Could Iran Replace Russian Oil and Gas?
A revived nuclear deal with Iran would untangle some energy knots while tightening others.
Non-Resident Fellow, AGSIW; CEO, Qamar Energy
In pursuit of non-Russian hydrocarbons, U.S. and European officials have come calling at the usual destinations, Riyadh, Doha, and Abu Dhabi, and some less traveled, including Algiers and even Caracas. So far, they have not appeared in Tehran. The holder of the world’s second-largest gas reserves, and one of the few countries with substantial spare oil production capacity, seems like an obvious destination – with equally obvious demerits.
Negotiations continue in Vienna over a U.S. reentry into the Joint Comprehensive Plan of Action nuclear deal, from which the administration of former President Donald J. Trump withdrew in May 2018. After recent progress, the talks stalled over a last-minute demand from Russia for sanctions exemptions. Since that was apparently resolved, Washington has faced the thorny issue of Iran’s demand for the United States to lift the designation of the Islamic Revolutionary Guard Corps as a foreign terrorist organization.
But if the stringent sanctions on Iran are lifted, would it really make a difference in the current oil balance?
Estimates of Iranian oil exports and storage vary widely because of shipments ostensibly from Oman and Malaysia going to China, but in fact originating from Iran. Iran may have up to 90 million barrels of crude and condensate (a light oil derivative of natural gas) stored on land in its territory, at sea, and in tanks in China, enough to add about 1 million barrels per day to the market for three months.
It would take Iran a few months to gear up to full pre-sanctions crude output of 3.8 mb/d, of which around 2 mb/d would be available for exportation (after meeting domestic demand), though it would probably get there more quickly than most analysts expect. The Iranians already went through such a restart process following the original 2015 JCPOA, and production was close to pre-sanctions levels within three months. That would boost Iran’s overall exports by 1.2 mb/d to 1.4 mb/d. Only two other OPEC members, the United Arab Emirates and Saudi Arabia, have comparable or larger spare capacity. The International Energy Agency has suggested Russia’s production could fall by 3 mb/d in April due to sanctions and buyer aversion. Therefore, while Iran’s full return would not totally compensate, it would be a major contribution.
Iran plans to spend $90 billion to reach 5 mb/d capacity over the coming decade. That would see it keep pace with the UAE, falling behind only Saudi Arabia and Iraq in OPEC. There is a long list of fields that could be developed or expanded, notably the West Karun fields near the Iraqi border (including the Yadavaran, Yaran, Azadegan, Darquain, and Jufeyr fields), the large claimed “Namavaran” heavy oil find, also in Khuzestan province, and the South Pars oil layer offshore, which overlies the gas reservoir and extends into the Qatari section (the large Al Shaheen oil field).
Such new oil developments will rely mostly on domestic companies, which would have freer access to finance and technology, assuming sanctions are lifted. European companies would be slow to return under the double threat of another U.S. withdrawal from the JCPOA after the 2024 presidential election and Iranian bureaucracy, political indecision, and unattractive investment terms. The Russians will not have capital or focus for any oil production effort in Iran. That would leave the Chinese companies, such as Sinopec and the China National Petroleum Corporation, which have engaged substantially in the past. So realistically, in a post-sanctions world, and after reattaining current maximum capacity, Iran’s oil capacity would from then on edge up gradually – a counterweight to falling Russian output but just one part of filling the deficit.
Gas is a different story. Iran exports significant volumes to Turkey and Iraq, but supplies have been erratic due to domestic shortages. Increasing reliable sales to Turkey could displace Russian gas there, save on liquefied natural gas imports, and allow other gas in Turkey to flow into southeastern Europe, which would help European energy security objectives. Russia has for some time, therefore, quietly pursued approaches to neutralize large-scale Iranian gas exports.
Lifting sanctions would help Iran’s gas sector immediately in two ways. First, it would eliminate restrictions on the marketing of condensate, for which Iran has at times run out of storage. Second, it would allow the purchase of compression equipment, badly needed at the colossal South Pars field (the Iranian section of what Qatar calls the North Field), where production will otherwise decline rapidly after 2023 as pressure in the reservoir depletes due to extraction of the gas.
