Can the World Live Without Iranian Oil?
A discussion with
Sara Vakhshouri
President
SVB Energy International
Denise Natali
Minerva Chair, Institute of National Strategic Studies
National Defense University
Moderated by
Barbara Slavin
Senior Fellow, South Asia Center
Atlantic Council
December 5, 2012
Atlantic Council
Stuart Eizenstat: I have been co-chair with Senator Hagel of the Iran Task Force of the Atlantic Council for several years. And I had the privilege of serving on the board of directors of the Atlantic Council itself. Some of the key participants in our two year effort, Susan and Barbara are here, and I want to acknowledge their tremendous leadership. In 1979, one consequence of the radical Islamic revolution in Iran was, of course, the profound political and security aftershocks it caused, which we live with today and which our task force has explored at a variety of dimensions.
The nuclear challenge, Iran’s support for terrorism, internal politics within Iran. But that 1979 revolution had another profound impact, which I witnessed firsthand from the White House. And that is it was the second of the two oil shocks of the 1970’s. The first after the 1973 Yom Kippur War. Iranian production dropped from around 5 million barrels per day to virtually nothing as the country was in turmoil. And the price of oil literally went up 120 percent between early 1979 and early 1980. It was a major factor in the double digit inflation and double digit interest rates, which occurred at that time and with which we lived for a number of years.
And it caused a new economic phenomenon supposed to contradiction in economic terms, high unemployment, and high inflation at the same time, stagflation. Today, we have a very different situation over 30 years later. Oil production in neighboring Iraq, which is now increasing, major new finds of heavy oil, as well as natural gas in the United States and heavy oil tar sands in Canada and elsewhere in the world coupled with sluggish global demand because of the after effects of the great recession raise the question of whether the world can live without Iranian oil and what that may mean for Iran’s ability to pursue a provocative nuclear program.
That’s the subject of today’s session. Over the past year, Iranian oil production and exports have drastically declined to levels not seen since the 1988 Iran/Iraq War. Iran is now producing less than 3 million barrels of oil per day and exporting less than 1.5 million barrels per day, which is about a million barrel per day drop than what their previous level had been before the major imposition of sanctions. And yet, the price of oil globally has not risen dramatically. Certainly, it has remained fairly high, but it hasn’t spiked. We’ve had nothing like the kind of shock that we had in the late 1970’s.
And this raises the question, which we want to explore of whether Iranian threats to close off the Strait of Hormuz through which, of course, much of the world’s oil production flows is still an effective means of pressuring the international community regarding its nuclear program. While sanctions, particularly the European oil embargo, which went into effect July 1 of this year, the difficulty of getting insurance on ships coming in and out of Iran, and general financial sanctions, including those on the Central Bank of Iran, have certainly had an impact on Iranian oil production and on their exports.
But so have poor management of the oil sector as well. We really want to explore these today, and I think that because we know that energy is one of the true global commodities and that to the extent that there are declines in demand in some countries like the US and, of course, in the European Union, there are increases in demand for Iranian oil and for oil in general from China and India. So we want to look at all of these features, and we have a very distinguished group of speakers to do so.
And with no further ado, I’m going to turn this over to Barbara Slavin who has been really the driving force behind the production of some dozen papers and many seminars and really who has been a tremendous source of strength for all of us. So Barbara, if you’ll take over now and give some introductory remarks yourself and then introduce our distinguished speakers. Thank you.
Barbara Slavin: Thank you very much for those generous words, and it’s a real pleasure to work with you, Ambassador Eizenstat, and with everyone here at the Atlantic Council who have been very supportive of this program. And also let me thank the Ploughshares Fund, which very, very kindly gives us financial support and enables us to put on programs like this. I’m going to give credit to someone who is actually not here today for the idea for this. It was Kenneth Katzman, some of you may know him. He’s an expert on Iran at the Congressional Research Service. And I was talking to him a couple of months ago, and he said something that stuck.
He said we’re basically on a glide path to Iran being erased from the world oil market. And this makes the assumption that Iran does not resolve its problems with the international community quickly and that sanctions continue to remain in place and get tighter and tighter and tighter. So I thought this would be a good topic to explore. Is this really the case? And is it possible that Iran can still cause oil shocks? Perhaps not to the degree that they did in 1979 during the revolution. But what would happen if Iran simply stopped exporting oil? Now, as Ambassador Eizenstat pointed out, there’s already been a drastic reduction in Iranian oil production.
When President Obama took office, Iran was producing more than 4 million barrels a day of oil and exporting nearly 3 million barrels a day of oil. And last summer, the Congressional Research Service predicted that its oil production would drop to 3.3 million barrels a day by 2015. Clearly, that’s already happened. And as was mentioned, exports are also down. At the same time, Iran’s long time rival, Iraq, has been increasing its production by leaps and bounds. According to the International Energy Agency, Iraqi oil production will exceed 6 million barrels a day by 2020 and may go as high as 8 million barrels a day in 2035, which would make it the world’s second largest oil exporter after Saudi Arabia.
The main reason for the drop in Iranian production, as we’re going to discuss, I think one of the main reasons has been sanctions. Not just the sanctions that went into affect over the summer when the Europeans said they wouldn’t buy more Iranian oil, but the effect of sanctions on foreign investment in Iran’s oil sector, which we’re also going to talk about. The lack of investment in Iran’s petroleum sector and what that has meant for Iranian production. At the same time, as was mentioned, there is new oil being found in other places that we didn’t expect. The United States, for example, may be self sufficient in oil within a few years and even be an exporter by 2020.
Demand is growing. But there are other ways of meeting this demand so that China, which had become a major purchaser of Iranian oil is turning away increasingly. I’ve seen recent reports that China will be buying 2 million barrels a day of Iraqi oil by 2035, perhaps no Iranian oil at all or a very small amount of this oil. Later this week, we’re probably going to hear from the State Department that a number of countries have gotten new waivers to continue to purchase a certain amount of Iranian oil. But they will get those waivers because they have significantly reduced their purchases.
The first round of waivers came last summer. Most of these countries, there were 20 of them, had reduced by around 20 percent. And judging from the news reports that I’ve been seeing, it will not be hard for countries like Turkey, India, China to meet this benchmark again. So I mean, there’s no point in Iran pumping all this oil if there’s no place that it can sell it. We’re going to talk about this. We’re going to talk a little bit, I hope, particularly in the Q&A about what this might mean for Iran’s leverage in upcoming nuclear talks. It would seem that their leverage is certainly less. But we’re going to hear from real experts now.
