran’s regional soft power is in ruins outside its ideological allies; its sanctioned economy offers little attraction; Syria, once a useful ally, has become a ruined battleground that sucks in Iranian resources; and groups such as the Houthis are motivated by domestic grievances.

Two pillars

Nevertheless, the Obama administration is widely seen in the Gulf as weak and indecisive. There is a fear of abandonment to a kind of Iranian hegemony, of the sort that prevailed during the 1970s under the Shah – the “two pillars” policy of Gulf security, with Saudi Arabia very much the junior pillar. The chances of a successful nuclear accord are still no better than evens, but the Obama administration needs a big foreign policy win, while President Rouhani’s economic and political programme in Iran cannot move ahead while stringent sanctions remain.

The Gulf states may lobby against a deal, but there is little they can do to prevent it – lacking both the clout in Washington and other tangible threats they could deploy in the Gulf itself. Despite a more muscular foreign policy recently, and their success in making a renewed ally of Egypt under president Abdel Fattah el-Sisi, they still depend on US protection, and are still internally divided. The rift with Qatar has not been fully healed, while Oman has been ready to pursue a more accommodating policy with Tehran.

The Gulf would, however reluctantly, fall in line and make accommodation with Tehran. Hostility is not pre-ordained: relations have been better, as during the 1990s, with then-president Hashemi Rafsanjani visiting Saudi crown prince Abdullah in 1997, and Rafsanjani has again been involved in recent outreach.

At a time of low oil prices, Iran’s return to the market would be a major challenge to its Gulf neighbours. December 2014 production was around 2.77 million barrels a day (b/d), compared with 3.58m b/d during 2011.

Iran’s oil industry has suffered during the intervening three years from under-investment and natural declines. But it could probably return within a few months to around 3.4m b/d, which with condensate could add 1m b/d to the market. Given that Saudi Arabia and the UAE have made it clear they have no intention of cutting production, as that would result in another sharp drop in prices.

Threatened even more than Saudi Arabia, the UAE or Kuwait by a lengthy period of cheap oil would be Oman and Bahrain. Under yet more stress would be Opec countries outside the region, such as Venezuela and Nigeria, as well as non-Opec Russia, which have higher production costs, substantial budget deficits, weaker economies and little in the way of sovereign reserves.

Iran’s ally Iraq would also face a yet more severe financial challenge, at a time when its new government is coming to terms with the legacy of corruption and financial mismanagement, bearing the expensive burden of fighting IS, and struggling to pay the agreed budget share to its Kurdish region. Iraq and Iran thus find themselves oddly in competition for markets, even though they are political allies and aligned on policy within Opec.

In a way, a possible revival of Iranian oil just represents a return to the status quo of the early 2000s, when the country’s production grew significantly with foreign investment at a time of moderate prices. After that, mismanagement in the Ahmadinejad era, and then sanctions, severely restricted exports. From the Iranian point of view they, like the Iraqis, are simply reclaiming their rightful market share.

Beyond the short-term, Iran will seek to attract foreign investment under a new petroleum contract, still under development. Increasing production beyond pre-sanctions levels will require development of new, large fields, such as Azadegan and Yadavaran, as well as other fields of moderate size in the Iranian context. Similarly, in gas Iran will seek to complete the 24 phases of South Pars, the world’s largest gasfield, which it shares with Qatar. It has to meet fast-growing domestic demand, but if this is satisfied, it could become a significant exporter. So, there are both dangers and opportunities for Iran’s Gulf neighbours. With the exception of Qatar, they are all short of gas due to soaring domestic consumption, and have all discussed gas imports from Iran. Iran signed a preliminary gas import deal with Oman in March 2014 – though, as with most Iranian gas export details, it omitted one crucial detail, the price.

Investors both government and private from the Gulf would also be intensely interested in investing in and trading with Iran, not just in the energy sector, building on long-standing family, historical and business links. Such ties offer the most promising way of normalising Iran’s relations with its neighbours, diversifying the economies of both, and creating some mutual dependence. If that can be achieved, a diplomatically rehabilitated Iran may not loom so threateningly over the Gulf.

Robin Mills is head of consulting at Manaar Energy and author of The Myth of the Oil Crisis

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