Vienna deal brings Iran’s oil back to market
The clinching of the Iran nuclear deal in Vienna paves the way for the Islamic Republic’s re-emergence into the global oil market – if it gets past its opponents
The deal itself freezes Iran’s nuclear activity for 10 years, in exchange for a gradual unwinding of sanctions. This involves an intrusive inspection regime that the deal’s many critics – from Israel through to the Arab Gulf states and President Obama’s Republican opponents – believe will ultimately fail to halt Iran’s clandestine nuclear programme in its tracks.
Tehran stands to gain access to a bounty worth tens of billions of dollars in frozen bank accounts, as well as a flood of foreign investment as international oil companies in particular target a large, wealthy and untapped economy.
That is alongside the benefits accrued from lifting the sanctions targeted at Iran’s crude exports and the prohibition of Western investment in the country’s hydrocarbons – though US companies must still abide by a separate sanctions regime unrelated to the nuclear issue and the terms of the buy-back contracts still need sweetening.
Some of Iran’s long-term crude customers have been lost in the sanctions years, and will be hard to win back without hefty discounts. Iran is likely to be disappointed in its ambition to pump an additional 1m barrels/day (b/d) within six months of the signing of the deal. Barclays estimates that Iranian oil exports will rise by only 200,000 b/d by the final quarter of 2015, with a further 400,000 b/d by end-2016.
Even so, the nuclear agreement remains controversial. It is unlikely to curb Iran’s regional ambitions and could worsen tensions in the Middle East, warns Torbjorn Sotlvedt, an analyst at risk consultancy Verisk Maplecroft. The decision to isolate Iran’s regional posture from the nuclear issue continues to cause concern in Saudi Arabia and Israel.
The agreement will face its stiffest opposition in the US Senate. Under the terms of the Iran Nuclear Agreement Review Act passed in May, the deal is now subject to a 60-day congressional review period in a Republican-dominated Senate.
But as Maplecroft notes, by opting not to treat the agreement with Iran as a formal treaty – which would have required a two-thirds majority in the Senate for approval – President Obama has ensured that the agreement cannot easily be overturned.
In any case, the nuclear deal contains some useful devices to reassure sceptics. Says Jim Krane, an energy research fellow at Rice University's Baker Institute in Houston, the Iran deal contains a "snapback" provision that allows the parties to quickly reimpose sanctions, in the event of Iranian violations.
“The snapback terms provide Iran with excellent incentive to stick closely to the terms of the deal, because the penalty for straying amounts to serious economic damage. In short, Iran cannot regain its share of the oil market unless it abides by the terms of the nuclear deal,” says Krane.
While this could reassure the international community, the snapback terms will make the majors cautious. “Before betting heavily on Iranian oil and gas, companies will want to verify for themselves whether Iran will comply with the intrusive nuclear inspections. If they invest and Iran comes under sanctions again, they risk serious losses,” says Krane.