And I’m absolutely delighted to have these two ladies here with me. I didn’t go out looking for women, but it just happens that the two best experts in know on these subjects happen to be women. So first, we’re going to hear from Sara Vakhshouri. Sara is president of SVB Energy International. She’s been an independent consultant based in Washington advising energy companies, think tanks, and investment banks about Middle Eastern geopolitics, economics, and energy. Sara is Iranian. She was born and raised in Iran. And not only that, but she worked as an advisor and an analyst for the National Iranian Oil Company International, which is a division that prices, markets, and sells Iranian crude oil.
She also worked for the Iranian Ministry of Petroleum as well as in the private Iranian energy sector. So she knows a great deal about the subject. She has a PhD in energy security and Middle Eastern studies, an MA in business management and international relations, and she’s the author of a book, The Marketing and Sale of Iranian Export Crude Oil Since the Islamic Revolution. So who better to talk about this than Sara. After Sara, we will hear from Denise Natali who is the Minerva Chair at the Institute for National Security Studies at the National Defense University. And she’s a specialist in Iraqi politics, regional energy, security, and the Kurdish issue.
She’s the author of numerous publications on Iraqi and Kurdish politics, energy, and economy, and she’s also a specialist in post conflict relief and reconstruction. Denise has a PhD in political science from the University of Pennsylvania, an MA from Columbia University School of International and Public Affairs, and she’s also a contributing writer for Almonitor.com, which is a website that I also write for that I also write for that specializes in news from and about the Middle East. So we will start with Sara and look forward to your comments.
Sara Vakhshouri: Ladies and gentlemen, it’s a pleasure to be here today. I would like also to thank the organizers. I believe this question that can the world live without Iranian oil is really important at this time, particularly that before the summer, before the beginning of the sanction had been implemented, most of the scholars were believing that the Iranian export oils is not going to drop more than 200 to 300 barrels per day. And if the Iranian oil export dropped more than this amount, the prices are going to rise from $150.00 to $170.00 per barrel. Yet, we see that Iranian oil production and export dropped more than 40 percent.
And Iran’s export today is around 800 to 1 million barrels a day, but the prices didn’t jump as we were expecting. Also, in the last statement that Iranian Ministry of Petroleum made that if the sanctions get tighter, we’re going to stop exporting oil, any drop of oil, the market didn’t react at all, and that was a surprise because usually the market, particularly the oil paper market, the oil deals are much more than a physical market reacts quickly to any psychological effect that could endanger or threaten the security of supply from major oil producing.
And now, just after IEA announcing the huge gas and oil resources coming up soon as they predicted in 2015 and 2017 from US and Canada, also Iraqi oil market coming to the market, the question is that do we really need Iranian oil or does the oil really need Iranian oil? To answer this question, I would like to start with just a brief on Iranian oil and gas reserves. Iran has the fourth largest global proven oil reserves, which stands for 9.3 percent of world’s total reserves. And this is about 12 percent of OPEC reserves. However, Iran consumes 36 percent of its own oil production.
And Iran stands for the second largest consumer of oil in the Middle East. In the national gas reserves, Iran has the second largest proven natural gas resources after Russia. Iran is the fifth producer of natural gas in the world. However, Iran’s consumption is so high that it puts Iran in the third largest consumer of natural gas after the United States and Russia. The natural gas counts for half of Iran’s total energy consumption, and it’s expected to grow around 7 percent in the next decade. Iran only has less than 1 percent of global gas market. Iran’s export is very little.
They have – the major – 90 percent of Iranian gas is exported to Turkey. Iran exports 90 percent of its oil to Turkey. The two countries signed a contract in 1996 to sell 10 billion cubic meter of gas per year to Turkey for 25 years. However, in the past few years, or four or five years, Iran could not sell 10 billion cubic meters to Turkey. There has been conflict. There has been – Turkey has threatened Iran that they are going to take the case to International Court of Arbitration because not only Iran could not sell the amount that was responsible in the contract but also the prices are higher than the [inaudible] or Russian gas.
But why the prices are higher? And why Iran could not sell the amount that was agreed in the contract? Unfortunately, as mentioned here, Iran is consuming a lot of its resources domestically. According to British Petroleum Annual Energy Outlook, Iran in 2011 produced 151 billion cubic meters of gas. However, this country consumed 153 billion cubic meters of natural gas. It means that Iran has consumed 2 billion cubic meter more than its production. In the same year, Iran imported 10 billion cubic meter of natural gas, exported 8 to Turkey, and consumed 2 of it domestically.
So when we are talking about the natural gas sanctions or ban on Iranian natural gas export, mostly has a psychological effect on Iran. Iran has to sell this gas higher because it’s importing it. So they cannot offer a competitive price with others or Russia to the Turks. Also, Iran wants to keep the minimum share in the market and does not look to lose its share. Exporting gas mainly more than having economic benefits for Iran is diplomatic and political importance, is more strategically important for Iran.
And that’s why we’ve seen the news that recently, although Iran has not enough gas export capacity, Iranian officials, Ministry of Petroleum, mentioned that Iran is going to build a pipeline to Syria and Lebanon via Iraq. What are the challenges for Iranian energy industry? Iran is currently facing many different challenges. The obvious one and the main one whenever we are talking about Iranian energy resources first comes sanctions. The sanctions against Iran since the Islamic Revolution has been existing, and they cause lack of investment and lack of technology. And Iranian huge resources of gas and oil suffered a lot from sanctions.
However, Iranian gas, particularly gas development, had a very huge rate of development under these sanctions after the revolution. But the Iranian energy sector is really suffering from lack of investment and lack of technology. And also, Iran has the Iranian particular oil will have a natural decline. They are old, and it’s expected based on IEA’s prediction that Iranian natural decline is around 400,000 barrels of oil a day per year. So Iran already has a natural decline. And maybe people are arguing that reducing Iran – by reducing its export and production, it’s giving it time to breathe to its old reserve well, and this might be good actually for Iran to keep its resources and not using them for later on.
However, if Iran stands under the same situation, which means lack of investment and lack of technology, it would be very hard for Iran to recover the amount of oil that they have stopped producing at the current time. Investment regulation is another major obstacle of investment in Iran. Many people really don’t look at it a lot, but I’m sure at some point, not at the current moment, that there is a great union against Iranian and development in oil and gas production. But in a few years ago, we see that foreign companies that once during early 2000, they were all – they came and invested in Iran, although the US imposed the Iran/Libya sanctions.
The French company was the first company to come into Iran and invest. But we see that particularly at the beginning of the [inaudible] presidency, most of these companies are leaving Iran. So the question here is that did the company leave Iran because of only sanctions? Or the investment regulations and type of contracts in Iran does not have enough leverage or benefit or profit for these companies to stay in Iran. Iran’s main challenge these days is Iraq. Iraq has the same huge resources in the neighboring country of Iran though the production cost is very little. However, it’s not so hard like Iran to enter this country, and we have a produce sharing contracts in the Kurdish side.