As with oil, more substantial gains will take longer. In 2021, Mohsen Khojastehmehr, managing director of the National Iranian Oil Company, revealed plans to invest $70 billion to add 23 billion cubic feet per day to production capacity by 2030, 20.6 bcf/d of which would come from new field developments. Iran also flares (burns off) about 1.4 bcf/d of unwanted gas from oil production, which could be saved.
The supply-demand deficit in winter, when Iran runs short of gas for home heating, is estimated at 7 bcf/d and is projected to increase to 12 bcf/d by 2030. The planned production increase would therefore meet all domestic demand and boost exports by about 11 bcf/d. On an annual basis, this equates to more than half of all the gas Europe imports from Russia. This would exceed even the expected export increases by the United States and Qatar, the other two heavyweights in gas export growth, over this period. In March, the National Iranian Oil Company invited investors to provide proposals for building small-scale LNG units, without giving more specifics.
The relaxation of sanctions would also help tackle Iran’s runaway domestic gas consumption by allowing investment in energy efficiency and solar and wind power, which hardly feature in its electricity generation mix today despite excellent natural resources. On the other hand, a slate of half-finished gas-based industrial plants would be completed, pushing up demand in this sector.
These gas production ambitions, however, have to be assessed with skepticism. As with oil, international investment is likely to be slow and halting and viewed with suspicion and obstructionism from parts of the Iranian system. In its best year historically, 2018, when it was finally catching up on the development of South Pars, Iran added 1.76 bcf/d of production. It would need to gain 3.3 bcf/d every year from 2023 to 2030 to reach its goals, from a standing start. Massive new pipeline capacity would be required to reach Turkey and Europe, Oman, Pakistan, and whichever other nearby markets were targeted. Or, Iran would need to build an LNG industry bigger than Qatar’s, the long-time world leader in LNG exports, in seven years.
This is unfeasible even in a much more attractive investment environment, given the likely prohibitive costs and challenging investment conditions for ramping up piped or LNG capacity. So, while Iran might moderately boost exports to Turkey, and perhaps even start up some modest LNG sales, by 2030, it will only be a small part of Europe’s solution to the Russian problem. If Iran does become a large international gas player, it would be closer to 2040 and more oriented to South Asia.
Of course, a revived deal with Iran solves some energy problems but raises others. Notably, Riyadh and Abu Dhabi have been reluctant to unleash their own spare oil production capacity. Partly this might be reasonable caution – firm evidence of disruption of Russian supplies is taking time to emerge, and the possibility of Iran’s return has to be accounted for in market balances.
But Saudi Arabia and the UAE have made their displeasure with the United States’ Middle East policy clear. The Saudi Ministry of Energy announced that the kingdom was not responsible for any shortage in global crude supplies while the Iran-linked Houthi forces in Yemen continue to attack its energy infrastructure.
On March 25, a missile and drone attack set fire to Saudi Aramco oil storage tanks in Jeddah. And, in September 2019, a carefully calibrated strike briefly knocked out some 5.7 mb/d of Saudi oil capacity at the key Abqaiq processing facility and Khurais oil field. A similar disruption today would wreak havoc on a tense oil market.
For the administration of President Joseph R. Biden Jr., this appears to argue for de-escalation between the United States and Iran, and between Tehran and its Gulf neighbors, to free Washington to tackle Russian President Vladimir Putin’s aggression without the risk of concurrent crises. Saudi Arabia and the UAE, though, fear unleashed Iranian adventurism and the lack of an explicit U.S. security provision, possibly with more serious strikes against oil and gas infrastructure in the Gulf Arab states.
As with U.S. engagement with the regime in Venezuela, necessity makes some strange bedfellows. A post-sanctions Iran would be an important part of replacing Russian hydrocarbons – but its limited impact just emphasizes the scale of the task. A revived JCPOA would untangle some energy knots while tightening others.
is a non-resident fellow at the Arab Gulf States Institute in Washington. He is CEO of Qamar Energy and author of “The Myth of the Oil Crisis.”