Policies of Scale: Efficient Global Policy

Is Iran’s Oil Ministry the X-Factor in Nuclear Negotiations?

The negotiations with Iran over its nuclear program have be shrouded in secrecy. But the on-goings of Iran’s oil ministry are providing insight into the dynamics at play on the Iranian side, and it is about time someone starts connecting the dots.

It is no secret that Iran seeks the return of Western international oil companies (IOCs), but Iran’s Oil Ministry may be forecasting the decision already made but kept secret by Iran’s negotiators: either Iran seeks an end to sanctions by mid-2014, or Iran is engaged in a plan to break the sanction alliance. Either way, the West must take notice.

Mehdi Hosseini, an advisor to Iran’s well-known oil minister, Bijan Zanganeh, was quoted on December 5th by Reuters as saying that he is aiming to announce Iran’s new oil contract at an event in London in April of 2014. A new contract is needed to attract IOCs as the current contract does not offer sufficient financial rewards. However, IOCs know better than to sign their names on dotted lines before the sanctions have been removed, though how they are removed is almost irrelevant in the long-run. The way negotiations seem to be going, the psychological barrier of the sanctions regime could erode before the actual sanctions themselves are stricken – no company wants to be the first one in, but none want to be the last.

Reinforcing the urgent pace, Zanganeh announced at OPEC’s December conference that Iran intends to produce 4 million barrels per day by the end of 2014. Coming on top of Hosseini’s new contract timeline, this suggests that there is an effort, at least by the oil ministry, to push for sanction removal early enough in 2014 to pave the way for a big production boost by the end of the year. Alternatively, it could be an effort to split the sanction alliance. The Europeans thus far do not appear to have put pressure on their IOCs to avoid the Iranian rapprochement while the White House has reported pressured American IOCs named as part of Zanganeh’s list to not engage with the Iranians.

Upon returning as oil minister this summer after a seven year respite from the position, Zanganeh made  overtures to IOCs similar to those he successfully made in his prior oil minister stint, and the IOCs are responding. One day after announcing his seven most desired IOCs (all Western-based), ENI CEO Paolo Scaroni sat down with the minister for, according to Scaroni, a “fairly long and very warm” meeting. And because Zanganeh’s credibility with IOCs was already established during his last tenure, he is as Scaroni said “a person we know very well,” suggesting Iran has the right kind of man for the job. Total has said they are quite interested as well, and Royal Dutch Shell is supposedly prepared to meet with the Iranians.

Hosseini’s timeline for a new contract announcement illuminates at least some of the Iranian thinking. The country’s full court press of Western IOCs is a pragmatic effort to line up the investment necessary to get Iran’s oil and gas production back on track if sanctions become less of a factor. It  also demonstrates the willingness of Iran, if not at least its Oil Ministry, to re-engage economically with the West. With the sector on life support, foreign investment will be necessary to increase production in any meaningful way because it is no secret that Iran’s nationally-owned companies will be unable to meet Zanganeh’s production target on their own.

The production target has geopolitical ramifications as well. Hitting the target would represent as much as a 3 million barrels per day jump from today, and come at a cost to other large producers who would likely be faced with the challenge of reducing production in order to maintain an acceptable price. Under these circumstances, tensions with fellow OPEC members Saudi Arabia and Iraq could rise, although Iraq is having trouble with security that threatens its oil and Saudi Arabia could accept additional Iranian oil on the market to help reduce its own production, an effort that it has sly been pursuing for the last few months because they are not comfortable producing at current levels indefinitely. Meanwhile, Russia’s and Canada’s increasingly energy-driven economies would suffer while America’s exports could see reduced demand.

How all of these dynamics would play out depends on the nature of the foreign investment in Iran and Iranian decisions about what to do with the production. It is important to remember there is a major distinction between crude petroleum and refined petroleum products, like gasoline. It is also important to remember that not all crudes are substitutes for each other, and that each refinery cannot handle all types of crudes. Iran’s industry has a major demand constraint on refining capabilities, and has experienced gasoline shortages despite having the fourth largest proven reserves (that in 2007 prompted a government decision to raise gas prices by 25% in order to temper demand). Further, Iran’s existing refineries use antiquated technology that produces gasoline with very low octane while using dated enhancers. The eventual investments that could be made will determine in large part where Iran’s future production gets sent and at whose cost it gets sold.

Iran’s economy is in a dire condition, and the revival of the energy industry will be critical to the future of the country’s economic and foreign relations strength (it is estimated that oil sales account for around half of government revenues). Within this context, the Oil Ministry’s aggressive contract and production timeline could be an attempt by the oil ministry to put pressure on the central government to find a solution with the P5+1 sooner rather than later. Or, it could be an attempt to split the sanctions alliance.

Either way, the P5+1 needs to consider the Oil Ministry’s moves. If the Iranians do genuinely want sanction elimination soon, then the West has new-found leverage and the oil ministry’s aggressive moves are an opportunity for the P5+1 to raise the bar at little risk. However, if the Iranians are attempting to split the sanctions alliance, a strategy likely found in the Iranian playbook, then the alliance needs to reassert its cohesion and commitment to a unified approach. Time will tell, but the Iranians are showing their craftiness and we need to pay closer attention.

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Aaron Menenberg Policies of Scale

Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at