So there is always this main question that if Iran revised and reform its investment regulation, we are not saying that they take a huge jump to accept the producing contracts that is against Iranian constitution. If they revise this and reform the contracts in a way to make more profit for the foreign investors, are the foreign investors willing to break the sanctions and come to Iran and invest? This is a question that has been always a challenge for decision makers that they’re setting the sanctions against Iran. And the major reason is that the investment risks in Iran are really high because of domestic issues and conflict, because of international sanctions, threat of war.
They once in a while raise the question of war against Iran. And these are different high risk factors regarding the investment in Iran. So these companies that are signing this type of buyback contracts with Iran, they have to wait for a long time to receive their investment back, and this could be a risk for these companies considering that Iran also takes in charge of marketing of the production that is going to return the money of these companies back. Management and efficiency is also another issue that has always been discussed, and Iran really suffers from. I’m not saying that they are not expert person.
I am against that because I work myself for the Ministry of Petroleum, and there are many expert people, managers or experts. There are lots of educated people there. And this is the difference between Iraq and Iran. Iran has the educated labor forces that are highly professional. But the bureaucracy sometimes challenges the modern ways of dealing and investment in Iran. So now, coming back to our question, can the world live without Iran. I mentioned at the beginning about the huge resources of Iran oil and gas. It’s very hard to deny or to ignore completely Iran from oil market. Of course, for consumers of energy, the energy security relies in diversification of supply.
So having Iran, a country with huge resources and reserves of natural gas and production, will increase their energy security. Also, Iran’s geographical position is in a location that Iran can easily has access to the land, can export its gas if there is enough export capacity to China, to Europe, to Lebanon, to Northern Caspian by just pipeline, which is much cheaper in compared to transferring the gas through the sea. So it’s very hard to imagine that Iran with this geographical position and huge resources control part of the Strait of Hormuz is going to be out of the market. But I would like to look at and answer this question in dividing the time.
Can the world live without Iranian oil at the current time that we have sanctions against Iran? I would say the limit is 800, so we cannot really push Iranian oil export to less than 800 and to 1 million barrels a day. The major producer of oil, Saudi Arabia, really to accept and covered for Iranian lack of export in the market. But also, the global economy problem caused the lower demand in the market. At the beginning of the first quarter of 2012, the total oil production is around 91 million barrels a day. And the total supply is 91 million barrels a day of oil. And the total demand is 89.
So the demand relatively in compared to supply was lower, and this is because countries are not using energy as much as they used to use during the good economic times. So this was another issue that one market didn’t really react in the short time to Iranian export cut. Also, there is a union of customers against Iran. So we’re expecting, as Barbara mentioned, for many countries, for most of Iranian customers, to get their waiver from State Department. Even China that we were all expecting to continue buying from Iran and feeling it’s strategy, petroleum reserves that was just building and could absorb all of Europe’s consumption that around 500 or 600 barrels a day that Iran was sending to Europe.
But we see that China also reduced its purchase from Iran. For Iranian customers, it is now a buyer’s market. So by having the union against Iran, they are trying to push for lower prices. And again, Iranian is very wise so far not to give big discounts because if they would give big discounts, they had to go further and further to really cut their profit. We have news here and there that Chinese at some point offer $50.00 per barrel for Iranian oil, and Iran didn’t accept it. So the other thing that makes state departments work easy is just India, China, Japan, they have a union against Iran for the price negotiation. And what is going to happen in the mid to long term?
Do we need Iranian oil considering what was mentioned about US, Canada, and Iraqi oil and gas reserves? If we make – if we add all the projects that today – and all the contracts that have been signed today, by 2020, we’re expecting to have around 49 million barrels a day of extra supply in the market. And if we deduct the decline of production in many major producing companies plus different risk factors, we’re expected in the most conservative way to have 17.6 million barrels a day of extra oil. And if you add this to 93 million barrels a day of normal supply that we were having, it makes the world supply of oil come to 110.6 or 110 million barrels of oil a day.
Now, how much is the demand? It’s expected that if the demand by 2020 doesn’t grow around 1.5 to 1.6 percent, we are going to have a surplus of supply. Having a surplus of supply means collapse of prices. But how much the prices are going to collapse? Most of these resources that they are coming to the market are conventional shale gas, shale oil, particularly from United States. And the Balkan formation that we all are looking at its resources, it’s beneficial – they need the price of oil to be between $50.00 to $65.00 per barrel to be economically feasible to extract and develop this basin.
So if you have a price of oil lower than $65.00 and conventional gas and oil could not be economically beneficial to be produced. Also, it’s expected generally that if the prices of oil collapsed below $70.00 per barrel, around 20 percent of these resources that we are expecting to come to the market cannot be developed. So we are expecting that the bottom price of the oil in the next decade by 2020 to remain around at least $70.00. Also, if United States is planning to export its crude oil to Asia and Europe, there is a price competition between United States, Russian gas, and Persian Gulf [inaudible] gas.
In Asian and European market that the main suppliers are a gas prime of Russia and [inaudible], they set the prices of oil based – the gas based on the oil prices. However, it still is really high. The [inaudible] price of gas in the US is $2.00 to $3.00 per million BTU. In Asia and Europe, the prices the gas company is offering is $13.00 to $14.00 per million BTU. But if the prices of oil reduce below $80.00 per barrel, it’s not beneficial from Asian companies and European countries to import US gas. So US and the whole world need to keep the prices at the bottom level of $80.00 to $70.00 per barrel.
Now, if we have 6 million barrels of oil from Iraq by 2020, and we have all these huge resources of US and Canada coming to the market. If we don’t have the demand to grow enough, we are going to have surplus of supply. How we are going to manage the supply? Is Iran – does Iran need to be worried to be a target kept away from the market in order to managing the supplies. Investment in Iran has problems. Most of the international companies are not interested in investing in Iran because of the buyback contract. So it’s not so profitable for them to invest in Iran.
Second, the whole world thinks, at least US and European Union, that the Iranian oil revenue, which is the major revenue of the country, threatens the world peace. It helps Iran to develop its nuclear program. So it’s better to keep Iran’s revenue as low as we can. So what is better than Iran with all those huge resources and capacity of export to keep it out of the market? This is not only a challenge for Iran. Russia, China, Saudi Arabia, they are all looking at their market strategy in the future. What they should do in the future to keep their market. We talk a lot about Iraq. I’m not going to interfere.
My colleague, she is going to speak on that. I just have this chart on the right side of the page just showing the advantages and disadvantages of investing in Iraq. Iraq has huge resources. The production cost is really low in Iraq, same as Iran. It’s around 17 times less than Canada and 7 times less than Russia. So it’s really easy oil to come out and lots of profit because if you spend $4.00 to produce 1 barrel of oil in Iraq and sell it for $80.00, you make so much money. But if you spend $50.00 to produce one barrel of oil in US, you have to at least sell it with profit.
