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Chronicle of the Middle East and North Africa

Iran Mulls Increased Energy Exports Amid Nuclear Talks

Iran Mulls Energy Exports
An Iranian man works at phase 19 of the South Pars gas field facilities. BEHROUZ MEHRI / AFP

Ali Noureddine

This article was translated from Arabic

Iran recently declared the discovery of a more than 1 trillion cubic meter natural gas deposit to the north of the “South Pars” field, with Iranian specialists speculating on the likelihood of a greater reservoir in the same area. This newly discovered resource will be added to the country’s vast natural gas reserves, which exceed upwards of 34 trillion cubic meters.

These reserves account for approximately 17.8 percent of worldwide gas reserves, placing Iran second only to Russia. Furthermore, Iran has a high potential for fresh gas finds in locations that have yet to be explored, such as the Caspian Sea, north-eastern Iran, central Kafir, and areas near the Strait of Hormuz.

The discoveries will increase Iran’s gas reserves in the future if significant commercial advances occur there, which Iran is banking on now to strengthen its economy.

Iran also possesses significant oil reserves, estimated at 158 billion barrels, accounting for around 9% of total crude oil reserves, placing Iran fourth globally behind Venezuela, Saudi Arabia, and Canada.

Given the availability of enormous areas that have yet to be explored for oil and gas, these reserves are therefore expected to increase as are natural gas reserves.

However, Iran’s potential in this sector extends beyond deposits and potential oil and gas reservoirs to encompass the country’s strategic position. The Islamic Republic is located at the crossroads of a significant cluster of economic and demographic oil and gas importing blocs, which may allow it to sell these commodities at a reasonable cost.

Furthermore, Iranian authorities have historically tried to play a central role in terms of energy supplies in the region in an attempt to exploit the country’s geographical location and gain a strategic role in oil and gas trade.

Bolstering Iran’s negotiating power

The main potential given to Iran by the newly discovered gas reserves are tied to current international developments, particularly those relating to the Ukraine war. Possession of enormous gas reserves, particularly newly discovered resources, provides Iran with greater negotiating leverage with Europe following the reduction of Russian energy exports to the continent, given the latter’s rising concerns of energy shortages.

Furthermore, whether or not they are cut off from Russian gas, European nations are actively seeking alternative natural gas suppliers to diversify their energy resources and minimize their reliance on Russia, emphasizing the strategic importance of Iranian gas. Additionally, these finds have taken on greater significance in terms of future revenues due to the spike in gas prices as a result of the Ukraine war and strong demand, with natural gas prices reaching $2.35 per thousand cubic meters for the first time since last March.

In view of the current pressing need for this commodity, the Iranian government may thus use its vast gas reserves, to which additional finds have been added, to pursue a bigger and stronger international political role. More crucially, the worldwide surge in gas prices will allow the Iranian government to develop multiple gas reserves that were previously inactive owing to high extraction costs, as strong profits from gas sales make investment in these areas more feasible. As a result, increased gas prices will not only allow the country to enhance its yearly output, but also to increase future investment in this sector.

The chances presented by the Ukraine war to Iran are not limited to natural gas deposits, but also to the recent spike in oil prices, which now surpasses $100 per barrel after the average price of a barrel of Brent crude oil was restricted to $70.68 last year, and to $41.96 in 2020. As a result of the significant rise in global oil prices, Iran may raise its oil earnings while also seizing opportunities to invest in sectors that it has not yet exploited.

As large industrialized nations demand that OPEC+ countries raise their oil output, Iran’s bargaining strength against these countries grows, as does that of its OPEC+ oil-producing partners such as Saudi Arabia and Russia. It should be noted that the United States, in particular, has been spearheading a large-scale worldwide push since last year to urge OPEC+ nations to raise oil production in an attempt to contain the rise in oil prices, which has been inching up since last year.

The significance of recent developments for Iran

At this point, Iran desperately needs all of these game cards, whether in terms of increasing profits from rising gas and oil prices or in terms of enhancing its political position and negotiation clout as a result of the Ukraine war’s implications.

Given the country’s numerous economic issues, Iran appears to be particularly interested in raising profits from gas and oil exports. The inflation issue, which has resulted in price increases of up to 150% for food staples, is at the forefront of these difficulties.

This inflation was caused by the Iranian toman’s value falling to unprecedented lows due to a drop in hard currency availability, as well as decreasing government assistance for basic goods.

Iran may need to stabilize its currency’s exchange rate in order to satisfy its inhabitants’ pressing demands. As a consequence, Iran may employ cash flows created by increased oil and gas export revenues to boost its revenue. It should be highlighted that Iran primarily gives direct financial assistance to the most vulnerable families and that the country’s revenue needs to be increased.

