Alleged Military Initiatives in Iran may Impact Oil Prices Further

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How Iran-US escalation may impact oil market?

By Omid Shokri Kalehsar for Trend:

Iran, in the post-sanctions era, was expected to attract more foreign capital and technology, especially in energy sector.

Prior to the imposition of sanctions, Iranian officials had, on many occasions, stressed that Iran needs about $200 billion to recover and potentially increase its oil and gas production capacity. Iran has devised a new oil contract entitled Iran Petroleum Contract (IPC) aiming to ease foreign investment in its oil fields.

The majority of oil fields are in the second half of their production and their production capacity is dropping annually to average 8 percent. This is while any attempt at recovering oil fields production capacity requires high technology and foreign investments.

By April 2020, Iran succeeded in signing only two contracts with foreign energy firms to recover and increase its oil and gas production capacity.

One contract was signed with France’s Total and China’s CNP for the development of the 11th phase of South Pars. The other one was signed with the Russian company Zarubezhneft for the re-development of the Aban and Paydare Qarb oil fields.

Iran is also planning to sign agreements with Indonesia’s state-owned Pertamina for Mansouri oil field development. Pertamina is interested in making investments in this field in a bid to produce 60,000 bpd and eyes for possible exports to Indonesia.

For that matter, it is safe to argue that Iran’s priority is to attract foreign technology and capital for development of its oil and gas fields.

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However, if the Trump administration decides to withdraw from Iran nuclear deal (JCPOA), Iran will encounter significant challenges in order to attract investments.

Further, if the US decides to impose new or further sanctions on Iran, it is likely that foreign energy firms, whose capital and investments are currently in the US or have mutual projects with American private and federal companies, would shy away from making investments in Iran’s economic and energy sectors.

In 2020 Iran lost its oil market share in Asia to Saudi Arabia, US and Russia in spite of gaining higher share in the EU market. Obtaining higher share in the EU market helps Iran to benefit from “Oil for Investment/Goods” with EU companies even if further sanctions are to be imposed on the country. It already has difficulties to receive its oil revenue.

I believe that Iran is a lucrative target for many foreign private and state energy firms who have sufficient experience and hold enough capital and technology needed to be able to enter the Iranian market.

The real problem, however, is for foreign investments to be made without hindrances. Iran needs a legal framework as well as an efficient and fast decision-making process and, most importantly, political stability in both domestic and international levels.

Iran can use difference-pricing policy to preserve its share in regional and global markets. Accordingly, Iran can offer discounts to major oil costumers, as this policy was pursued during the sanctions period in which India benefited from such discounts.

During the sanctions period, Russia, Iraq and Saudi Arabia captured Iran’s share in global oil market. The quality of Iranian oil is in many respects very similar to Iraqi Kirkuk and Russia Ural crude oil.

The oil industry will be affected by the forthcoming US decisions regarding the future of Iran nuclear deal.

In the post sanctions era Iran increased its oil exports by 1,000,000 bpd. It is thus expected that Iran’s oil export would drop significantly in case of re-imposition of sanctions.

Since supply and demand is the overarching principle ruling the world’s oil market, other major suppliers hold a potential to produce more if Iran or any other country faces a decrease in its production capacity because of sanctions.

In addition, if tensions surface in relations between Iran and other OPEC or non-OPEC producers, they may exploit the situation to raise their production capacity and use it as a viable political leverage against Iran.

Alleged Military Initiatives in Iran may Impact Oil Prices Further

Issue Brief – Volume 1, Number 7, June 11, 2020

Note chart below on Russian and Chinese Equipment Subject to U.N. Sanctions

One of the most significant aspects of the latest round of UN Security Council sanctions against Iran has received the least attention – the ban on major weapons deliveries. Yet the weapons embargo is likely to have the most consequential impact of all on Iran’s national power and prestige by promising to significantly reduce Iran’s military capability in the months and years ahead.

Some initial media coverage of the P-5 agreement to sanction Iran did not even mention the resolution’s embargo on the transfers of heavy weapons, their spare parts, and related training and maintenance assistance.[1] The overall verdict of pundits and press commentators on the June 9 sanctions resolution has been largely negative, with most of the public discussion focused on efforts by Russia and China to “water down” provisions favored by the United States[2] and the ultimate absence of stringent measures to target Iran’s energy sector.

Yet the Russians and Chinese, along with ten other members of the UN Security Council, voted to subject Iran, for the first time, to an embargo on creating and maintaining the most import sinews of military strength. UN Security Council Resolution 1929 directs all states to “. prevent the direct or indirect supply, sale or transfer to Iran. of any battle tanks, armoured combat vehicles, large caliber artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems. or related materiel” and “shall prevent the provision to Iran. of technical training, financial resources or services, advice, other services or assistance related to the supply, sale, transfer, provision, manufacture, maintenance or use of such arms and related materiel. “[3]

This prohibition affects not only the ballistic missiles, which are the presumed delivery vehicle for any future Iranian nuclear weapons, but also the submarines, aircraft and anti-ship missiles, which pose the most significant threats to the safe operation of shipping through the Persian Gulf. The embargo on tanks, artillery, and armored combat vehicles also affects directly the strike elements of any Iranian forces posing an invasion threat to Iran’s neighbors.