And compared to Iran, it’s easy for international companies to enter, and we have the [inaudible] side that they’re offering the produce sharing contracts. But on the other side, there are some challenges for investing in Iraq. And that’s why in the last few years and last four or five years, you don’t see the Iraqi market and investment to grow as fast as you were expecting. The hybrid [inaudible] law is the biggest challenge. There is a big conflict between the Kurdistan and the central Iraq government on what should be the law of hydrocarbon and investment in the country. This is a big challenge.
The two sides are preventing each other from development. Central Iraq is threatening the companies that if any company invest in Kurdistan, they are not going to work with them. Transportation, therefore, also is another issue. Lack of water and electricity for developing these fields is another issue. And as I mentioned, infrastructure and having an expert laborer is another advantage that Iran in compared to Iraq has and Iraq doesn’t have it. So I think it’s very important for Iran to revise its strategy. And here, the last is that can Iran live without selling oil? Well, for Iran, it’s very important to sell oil, at least at this current moment.
Most of Iran’s – around 80 percent of Iran’s export income and – I cannot read – 80 percent of Iran’s foreign export income comes from oil, of course. Iran is really dependent on its GDP for its oil export. It’s around more than 50 percent of government income is from oil. And the oil revenue has a very major part in budgeting system in Iran. So we see that at the current time, Iran is really depending on its oil revenue. But how can Iran revise its strategy like other countries? Not that this is just about Iran, but we see that Russia is revising its market strategy.
Turkey is revising. Consumer and supplier are both revising and adapting themselves, trying to adapt themselves to the future changes in the market. Iran needs to step ahead to try to raise or reduce or stop the sanctions against itself because this is the really Achilles’ heel of Iran, the investment and the technology. Also, Iran needs to revise its investment regulation and make it more profitable. Whatever they want to use, we don’t say that they have to use producing sharing or any type of contract, but just to make more profitable. Also, try to control – reduce their consumption because they are consuming a lot, and this hurts their expert capacity.
Diversifying their economy could be another issue. Iran already started to focusing and improving its petrol chemical and refining capacity. So if they had problems selling crude oil, they can add the value added to that and convert it to other products and sell it with value added. Well, these are my suggestions.
And I think that, like many other countries, Iran really needs to revise its strategies and its outlook, otherwise it’s very highly that if the demand doesn’t grow as much as we are expecting, and the supply grows as much as we are expecting, it’s a very high risk that the investors and the companies that they are investing and the unconventional oil and gas would benefit from keeping Iran out of the oil market. Thank you.
Denise Natali: Thank you very much. Thanks for the Atlantic Council for inviting me here. I’ll try to do a 15 minute on Iraq. Do I press this? We got it? Okay. We’ve asked the question can the world live without Iranian oil? And talking about Iraq, I assume the follow up would be can Iraq then become a viable replacement if we can or cannot live without Iranian oil? And at first glance, the signs seem to be pointing in that direction as Barbara and Sara both indicated. We know that Iraq has recently bypassed Iran as the second major exporter of OPEC. The International Energy Agency has predicted, as Barbara said, 6 million barrels a day by 2020, 8.3 by 2035.
And we are starting to hear Iraq now possibly providing a major source of stable supply amidst the uncertainty of Iranian crude. Now, what I want to discuss here today is I’m a bit more skeptical. And Sara has nicely outlined all of the other variables regardless of whether we have sanctions or not on supply and demand. But I do want to look at Iraq and why we shouldn’t be so optimistic, No. 1, about the International Energy Agency’s projections. But the very difficult geopolitical, political, and infrastructure problems in Iraq that’s not going to make Iraq a viable threat to Iran in my view, at least in the near to short term.
So again, this is about Iraq’s own potential. What can we expect? Let’s look at today, I want to – what we can expect from the Iraqi oil market, what are the possibilities and, again, the constraints? And how is this impacting the regional balance of power. Am I pressing this? Okay. So this map, we can look at it is the glass half full or the glass half empty. I want to try to be positive first because I’m usually too cynical. As we said, Iraq is sitting on a massive hydrocarbons reserves, as both of my predecessors indicated. There’s an estimated 143 billion barrels of oil, natural gas holdings of 126 trillion cubic feet.
I’m going to spend most of the time on oil because to this point, Iraq has not focused or developed its gas markets. About 70 percent are associated gas that’s largely been flared. And while you have some development of gas in the north, there is no viable gas market or pricing mechanisms to talk about. So let’s talk about what’s happened and what’s exciting about the Iraqi oil industry. Baghdad signed 19 technical sharing contracts since 2003. Over 50 signed in the Kurdish North with its own contracts. Baghdad is planning to invest $200 billion into the Iraqi oil industry in the next several years.
We’ve got single point moorings that have come online, pipeline agreements with South Korea, and we have the large West [inaudible], too, which is expected to start production next year. So again, all of this looks for a large increase. But if you look at this, and what I do want to look at, again, Iraq’s energy potential is also tied to its political trajectory. And as you’ve seen, from 1980 on, you haven’t seen a forward flowing and a direct upwardly moving production level. We’ve seen the ebbs and flows, again, tied to a very unstable political system at three different types of – or two since 1980, and actually three since 2003.
So we can take it from 2003 and be positive. But we do need to understand there is no historical trajectory of continuously moving upward because of the wars that have occurred. And because of this, and I’ll look at it later, there is massive infrastructure damage. There is massive investments that haven’t been made, so Iraq is not nearly close to what it would like to be. And some of the projects even that Iraqi oil industry specialists have projected 13 million, that’s been downplayed to 8. And now you’re going to see, I would say, even lower than that. So let’s look at what is this all about? Pipeline politics.
So some of the key issues and challenges. The biggest problem is not there are reserves, and they’re easily taken from the ground. It’s how do you get this to the market. And here, you need to look at the location of the field, the pipelines, and the politics. We know that their numerous pipelines exist. And as I’ve said before, most are nonfunctioning because of decades of war. So you have, since 2009, only one working pipeline. And that is the Iraqi/Turkish pipeline you can see going out to the Turkish parts to Jahon.
That initially had a 1.6 billion capacity, and now it’s only exporting about 400,000. There actually were two lines, but they were jerry rigged together, and now there’s only one line working. You will see there’s a strategic pipeline that was actually commissioned in 1975 to deal with the very issues that some are concerned about today. What happens if Iran closes the Strait of Hormuz? So the strategic pipeline was commissioned and finished in the mid 1980’s with the hopes of exporting southern oil northward. Now that’s also defunct. Then you have the line from Cartabella – the strategic pipeline that goes to Cartabella, that’s defunct.