At the same time, Iran continues to provide financial and military support to a wide range of paramilitary groups, including financial and logistical support to the Popular Mobilization Forces in Iraq, despite the collapse of ISIS and the reduced threat posed by the group; Yemen, where Iran continues to send military equipment and financial support to Houthi forces, who are waging a fierce war against Saudi Arabia and local authorities backed by Riyadh; Lebanon‘s Hezbollah as well as pro-Assad regime non-state actors in Syria.

With the rise of Iran’s military activities and interventions in the region, in addition to the expansion of the security tasks performed by the Islamic Revolutionary Guard Corps, the IRGC’s hard currency requirements are increasing. These requirements are often met by earnings from the sale of oil and gas, with the IRGC, which is involved in all of these regional wars, playing a vital role in marketing and selling substantial portions of Iranian oil and gas.

Missed opportunities and potential: Mismanagement and penalties

Despite all of the prospects presented by new discoveries and vast natural gas and oil reserves, Iran faces severe challenges that prohibit it from reaping the benefits of these resources. In reality, despite possessing all of these riches, Iran now runs the possibility of becoming a gas importer rather than profiting from the revenues of the resource’s export.

This was the risk that Iranian Oil Minister Javad Oji warned of last November when he lambasted his country’s inability to make critical investments in the oil and gas industries. Oji cautioned that the government may be forced to purchase these resources within a few years due to poor rates of oil and gas production, processing, and refining due to failing equipment and infrastructure in the industry.

Iran has failed to allocate the required cash to maintain existing oil and gas refineries and infrastructure, dig new wells, develop current fields, and increase exploratory operations in recent years due to mismanagement and enforced sanctions.

According to the Iranian Oil Ministry’s own calculations, Iran need $80 billion to address this sector’s investment demands and compensate for prior years’ shortfalls. These procedures are required to sustain current production rates, while also using existing facilities and equipment and depleting certain aging wells.

The primary reason for this dilemma, according to the oil minister, is the government’s inability to expand the sector owing to its concentration on public expenditure to cope with domestic economic difficulties and the use of oil and gas profits to support the IRGC’s regional activities.

The second factor is the sanctions-related embargo on Iranian oil and gas, which reduced Iran’s earnings from the sale of these resources and hampered its capacity to invest in the sector’s infrastructure. According to Hamid Hosseini, the head of the Iranian Oil, Gas, and Petrochemical Exports Syndicate, Iran’s annual losses in the oil and gas sector as a result of sanctions total to $62 billion.

According to Hosseini, as a result of the sanctions, Iran was forced to market its gasoline at discounts ranging from 10% to 12%. The nation experienced up to $10 billion to $15 billion in losses as a result of the greater transportation costs associated with sanctions evasion.

Alternative solutions

Iran is looking for alternatives to guarantee the necessary investments in the oil and gas industry, as well as to capitalize on international conditions that would allow it to exploit its assets to expand its profits and political influence.

As a consequence, the country has signed a $40 billion agreement with the Russian corporation “Gazprom” to develop a large group of oil and gas reserves and transfer industry technologies. The deal also calls for Gazprom to construct and maintain a number of gas pipelines, as well as exchange oil derivatives required by Iran, in addition to carrying out a number of other vital projects.

All components of the deal centre on allowing Gazprom the right to invest in and benefit from select Iranian fields in exchange for paying a portion of the investment returns to Iran. Furthermore, Gazprom has promised to complete various petroleum projects for Iran, such as pipeline construction, allowing the nation to expand and invest in the industry without incurring costs. Simultaneously, Gazprom bears responsibility for exporting a major portion of Iran’s oil and gas derivatives to global markets, relieving Iran of the need to find markets, offer discounts, or suffer losses on the value of the produced gas and oil.

Iran is banking on such projects and enterprises as part of its ongoing efforts in Vienna to reach a final settlement on the nuclear deal. If a definitive agreement is reached on this matter, Tehran will be able to re-enter the world oil and gas markets with pace and power after US sanctions are lifted. In such a situation, Europe might rely on Iranian liquefied gas and possibly connect the Iranian pipeline network to those that reach Europe to secure a portion of the continent’s gas needs and diversify its energy sources.

This would allow Total, a French multinational, to return to the Iranian market and fully develop these fields. If the nuclear agreement is struck and sanctions against Iran are dropped, Tehran will be able to benefit financially from the circumstances caused by the Ukraine war, as well as in terms of economic links with European Union members.

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