Wednesday, January 26, 2011

Iran, oil, and nuclear weapons: Is there an ‘optimistic’ prospectus?

by M. Ulric Killion


Photo/Iran denies its uranium enrichment programme is aimed at developing nuclear weapons [EPA]; Turkey hosts Iran nuclear talks - Middle East - Al Jazeera English.

In terms of the geopolitics of oil and gas, and the Islamic Republic of Iran (“Iran”), OilEdge characterized what many deem the pending crisis of Iran, and borrowing from the title of its article, as “an oil giant being held back” (Review: Iran – an oil giant being held back, OilVoice, December 8, 2010). In the opening sentence or even salvo of its article, OilEdge appropriately queries: “Is Iran about to embark upon a ‘new era’ in terms of its oil industry, as Oil Minister Masoud Mir Kazemi suggests?” In response, OilEdge speculates “possibly so.”

An Iranian government facing international sanctions begs the question of the source of OilEdge’s optimism. As OilEdge similarly observed, the fourth round of the imposition of international sanctions against Iran in June 2010 also “begs the question whether the nation is starting to feel the pinch?” These questions are relevant because there is an abundance of reasons for pessimism.

The UN Security Council Sanctions

First, and as previously mentioned, in June 2010 the UN Security Council imposed a fourth round of sanctions against Iran for refusing to curtail its nuclear programme. Adding to Iran’s problems, following UN-imposed sanctions against Iran, Western allies imposed additional, unilateral sanctions targeting Iran’s energy sector.

As for the effectiveness of these international sanctions, the varying opinions seem to routinely fall along the line of Western vs. non-Western observers. For instance, according to OilEdge (OilVoice, 2010), Undersecretary of State William Burns perceives the sanctions as dearly costing the Islamic regime, which is to the tune of $60 billion in lost energy investments. In 2010, US officials generally believed that the force of the recent sanctions would drive Iran back to the negotiating table (OilVoice, 2010).


Iran's chief negotiator, Saeed Jalili, with the EU's Catherine Ashton before the nuclear talks began in Istanbul. Photo: Salih Zeki Fazlioglu/Pool/EPA; Iran nuclear talks start in Turkey | World news |

In fact, in January 2011, Iran did return to the negotiating table. On January 21-22, 2011, the United States and five other global powers began a new round of negotiations at the Ciragan Palace in Istanbul, Turkey, to discuss Tehran’s controversial nuclear program.  The United States and the five global powers comprise the so-called G5+1 group, which are, more specifically, the five permanent members of the UN Security Council including the United States, Russia, China, Britain and France, plus Germany.

During the two-day talks, the United States and its allies typically voiced concerns that Iran is enriching uranium beyond its peaceful needs and trying to build a nuclear weapon. In response, Iran typically refused to halt its program, while maintaining that its enrichment is for civil purposes only. (Steven Erlanger, Little Progress Is Seen in Iran Talks, NY Times, January 21, 2011).

In this seemingly evolving impasse, while Western diplomats hope to persuade Iran to engage in a full-swap plan that will exchange the country’s low-enriched uranium for fuel for a research reactor, analysts opine that Iran will instead focus on pushing a general discussion on global disarmament (Iran nuclear talks start in Turkey,, January 21, 2011).

Whether one will assess the two-day talks as a success or failure, however, seems also to routinely fall along the line of Western vs. non-Western observers. For example, Western observers and media sources generally perceived the talks as a failure. This is because Western media sources variously described the two-day talks and their potential in the language of “little hope” (See cf., “Six world powers open negotiations with Tehran with little hope of breakthrough”,, 2011) and “little progress” (See cf., Erlanger, 2011).

Then there is the perspective of Iran and its allies. For instance, and in contradistinction, Iran, actually, described the two-day talks and their potential in a more positive language. Notwithstanding positive amenities that associate with a much-needed general discussion on global disarmament, Iranian President Mahmoud Ahmadinejad perceived the talks and their potential as paving the way to both hope and progress.

As the Tehran Times (Iran-5+1 talks can yield agreement: Ahmadinejad, Tehran Times Political Desk, January 24, 2011) reported:

Iranian President Mahmoud Ahmadinejad has said that the future rounds of talks between Iran and the 5+1 group could yield a good agreement. He made the remarks in the northwestern city of Rasht on Sunday, in reference to the meeting between Iran and the 5+1 group (the United States, Britain, France, Russia, China, and Germany) held in Istanbul on Friday and Saturday.

Iran’s Oil Industry “Before and After” Sanctions

Secondly, there is the current state or even economic health of Iran’s oil industry. This presents questions of the current state of the oil industry after four rounds of UN-imposed sanctions and attendant unilateral sanctions of Western allies.

The history of Iran’s energy sector before the imposition of UN-sanctions is one of a struggling oil economy. In terms of the geopolitics of oil and gas, especially using oil as a weapon, as early as 2005, and perhaps even earlier, Iran has been the world’s fourth-largest oil exporter and the second-largest producer in the Organization of Petroleum Exporting Countries (OPEC) (Ulric Killion, Modern Chinese Rules of Order: Paradox of Law and Economics, 2007, Chapter 9). This is a world ranking that clearly demonstrates the potentiality of oil and gas as a weapon.

During this earlier period, however, Iran’s energy sector was far from being in good economic health, and a potential Iranian threat of using oil as a weapon would have been more bark than bite. This is because the earlier era was one of a dim energy future for Iran, and, according to analysts, a future that could potentially grow dimmer. In 2006, the projections for Iran’s oil energy were generally as follows.