Cartabella to Hadeeth, that’s defunct. And of course, Hadeeth to Bajee also not working. So you do have that is functioning in Iraq is bifurcated system. The northern fields coming out of Kirkuk, and you see again that Iraqi/Turkish pipeline that I talked to you about that is only right now, at most, exporting 400,000. Anchora and Baghdad renegotiated their pipeline deal in 2010 for another 25 years. And then you have the vast majority of Iraqi oil exports 80 to 805 percent coming through the south. And this is extremely important, particularly when we’re talking about Iran. Ramella – and in addition to this, you have a disproportionate amount of fields contributing to Iraqi exports.
So Ramella, for example, accounts for 40 percent, which is considered the third largest field in the world. And that produced last month 1.3 million barrels per day from this one field. So you’ve got one field and one export port producing the vast majority of Iraqi oil. The other part, again, I’d like to spend a longer time on the Kurdish production, but nonetheless, there is an important amount of potential here. And again, the International Energy Agency’s report included Kurdish exports.
But again, there’s the same issue of how are you going to get the Kurdish crew to the market? This is a landlocked region. There’s two ways out. Through the existing Iraqi pipeline, and what some Kurds are hoping for is their own pipeline, which is highly unlikely. Nonetheless, this depends on Turkey. So right now, the Kurdish region has only contributed to about a miniscule amount of 4 percent of Iraqi exports are actually coming from the north. And when Iraq surpassed Iran in terms of exports a couple of months ago, there were no Kurdish exports that were even part of this. So what is Iraq focusing on? It’s focusing on the southern markets.
The Kurdistan regional markets, regardless of what you hear, they’re too insignificant still to what Iraq is producing right now. So the energies are not toward whether we can discuss whether this is a dangerous strategy, but they’re not toward developing or repairing that northern corridor. Now, and again, I want you to look at – this is where the Kurds are trying to – you’ll see that longer – the blue line up going through Turkey to Jahon. This is where the Kurds – and this pinkish area is where the Kurdish area is. The Kurds are aiming and have to. And again, what’s important also is that Iraqi/Turkish pipeline, the metering station is at the border inside the Kurdistan region.
So regardless of what’s happening now is the Kurdish companies are now building feeder pipelines with the Kurdistan regional government to connect either they’re threatening to build their own pipeline, but in fact, they’re building connecting lines. And at the end of the day, it’s all at that metering station anyway, which is at the border. So there’s a lot of contentions right now, but you’re going to see if anybody wants their oil out, they’re going to have to cut a deal between Anchora, Baghdad, or build. Now, one of the – here is where I become even more skeptical, pessimistic because oil in Iraq is political.
It’s the heart of the political disputes right now. And this is where I would step back a bit and look at the International Energy Agency’s report and say unless these issues are resolved, you’re not going to reach 6 million barrels a day. What are they? One, this is all rooted in the 2005 Constitution, a very vague document that never really defined who has authority in Iraq, on paper, decentralized the Iraqi state, dismembered the central government authority, but never really defined who has the right to exploit, how resources can be managed, who has control over revenues.
And there is not still today, as Sara talked about, there’s no national hydrocarbons law. There’s no revenue sharing law, which is actually more important. And in my view, there is not going to be for a very long time because neither side really needs it because there’s too much money to be made without it. So what do you have? You have oil and land disputes right now. And so all of these contentious issues about authority and rights to exploit are rooted in the idea of what is Iraqi territory. And you see these – this is important. You see these lines, not the orange. That’s right now Kurdistan region proper, the three governors.
Since 2003, the Kurdistan regional government, while Baghdad was very insecure and weak, they moves their Pesh Murga in and are essentially stationed or occupying these disputed territories with their Pesh Murga. Adding fuel to the fire, these red lines here are where Exxon Mobile, and Exxon by the way is not the only international oil company that has signed contracts in the disputed territories, but nine others starting with Honda Oil. But they signed contracts, which are fundamentally different than the technical sharing contracts, inside these territories, which have no historical past of being part of the Kurdistan region.
So rather than now coming to some closer possibility of signing a national hydrocarbons law, you’ve got both sides further embedded in their positions. And of course, Kurds threatening to not export their small, little 100,000 barrels anyway. And Baghdad now taking away it’s only form of leverage, which is money to the Kurdistan region. I can’t get into the leverage points. But the point is these very deeply entrenched political issues and land issues have now been fueled by the oil sector contracts. And I want to make some point about the oil sector contracts.
Just as Sara said, I was interested to hear about in Iran, the production sharing contracts are unconstitutional. They don’t say in Iraq they’re unconstitutional. But they are at the heart of the Iraqi issue of state sovereignty. And you are not going to find a production sharing contract that will give international oil companies ownership of Iraqi land the way that the Kurds did. So while Iraq is still holding onto technical sharing contracts, they’re not as profitable as the companies – probably a little bit more than in Iran, but they’re not. And this is why some of the companies are going to the north where these production sharing contracts have absolutely no guarantee of payment.
But they do allow the companies to do what they really want is to book reserves. To book and cook reserves so that, therefore, you can be there for a long period of time. And again, there’s no guarantee of payment. Now, there is finally the issue of security and border security. And that’s going to get into some of the regional and geopolitical issues falling into the Iraq energy sector. That is to say you have the Syrian crisis. You have now Turkey and questions about is Turkey’s energy ambitions conflicting with its national security interests?
As Turkey consolidates its relationship with the Kurdistan regional government, as tensions exacerbate with Baghdad, is it also encouraging PKK Kurdish autonomy, which has spilled over into Syria, spilled over into Turkey, and you have now a worse PKK issue than you ever had. And you hear now chatter, more than chatter, in Anchora worrying about are we going too far with the Kurdistan region. How far will Turkey go in this whole threat of building a pipeline over without Baghdad’s control? I do want to make one point about China. We have talked about where this extra Iraqi export or production will go to.
And what you’re seeing is a bifurcated Iraqi energy sector where private, some American oil companies going to the north with these production sharing contracts. And don’t be dismayed. Baghdad will fill Exxon’s position with national oil companies. We know about the seven sisters. We also know now about the emergence of the seven brothers. And the emergence of national oil companies, particularly China and Russia, so you will see China and Russia possibly or likely to dominate the southern sector and to replace these international oil companies while the private companies go up north.
And I’m glad that Barbara made the statement about of the 6 million barrels that Iraq is expected that is right. China is expected to take – or not only be a partner but be a beneficiary of Iraqi oil. And in 2013, for example, China’s [inaudible] is expected to double the amount of crude it purchases from Iraq to about 568,000 for a total volume. So this is not going to compensate for all, but let’s look at who is filling this. And it’s non OEC. It’s part of the non OEC rising demand. And I want to briefly get into finally the known unknowns. I’ve talked to you about how regional geopolitics are actually further – that’s just a map.
