US sanctions expected to cut Iran’s growth, weaken foreign investment

Trump’s decision will weaken Iran both economically and politically by deterring foreign investment.
Sunday 24/06/2018
On the blink. Iranians leave the stock exchange in Tehran, on May 8.                                                                     (AFP)
On the blink. Iranians leave the stock exchange in Tehran, on May 8. (AFP)

WASHINGTON - The reinstatement of US sanctions against Iran would severely weaken Tehran’s oil exports, economy and political power while benefiting major oil producers such as Russia and Saudi Arabia, experts on the Middle East and energy production concluded.

The sanctions would reverse several years of strong growth in Iran’s production of oil and natural gas that restored the country’s position as one of the world’s leading fuel producers.

A report stated that Iran’s production of oil and natural gas soared since sanctions were lifted under the 2015 Iran nuclear deal to the point that it is the world’s fourth-leading oil producer and third-leading natural-gas producer.

With increasing sales boosting its economy, Iran became the largest energy consumer in the Middle East in 2017, edging ahead of Saudi Arabia, a report by British oil and gas company BP stated.

That growth would be jeopardised when US sanctions resume between August and November, forcing many countries to scale back imports of Iranian oil and natural gas and turn to other exporters, such as Iran’s chief rival Saudi Arabia.

“Iran is under a perfect storm today. [It] will go under very strict US sanctions. It’s happening just as Russia and Saudi Arabia are deciding to stop their [oil] production cuts,” said Jean-Francois Seznec, a scholar at the Middle East Institute and former international banker in the Middle East. “Iran will suffer a great deal under the sanctions because I expect the sanctions

will be really tough.”

The consensus among oil traders is that Iran’s oil production will fall 300,000-500,000 barrels per day (bpd) within six months, Spencer Dale, group chief economist at BP, said at the release of the BP report. Iran produced nearly 5 million bpd in 2017 and has some of the world’s largest oil reserves, the latest annual BP Statistical Review of World Energy said.

In 2014, before sanctions were lifted under the nuclear agreement, Iran produced 3.7 million

barrels of oil a day.

Much of Iran’s increased production has gone to European countries. Iranian Oil Minister Bijan Zangeneh cultivated markets in Europe to expand sales beyond Iran’s traditional customers: China, India, South Korea, Turkey and Japan.

“For him Europe is still the big hope. The big test is: What will the Europeans do? Can they do anything to overcome American objections and the new Trump policy?” asked Alex Vatanka, a Middle East expert who advises the US Air Force.

US President Donald Trump announced in May that he was withdrawing from the agreement signed by his predecessor, President Barack Obama, and European leaders requiring Iran to limit its nuclear programme in exchange for easing economic sanctions.

Trump’s decision will weaken Iran both economically and politically by deterring foreign investment. “If I get more investment, I produce more and that means we have more political capital on the world stage,” Vatanka said.

Experts say Europe will scale back imports of Iranian oil and investment in Iran to avoid sanctions that could restrict access to the lucrative US consumer market and to US financial institutions. The French oil company Total said, in response to the US sanctions, that it was pulling out of a $2 billion deal to develop the Iran’s South Pars gas field.

“Russia and China seem like the only options for the Iranian Energy Ministry for investment and oil imports,” said Rauf Mammadov, a former top official at the State Oil Company of Azerbaijan Republic.

Russia, however, might not be so eager to invest in Iran because it is a competitor as the world’s third-largest oil producer and second-largest natural-gas producer, Mammadov said. The China National Petroleum Corporation lacks the technical expertise to cultivate Iran’s substantial oil and gas reserves.

“They certainly don’t have the technology to produce liquid natural gas, which Iran needs from being the largest reserves of gas in the world,” said Seznec. Russia also wants to increase its oil and gas production because it needs more money as its economy suffers under increasingly tight economic sanctions imposed by the United States and the European Union, he added.

Seznec, Mammadov and Vatanka spoke at a panel discussion at the Middle East Institute in Washington on the future of Iran’s energy sector.

Another Middle East Institute panellist said US sanctions would benefit many countries by compelling them to increase oil and gas production. “Having sanctions on Iran is not really hurting anyone. It creates market share for oil producers,” said Sara Vakhshouri, president of SVB Energy International who worked for the National Iranian Oil Company from 2000-08. “Having sanctions on Iran will profit many countries and doesn’t bother the rest.”