According to the National Iranian Oil Company (NIOC), by 2010, Iran’s oil production could fall short of earlier planned projections, by as much as half a million barrels per day. Gholam Hossein Nozari, director of NICO, announced, “We are not close to the 5.0 million bpd target of the fourth [five-year, from 2005 to 2010] plan.” Nozari attributes Iran’s production problems to lackluster investment in aging oil fields, because “more than 80 percent of the current total oil output is being provided from aged oil fields that need serious investment to increase production.” Despite oil production estimated at about 3.9 million barrels daily, Tehran still needs additional investments in the oil industry. According to Mohsen Yahyavi, deputy chairman of the energy committee of Iran’s parliament or majles, the oil industry needs some $100 billion investment over the next two decades. Yahyavi stated, “Oil, gas, and petrochemical projects need huge investment and we will seek domestic and international investments.” In terms of the geopolitics of oil, “More than 70% of the increase in oil demand comes from developing countries (notably China and India), which see average annual demand growth of 2.5%.” Many predict that the oil supply, which a small number of Middle East producers increasingly dominate, will peak within a decade. Countries such as Iran and Iraq have the potential to expand oil production, while Saudi Arabia remains the largest producer. A critical concern is whether non-OECD countries will make investments in increasing oil production. Non-OECD countries may choose to deliberately develop their production capacities slowly and non-responsively to an increasing global oil demand. The latter would be the consequence of either capital shortages that prohibit oil producers from investing in expanding capacities or a slower growth in OPEC oil production that drives up global oil prices (Killion, 2007).


President Barack Obama and his national security team met earlier today in the Situation Room at the White House with Undersecretary of State Bill Burns (right) as Burns departs for P5+1 (five permanent members of the UN Security Council plus Germany) talks with Iran in Geneva on Thursday (January 21, 2011).

The latter prospectus of Iran’s oil industry parallels, at least in results intended by both the UN-imposed sanctions and unilateral sanctions of Western allies, the general perception of Undersecretary of State William Burns and others that the sanctions are wrecking economic havoc on the Islamic regime, “to the tune of $60 billion in lost energy investments” (OilVoice, 2010).

The problem is that these earlier forecasts (prospectus) from 2006 are subject to the routinely, inherent limitations of drawbacks attendant to forecasts concerning all types of investments, including investments in the oil industry. This also brings us to the question of the current state or economic health of Iran’s energy sector, especially the oil industry. It is also here that we will discover the source of OilEdge’s optimism concerning Iran’s oil industry (OilVoice, 2010), an optimism that is contra distinguishable from the general perception of Undersecretary of State Burns and others.

As OilEdge (2010) earlier observed, despite UN-imposed sanctions and unilateral sanctions of Western allies, in 2010, Iran’s oil industry remains key to the Middle East and to the world at large. OilEdge (2010) described Iran’s importance to the world as follows.

Iran is already the Organisation of Petroleum Exporting Countries’ (OPEC) second largest oil producer, and until recently it was also the third largest producer of oil globally (before Iraq recently claimed to have taken this position, demoting Iran to fourth spot). Oil reserves in Iran were recorded at 138 billion barrels in 2009, some 10% of the world total. However, the nation’s proven oil reserves have reportedly risen by around 9% to 150.31 billion barrels this year, partly driven by new discoveries, according to the minister. Furthermore, an Iranian state energy firm announced a major discovery of around 34 billion barrels in associated oil reserves at an offshore gas field in the Gulf last month, sending Iran’s total proven reserves rising once again. Trailing only Saudi Arabia and Venezuela, Iran’s revenue from oil exports reached $69.1 billion last year.

Nonetheless, despite OilEdge’s optimism concerning Iran’s oil industry, their analysis still concedes that the UN-imposed sanctions, including unilateral sanctions of Western allies, are having a dramatic effect on Iran’s capacity to develop its energy sector. This is because the international sanctions, though they may well serve political purposes or goals, are hampering Iran’s ability to “invest in upgrading its refineries to raise gasoline output – the International Energy Agency commented in an October report” (OilVoice, 2010).  Additionally, “UN and EU sanctions pose a sizeable threat to the participation of foreign firms in the oil and gas sector. Indeed, the sanctions have prompted the likes of Royal Dutch Shell, France’s Total, Italy’s Eni SpA and Norway’s to stop investing in the country” (OilVoice, 2010).

Conclusion: The “Optimistic” Prospectus

Finally, though the international sanctions are hampering the oil sector’s ability to reach its full potential, OilEdge still remains optimism in its review of Iran’s oil industry. This is because, according to OilEdge (OilVoice, 2010), “it is not all doom and gloom.” OilEdge (OilVoice, 2010) optimistically writes:

Despite the sanctions and the recent withdrawals, Iran does have a mechanism in place that is designed to prevent overseas operators from shying away. The Foreign Investment Promotion and Protection Act (FIPPA) provides some protection to foreign investors and allows relatively good terms for the repatriation of profits earned.

Perhaps the biggest factor holding the Iranian oil industry back is that the nation’s existing oil fields have a natural decline rate of around 13% per annum, creating a growing shout for substantial upgrading and modernisation. Investment in enhanced oil recovery is required to raise the below average recovery rates of less than 30%. To put a figure on just how loud these cries for investment are, the Iranian government has said that its oil and gas sector will need around $500 billion of investment to 2026 in order to boost production. The sooner that sanctions are lifted, the sooner this issue can be addressed head-on.

Copyright © Protected – All Rights Reserved M. Ulric Killion, 2011.