History Lessons
History provides a dramatic illustration of the potential impact on Iran of a weapons embargo. During the reign of the Shah, Iran’s military was largely equipped with U.S. and British weapon systems. With the seizure of the U.S. Embassy in Tehran, this relationship came to an abrupt end and the Iranian military – including the second most powerful air force in the Middle East – began rapidly to atrophy. However, in those days, the Soviet Union and China were willing to step into the breach, essentially re-equipping the military forces of the Islamic Republic.[4]

After providing significant numbers of fighter aircraft, armor, artillery, and three modern diesel submarines, Russian transfers have tapered off in recent years. Russia was active through most of the past decade in selling air defense systems and in 1998 had licensed Iranian construction of 2,000 anti-tank missiles over a ten-year period. The last direct transfer of equipment from Russia to Iran was the 2006-2007 delivery of 750 SA-15 Gauntlet short-medium range surface-air missiles and 29 more advanced SA-15s (Tor-M1s). Russia’s 2007 deal to supply the sophisticated and longer-range S-300 air defense system has not been carried out. Although exclusion of this system from mandatory sanctions has been described by critics of Resolution 1929 as a “loophole,” that resolution also “calls upon all States to exercise vigilance and restraint over . all other arms” as well.[5] There are strong indications that, accordingly, Moscow’s freeze on the S-300 transaction will continue.[6]

China was also an important supplier of tanks and artillery to Iran during the 8-year Iraq-Iran War and, in the last two decades, has been the source of ten missile-firing fast attack boats and 565 C801/802 anti-ship cruise missiles, which the U.S. Department of Defense describes as “an important layer in Iran’s defense of or denial of access to the (Persian) Gulf and Strait of Hormuz.”[7] Indeed, Iran’s potential to interfere with crucial oil shipments through the Persian Gulf is of more acute concern to the international community today than any threat of an Iranian invasion.

Iran needs Russian and Chinese Military Assistance
Today, Tehran remains principally dependent on Russia and China for manufacturing and maintaining the most sophisticated core of Iran’s arsenal for offensive military operations. It is all the more significant then, that in the latest round of negotiations on UN Security Council sanctions, Russia and China agreed to a total cutoff of these weapons for Iran – including spare parts and technical training.

Iran has been creative and energetic in mitigating the impact of past supply chain cut-offs on its front line weapons systems through black market acquisitions and shifting to the use of asymmetrical tactics. With its oil wealth, it can offer large incentives for countries and individuals to circumvent sanctions. Therefore, it will not only be important for states to abide by the arms embargo, but to also use the resolution’s own enforcement mechanisms to inspect and seize shipments suspected to be in violation of the embargo.

UN blockage of Iran’s traditional sources of weapons will be politically and economically costly for Tehran. Finding a substitute for its principal suppliers will not be easy. It will be forced to adopt compensatory measures requiring more time and more money, and probably to less effect. To be rebuffed in this way by the two countries on which Iran has relied for protection on the UN Security Council is a political as well as a military blow to the regime, raising domestic questions about the government’s competence in managing foreign affairs.

Wider Impact
Two of the world’s most pressing proliferation challenges, Iran and North Korea, are now subjected to nearly comprehensive arms embargoes and a variety of other restrictions in response to their behavior. These actions by the UN Security Council help to send a message to potential future proliferators that they can expect a similar response, and would need to weigh a risky nuclear weapons program with the degradation of their overall military capabilities. – GREG THIELMANN, with MATTHEW SUGRUE

How Iran Impacts The Price and Supply of Oil

In 2020, the United States and its allies negotiated a deal with Iran that would lift many of the economic sanctions that have been placed on the country to curb its nuclear program. Congress approved the deal, but in 2020, President Trump backed out of it and resumed economic sanctions on the Islamic Republic of Iran.

Then, on Jan. 2, 2020, U.S. forces killed a top Iranian military general with a done strike, igniting concerns about how and when Iran and its allies might retaliate. Oil prices spiked in response given Iran’s massive oil reserves and its role in the global petro-economy.

Iran’s Oil Production Capacity Has Diminished in Recent Years

In 2020, Iran accounted for only 4% of total daily oil production, producing just over four million barrels per day, according to the Energy Information Administration (EIA).

Iran, which is a member of the cartel, sits upon 13% of global oil reserves.   It produces over four million barrels per day, accounting for 4% of total global production.   However, economic sanctions by the U.S. and other countries have diminished the Republic’s exports in recent years.

World Oil Supply and Demand

According to the International Energy Agency (IEA), total production, measured in barrels of oil produced daily, is around 94.7 million barrels. That’s slightly lower than the 96.3 million barrels per day in 2020. Total global consumption is around 99 million barrels per day. Iran is the seventh largest producer if crude oil in the world.

When supply surpasses demand, the price of oil falls. When demand is higher than supply, prices rise. Each country and producer decides how much oil to produce, which is why alliances like the Organization of Petroleum Exporting Countries, or OPEC, can change the price of a barrel of oil by deciding to increase or limit production. In 2020, OPEC members and its allies, OPEC+, agreed to cut production by 500,000 barrels per day to boost prices, which had been on a downward trend since October of 2020.

Iranian Production Capacity

Due to the sanctions, Iran’s ability to produce oil has declined over time. Oil production requires expensive equipment that is slow to deploy and expensive to maintain, and the aging oil infrastructure in Iran has severely limited production capacity.

Iran is believed to have stored around 25 million barrels of oil, but that amount is not enough to flood the market and drive a steep decrease in prices. If the sanctions are lifted, production will slowly ramp up to pre-sanction levels, which by itself still will not cause a significant change in the market.

One expert estimates that it will take a full year to add 500,000 barrels per day to current production. Iran does have large oil reserves, but it will take some time to access them.

Influence on Oil Prices

When the nuclear deal with Iran was announced in 2020, oil prices fell about 2%, but the decline was only temporary. While traders initially feared that Iran could flood the market, we now know that it simply does not have the ability to do so immediately.

Geopolitical Futures

The United States has openly accused Iran of being behind the drone and cruise missile attacks on Saudi Arabia’s largest oil refinery. Now the question is what the United States will do in response.

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