We can look at it anyway. Further impeding or further challenging Iraq’s energy export potential or development. We had the Syrian crisis, again, this is a real – this could be a real game changer. What type of regime can emerge in Syria? There were once pipelines projected between Iraq and Syria. How is this going to play out? If the Sunni Arab regime emerges in Syria, how will that undermine, if at all, the [inaudible] government. Turkey right now is between Baghdad and [inaudible]. I think Turkey is playing a game of leveraging Baghdad through the Kurdistan region.
I am a bit more skeptical about any type of independent pipeline being built. But nonetheless, there is very deep fissures right now, and the extent to which Turkey can ameliorate its relations with Baghdad and develop that northern line. This is the key to Iraq’s real production increase. And right now, with 4 percent only coming from the Kurdish north, you have to ask how else is it going to get out? So you have to – again, there was some talk about with the US bank JP Morgan and the KRG to develop this pipeline, but the political risks are too high.
Now, finally, from an Iranian perspective, unlike the gulf states, which look at Iraq as a real – not as a real threat or challenge in terms of energy, but the Iranian leadership can look at Iraq in an oil centric mentality. So the extent to which Iraq can outpace Iranian production while sanctions are going on could, again, turn back on Iraq. We don’t know the way that Taron can make it more difficult for Iraq to realize its energy objections. Again, I go back to the Strait of Hormuz. We all say well, this is impossible. Iran would never do this. There’s too many repercussions.
But we still have to ask if the straits were closed that would essentially kill today Iraqi exports since 4 percent are going north, 80 to 85 percent are going south, and the rest is internal. So Iraq is playing a quite risky game by not to this day developing its northern line. There have been some attempts. It’s not moving forward. They’re entirely focusing on the south. So right now, you have a disrepaired northern line. So I’ll conclude quickly. I don’t see Iraq realizing its energy potential of 6 million. I would project about 4 million by 2016.
I don’t see the tensions with the KRG being resolved, but because the KRG doesn’t have half the leverage it really thinks it does, Turkish/Baghdad amelioration of relations could greatly move forward this potentially increased production levels. And so therefore, Iraq could expand gradually. But it will have to drastically either increase northern production or reconnect the south to the north to maintain this nameplate capacity. And again, this is not just the dichotomy between Iran and Iraq. We also need to look at, again, where the demand is as Sara nicely said.
And the gulf states, what’s going to be happening with the demand within the gulf states itself and how these Middle Eastern countries are actually going to use their oil production. Will they increasingly be using it for domestic reasons to pacify local populations after the Arab spring that are looking for domestic or government support? Or will it increase its exports? And I have to make that quick. But thank you.
Barbara: Okay. Well, I knew it was going to be impressive – going to be that impressive, but it really was. Thank you both very, very much. I’m going to get this started, and then we’ll open it up to questions. I have a feeling there’s more expertise in the audience than I have about this particular subject. But just going back to the political implications of all of this. I guess the question, maybe it’s for you Sara, is whether Iran will permit Iraq to become such a major seller, whether Iran will collude with Iraq. After all, the two governments are, at this present time, fairly close allies one would say.
And is there a way in which Iranian oil companies, for example, might come in and develop some of the Iraqi fields? What could Iran try to achieve with Iraq so that it would not be paying such a heavy price for this increase in Iraqi consumption – or rather production?
Sara: I just remember my discussion with one of the Kurdish officials in Washington DC, and they were keep mentioning that the conflict between Central Iraq and Kurdish side not having permanent or unified hydrocarbon law is Iran’s rule. So they were saying that this is Iran’s central activity and their influence on the Iraqi minister that they cannot reach that avenue. This could be funny, as many of you laugh, but of course, Iran is not sitting quiet. Not to have a disruptive role, but of course, Iran is sometimes very subtle in its activities. But as my colleague mentioned, there are lots of challenges for Iraqi oil to come to the market.
And Iran could see this as a threat, unless they’re staying under the current circumstances that the sanctions and lack of investment – sanctions under oil export is remaining, and they cannot really double all of their fields. I personally really believe that if Iran make a revision on their investment regulations, they can once again practice sanctions. Not at this current time that there is this high unity against Iran, of course. But let’s say if Iran goes a year or two years more and resists. At the beginning of my discussion, I mentioned that the world didn’t shock – or was surprised that the market didn’t shock of [inaudible], but also, Iranian resistance was shocking, too.
Being so much dependent on their oil revenue and just exporting half of what they were exporting.
Barbara: Do you want to add anything about that? Do you see that Iran is responsible for the fact that the Kurds and Baghdad can’t reach agreement on a hydrocarbon law?
Denise: This is fantastic because I’ve heard the blame put on Turkey. This all makes it –
Barbara: Oh dear. Now, it’s on.
Denise: That now, we’re blaming Iran. But I wanted to make one point about this hydrocarbons law. People have been talking about it since 2007, and when I’ve been in the north in the last seven years, except this last past year, there was never any real possibility that hydrocarbons law was going to be passed. It’s good investment talk. It builds investment confidence. It’s even gotten worse. But even now, it’s neither in Baghdad’s interest or the Kurdistan regional government’s interest right now to have a hydrocarbons law for the following reasons. One, Baghdad doesn’t really need one.
As I showed you, most of its production is coming from the south. The central government is consolidating its power. Malachi is getting increasing support whether or not we consider them a dictator or not. So the focus is on the south, and they’re operating on a group of all Saddam laws, laws that are negotiated with with the [inaudible] government. But it’s the north that needs this law. And even then, look, you’ve got major IOC’s leaving Baghdad going to the north. For every – and what the Kurdish oil ministry needs right now is to get out the small companies and have about 10 oil majors in the region.
What does that mean? It means not paying that. So this is a survival of the fittest. Every oil company that comes in gets a new sign on bonus of at least $150 million. For every sign on, that means you have another three years before production can start. So for every new company that comes into the Kurdistan region, they just gained three more years of not having to pay anything. So it’s a great deal. People are making millions and billions of dollars without having to ship oil out. So this allows to prolong the issues of disputed territories. It allows you to prolong really difficult issues of hydrocarbons laws.
And it allows still oil to be trucked to Turkey, non disclosed revenues to be made, oil to be trucked to [inaudible], non disclosed revenues to be made. And again, allowing the oil majors who if you ask, they’ll say we don’t need anything for 30 years, 20 years, 10 years. So they’re waiting. It’s the small companies who need to be paid or they have to leave, and that’s just what the oil minister wants. So back to the oil law, I don’t see it happening for many years to come.
Barbara: One other question, and that’s on pipelines. Iran has been trying to build a pipeline to Pakistan and India. Where does that stand? Okay. Switch mics. Mine’s working. Yours are not. The question was whether there are any pipelines that Iran can construct for oil or for gas under the current sanctions regime that can help them. I believe they’ve been constructing a pipeline to Pakistan. I don’t know whether that’s viable. I don’t know what the politics are in the Pakistani side of that as well. But have you heard anything on that?
Sara: Well, Iran can always make pipelines. I mean, building pipelines, can always be – it’s doable. They can build pipelines. But if there is any gas to flow through these pipelines, that’s the main question. The main thing is that at the current situation, Iran’s consumption is more than its production. And they’re importing for their domestic use. And they have 25 years agreement with Turkey that if they come out of it, they have to pay a fine perhaps. So they’re importing from Turkmenistan, and they are exporting to Turkey. So there is not, at this moment, a capacity for Iran to export gas.
But exporting gas and talk of exporting gas because it’s usually gas exports are very long term contracts, at least 20 to 25 years, whether if the pipeline or if it’s an LNG, it helps Iran to show that there is going to have a long term alliance and long term strategy connection whether it is Pakistan or India, or it’s Lebanon and Syria. So that’s why export to – Iranian gas export now is targeted by Congress and European Union just because it helps you strategically to develop partnership with the countries that they’re receiving.
Barbara: Let me open it up to the floor. Wait for a mic and say who you are.
Audience: [Inaudible], National Petroleum Enterprises. Thank you all for the wonderful remarks. I tend to agree with much of what Dr. Natali said about the pessimists that she mentioned about Iraq’s future production. And I would like to add a few things if you don’t mind.
Barbara: Please do. And also, a question somewhere in there.
Audience: Sure. The polarization of – Iraq is really almost a landlocked country, as you mentioned. Only a small portion goes through north. So any additional tension would polarize the situation, and there was a mention of Ramella and then the contribution of that field, and it’s going to be much tougher. And Iran definitely has a much better position down south with the Shiite groups. So that’s one. The type of contracts you mentioned maybe more viability or better situation for Iraq is actually is not the case. The buy back is far more superior because at least companies would get their money back. This is not the assurance.
And we’ve seen a lot of reneging. It’s not by Exxon only but also Shell is going to shape a considerable amount of investment. So there are – and if the national oil companies come in to replace the IOC’s, then the efficiency would go down. So definitely the outcome is going to be much more negative that has been prescribed. So for all these things – and if in case Iraq is successful, Iran always has the card of demanding the war reparation. This is another factor. And to address what Barbara was asking, their commitment is not only to Iran. Their commitment is to OPEC.
And if they want to remain as a viable member of OPEC, then they have commitments. And Saudis are going to raise more questions about their ability. And as far as Iran is concerned, Iran – I remember, I was working in Iran before the revolution. And the policy of – that was a strategic decision under the Shaw towards the end that Iran is not going to produce more than 3 million barrels today. And even today, Iran is producing more. So long term, strategic planning is still in place, and it’s working. So Iran is not – and as far as export, it’s 10 times more than what Iran had during the Iran/Iraq War.
So with all of these factors, the question is really can the world live without the Iranian oil? And it’s not only the second position in the gas or the fourth or fifth position in the oil, the total hydrocarbon position of Iran is the biggest in the world. So is it easy to bypass that country with all that potential and all the expertise and all the experiences with the nationalization, with the long duration of the war, the problems that it had to go through, and 30 years or more of sanctions? Thank you.
Barbara: I’m not sure there was a question. I think it was more of a statement. But what would happen, if I could sort of add onto that, if Iran does close the Strait of Hormuz, or tries to, in the current situation? What do you think the price of oil would be?
Denise: Well, right now, Iraq does not have – they keep talking about building strategic reserves. This is so short sighted of Iraqi officials. They could jack up their northern line, but we don’t know whether that capacity could possibly go to 750,000 barrels. It hasn’t gotten over about 450 since 2003. So what would happen is that you would have right now a stoppage. So 80 to 85 percent is coming out of the straits. There is no line. The Saudi line, that’s been defunct for years. The line to Syria, that’s not functioning. And 10,000 barrels to Jordan that doesn’t work.
So either you have to – and if you started even investment today, you’re not talking about a couple of years until this could go through. So this would cripple – what would happen, it would cripple the Iraqi oil industry. And 95 percent of which accounts for Iraq’s [inaudible]. It’s much higher than Iran’s. So we’re talking about –
Barbara: What would the price of oil be do you think?
Denise: Well, the price of oil – well, Iraq’s – actually, the revenues decreased in November by 4.5 percent because last November, I think it was at 105. That’s what – even then, so – in a couple of years, I can’t project. I don’t see it going, as Sara said, underneath $80.00 or $70.00 a barrel.
Barbara: But if there were a blockage of the strait now given this situation, what do you think the price of oil would be?
Denise: I can’t make that projection.
Barbara: Can you?
Sara: Well, just to mention about the $70.00 to $80.00, we were talking about the price of oil in 2020, not in the next few years. And it’s expected that by 2015, still the prices are volatile due to the supply, demand, and political tension. So that the bottom line of the price was if we have a surplus of supply. But there are many different – I mean, there have been expectations and the forecast that the price could jump from $150.00 to $200.00. But historically, we never seen that Iran close really the Strait of Hormuz. And if this is going to happen or not, or when it’s really going to happen, I think that’s the main question because Iran also uses the Strait of Hormuz.
And I don’t think that Iran – unless there’s lots of pressure or Iran really cannot export any drop of oil from that strait or import anything that might be happening. But I don’t see that as something to happen soon.
Barbara: One other question. With these waivers that are being given and so on, it seems that these countries are decreasing by 20 percent every six months, something like that. How low can it go? I mean, where is Iran going to sell the oil that it’s not selling to these countries that are going to be getting waivers?
Sara: Well, these waivers are not monthly based. So State Department expects that Iranian customers to reduce their purchase from Iran annual average. So they are looking at their annual average of their purchase and compared to their purchase last year. And the reason for that is, for instance, we are reaching to the winter. The season is cold. The seasonal demand is higher. So if China or South Korea import more from Iran, there’s now going to be contradiction with what the State Department wants them to have a waiver. But as I mentioned, the demand was not high this year. And there was excess supply in the market.
And something very interesting, I mean, it was all expected that Iran’s export is not going to drop more than 300, which it dropped highly. But also, we should look at the other side. Surprisingly, Iran also survived so far by just selling 800,000 barrels of oil a day.
Barbara: Not very well from my –
Sara: No, not very well, but still.
Barbara: Yeah. Any other questions? Yeah. This gentleman here.
Audience: You talked about –
Barbara: Could you say your name, please?
Audience: I’m so sorry. Rashid Chotani You talked about various other nations that have recently found reserves of oils, including United States. You did not discuss the Stans, the Kazakhstan and Uzbekistan role in that particular equation because that will change how oil is exported to various countries. If you can shed some light on that, I’d appreciate it.
Sara: Well, we were just talking about the main game changes in the market, and the main game changers are expected to be Canada and United States because of the new technologies that we have to produce shale gas and shale oil and Iraq. And these are the main game changers. If you have any certain idea, I would be very happy to hear that. But –
Denise: What we know of Kazakhstan, for example, is yes, Kazakhstan is absolutely developing its energy. But China is developing and building its pipelines tapping into Kazak absolutely. So whether Kazakhstan or Kazakhstan is developing its energy supplies, I would see that as one of its main sources will be Southeast Asia, will be China. And I would be looking at where those pipelines – who is sourcing those pipelines and who is building them. I don’t see that – I would like to see where the excess supply or producing is going to. I see that going back to Southeast Asia. And filling that question is where is global supply moving toward?
I mean, it’s not always CD countries. But I don’t see Kazakhstan as the game changer.
Sara: But the flow of energy absolutely is going to change because US dependency on the Persian Gulf resources is going to be much less. And more so, the Persian Gulf resources are going to be directed to Asian market and European market. This will absolutely change the geopolitics of energy. We are going to see China to be more concerned that US [inaudible] Strait of Hormuz at that time because it’s dependent on most of its supplies from Persian Gulf.
Denise: I just want to make one other point about the gulf. We’re talking about the Persian Gulf, and then we have the Arab Gulf states. And what’s happening, as we know, some of the key exporters of OPEC are the Arab Gulf states, the GCC. What’s happening inside the GCC right now? Increasing demand, increasing unrest, state governments redirecting some of their exports and export revenues toward their populations. Why? To buy them off, to increase subsidies, to increase salaries.
So some of the concerns, and I’m not going to go this far that Saudi may become an oil importer in the next 20 years, but you certainly have other GCC countries, whether that be Bahrain or the smaller UAE will probably likely be importing oil. So you have to also look at what else is happening in the gulf and where that other excess oil, which we thought was going to be there, is now – or how are these regimes spending their export revenues? And I would say they’re going to be more increased toward their domestic populations.
Audience: [Inaudible]. Thank you so much for an excellent presentation. I have a question for Sara. Let’s imagine that the projection that you put forward comes true, and let’s imagine that the Iranian government sees it the same way. They’re seeing that time is not on their side and that they’re going to get squeezed out of the oil markets, even if the uncertainties are there. They still come to the conclusion that that is the most likely scenario. What are the various responses that you see then become likely? Perhaps responses that currently are deemed unlikely?
Because assuming at the end of the day, he Iranian government is not going to roll over and play dead and watch this over the next eight years occur to it. What are the things beyond closing the Strait of Hormuz or creating some instability in Iraq as it’s been accused of. Are we also seeing a scenario in which perhaps an incentive is being created for the Iranians to actually make the decision that according to the US Intelligence they have not made, which is to actually build a bomb rather than just having the option, the nuclear bomb?
Sara: Well, I think you’re more expert than me to answer this question, Treda. But regarding the energy side, my experience working with Iranian government is that usually, they don’t respond under the pressure like this. I mean, they step forward. They try to reconcile. But something that we forget often is that they sold oil under the war. And this is what I heard from my peers and people that they were much older and more experience, they’re telling us that when there was a war under the Iraq/Iran War, they would send a group that they would say good bye to their families, take the oil on the international water to sell it.
So they psychologically, the Iranian leaders are used to working under tension and hard times. And they won so far before the current situation so far. So it gives them confidence, too. Regarding the bombs, I prefer not to really give comment because that’s not really part of my expertise. But things that I can see that can help Iran to ease the situation on its own behalf, not only because Iran is at this current situation but because other countries, other producers are also looking at this. Just a few months ago, Putin ordered gas to revise and look at their strategy and make sure that they are not going to lose the market in the next decade.
What I see is that they have to control their consumption because Iranian consumption has really consumed their export capacity. They have to revise their contracts. Again, I’m not suggesting that Iran should – because it usually takes time for Iran to take a drastic change to act against the constitution, but still, there is lots of way that Iran can make its contracts beneficial for international investors. And also, the most important thing is that Iran should step toward picking an attitude or whatever in its negotiation, particularly with the United States, toward a reconciliation because the current sanctions are really hurting Iranian oil industry.
Before US Senate, once in a while, the Congress would come with the name of a company. And they would say okay, this company has an influence of revolutionary or a connection, it sanctions. Now, what they did is just a few months ago, they just came and said no one can invest in Iran. No one can sell anything to Iran. No one – whatever you have, you should stop your activities in Iranian energy industries in details in certain months like maximum 180 days. There is no way – I talk a lot with Japanese. There are no loopholes anymore for companies and countries to sell procurements to Iran, to import anything to Iran, to buy or to invest in Iran.
And what they did, Treasury Department, just announced that okay, we have no evidence. But what we announced is that NIOC, National Iranian Oil Company has an influence, is influenced by the revolutionary guard, therefore, they are sanctioned with having no clear evidence. But of course, Iranian Oil Ministry has a close tie to the revolutionary guard. So this is really hurting. It’s not anymore investment limitation. It’s not anymore particular companies tied to revolutionary guard, but it’s total. There are no more loopholes.
So they have to really walk toward or choose an attitude or solution to reduce or stop or waive the sanctions against themselves.
Barbara: That’s very good news, at least in terms of what negotiations coming up and so on one hopes. How long, I guess, can Iran go on selling such a small amount of oil and still manage to meet the minimum demands of its society?
Audience: Well, it’s really hard for Iran to go further than this. It’s really hard on people. We know the inflation. We know there is lack of sufficient goods in Iran. But also, something which is very important is that, again, the US government and the Congress are forcing Iran to use its money – it’s oil revenue only to buy necessary goods like food or medicine. Congress just passed a bill that no country can sell gold or precious metals in return to Iranian oil revenue. This means Iran cannot anymore have any dollars or precious metals as an investment to invest it or to spend it on whatever they want.
They have to just spend this money on buying medicine, goods, or grain, or rice.
Barbara: Anymore? Yeah. Back there, wait for the microphone, please.
Audience: Thank you. Alidad Mafinezam. My question has to do with what Barbara asked at the beginning, and that has to do with the status of the so-called shared fields between Iran and Iraq because every time there is more pressure put on Iran, I feel you hear people in the Oil Ministry saying this is the year when we’re going to settle the status of these so-called shared fields. And it’s with Iraq but also with Khattar and the South Parse gas field and also, perhaps, with Turkmenistan and the Dolatabod field there. And it seems like a perfect storm. And I wanted to ask you how you think that’s going to play out?
Sara: Well, unfortunately, Iran is really losing on its shared resources, both gas and oil. After the revolution, