Where JCPOA, oil conjoin stands OPEC+
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Russian President Vladimir Putin (L) and Saudi Crown Prince Mohammed bin Salman at G20 summit, Hangzhou, Sept. 5, 2016, where they planned an oil output task force that fructified as OPEC+
The news that made the headline today is that the Biden Administration may have inched closer to restarting the 2015 nuclear deal with Iran. Meanwhile, it escaped attention that the Iranian oil minister Javad Owji said just a day earlier in Tehran following a meeting with Igor Levitin, President Vladimir Putin’s senior aide, that the two countries have finalised their talks on “gas purchase and swap” and the contract is going to be signed in Moscow.
Owji disclosed that Iran and Russia are negotiating a Memorandum of Understanding (MoU) for developing another 14 Iranian oil and gas fields in addition to the seven oil and gas fields already for which contracts exist.
Indeed, in July, Iran and Russia had signed an MoU, according to which Russia agreed to invest $40 billion in Iran’s petroleum industry. The highlights included the development of Iran’s Kish and North Pars gas fields and six oil fields and completion of LNG projects — and, importantly, swap of gas and petroleum products, and construction of gas transfer pipelines.
Owji added that the Iran-Russia joint economic commission will hold a meeting in Moscow within the next two months to continue their discussions on the expansion of cooperation in the energy, transport, trade, amongst other areas.
A western narrative has gained ground that Russia opposes the Iran-US nuclear deal, since Iran will be replacing Russian oil in the lucrative European market with its own oil and in the process drive down the high oil price too by flooding the world market with its increased up oil production, which would erode Moscow’s income out of oil exports, which is a mainstay of its economy struggling under western sanctions.
In reality, though, there is no contradiction here — at least as far as Iran and Russia are concerned. For a start, expert opinion uniformly is that this is far from a situation that Iran completely replaces Russian oil from the global energy market. Conceivably, Iran could add as much as 900,000 barrels a day of production within three months of sanctions being eased, and potentially pump near its full capacity of about 3.7 million barrels per day within six months.
According to Goldman Sachs, even if a deal were agreed, Iran would take around 12 months to fully ramp up its oil production. The bank estimates Iran would increase its output to 3.7 million barrels a day, from 2.7 million barrels currently, but exports would likely take several months to pick up. At best, Iran’s return to the market will have a temporary effect in the near term, because a part of Iran’s oil is already available in the market.
Hidden charms of oil swap
There are three key factors playing out here, which is engendering false narratives. First, expectations need to be tempered, considering that the strategic understanding between Russia and Iran are at an all-time high level today and it is hard to see Tehran challenging Russia’s core interests in the current geopolitical conditions — leave alone, being party to such a western enterprise.
Iran will certainly factor in that any significant improvement in its relations with Europe or the US will be a long haul while on the other hand, the shelf life of a nuclear deal may be very limited. Beyond 2024, US politics may take new turns. For European energy market too, the present time is a period of transition to green energy.
Given these parameters, Iran is rapidly stepping up its economic cooperation with Russia, with energy and transportation being two hubs. Iran announced on Tuesday that the rial-ruble payment system has come into vogue and is being handled by handled by the Russian Central Bank’s Mir system. Last month, Tehran Stock Exchange launched rial-ruble trading. The strategic intention, clearly, is to bypass the US-dominant global financial system.
Secondly, stemming from the above, Iran is not at all looking at the paradigm in binary terms. There is a strong possibility that Iran could step up oil exports to Europe via a “swap” mechanism with Russia.
A swap arrangement is quite viable whereby Russian oil meets the needs of Iran’s northern Caspian regions while Iran exports (on Russia’s behalf) the surplus oil freed from meeting its internal demands. Russian and Iranian officials have been fleshing out the idea of a “swap” arrangement.
Now, since their payment system is out of the SWIFT and dollar trade, outsiders will be left guessing about any Russian-Iranian swap deal. Besides, beggars cannot be choosers, and the EU is in no position to spurn Iranian oil. Again, Iranian oil present on the market today is almost all in the form of mixtures, which are often transported by tankers of other states.
Third, it should not be overlooked that Iran has a convergence of interests with Russia (and with Saudi Arabia and the UAE) as regards the prices in the global market. Put differently, it is a matter of time before Iran joins the OPEC+ (the oil alliance between Saudi Arabia and Russia at its core.)
Saudi Arabia, is increasingly more aligned with Russia than with the US on the global stage. And both need higher oil prices. The Saudi Oil Minister Prince Abulaziz bin Salman’s embittered remarks recently were barbs aimed at the Biden Administration when he spoke of the “self-perpetuating vicious cycle of very thin liquidity and extreme price volatility” in oil markets, and how it has been “amplified by the flow of unsubstantiated stories about demand destruction, recurring news about the return of large volumes of supply, and ambiguity and uncertainty about the potential impacts of price caps, embargoes, and sanctions.”
The Saudi Prince was alluding to the Biden Administration’s rampant intervention in oil markets. From the Saudi perspective, President Biden’s climate-first policies have thwarted upstream investment since he took office in early 2020.
The butterfly effect
The Saudi Prince’s remarks were even more telling when he was asked by Bloomberg about the future of OPEC+. He stated in a written reply:
“In OPEC+ we have experienced a much more challenging environment in the past and we have emerged stronger and more cohesive than ever. OPEC+ has the commitment, the flexibility, and the means within the existing mechanisms of the Declaration of Cooperation to deal with such challenges and provide guidance including cutting production at any time and in different forms as has been clearly and repeatedly demonstrated in 2020 and 2021.
“Soon we will start working on a new agreement beyond 2022 which will build on our previous experiences, achievements, and successes. We are determined to make the new agreement more effective than before. Witnessing this recent harmful volatility disturb the basic functions of the market and undermine the stability of oil markets will only strengthen our resolve.”
Plainly put, Riyadh, a key regulator of the global oil market, plans to maintain or even increase the restrictions on the production and total supply of oil for the world market and to this end, will extend the OPEC+ agreement, which limits production in the participating countries.
The implications are two-fold: one, Russia can consider its revenues from oil exports relatively protected for the conceivable future; and, two, if OPEC+ is to be improved upon to make it “more effective than before,” Iran will have to be brought on board.
Curiously, the last OPEC+ meeting on August 3 decided to increase output to 100,000 barrels only in September after raising it by 648,000 barrels per day in July and August. According to Reuters, in July, real production was actually below the agreed quotas by about 2.9 million barrels per day. This shortfall is more than the entire current production of Iran!
Fundamentally, Saudis understand that the ousting of Russia from the Asian markets may not take place, given the positions of China and India. That is, any increase in the presence of Gulf oil in Europe will happen by itself as Russian supplies turn to the east — and therefore, there is no reason to ruin the OPEC+ with Russia.
Therefore, a significant decline in world prices due to the growth of production in Iran should not be expected. Both Saudi Arabia and Iran primarily care about the welfare of their states, therefore, their position will be formulated so that the current prices are comfortable, large companies keep increasing quarterly profits, and as long as the market does not reject such an oil price due to a banal lack of money, try to keep it high.
The OPEC+ was the brainwave of President Vladimir Putin and the Saudi Crown Prince Mohammed bin Sultan on a Sunday in Hangzhou, China, six years ago. (See my article Pay heed to the butterfly effect of Putin-Salman oil deal in Hangzhou, Asia Times, September 7, 2016) The paradox today is that Russia and Saudi Arabia are set to be major beneficiaries of the US-Iran nuclear deal known as the JCPOA.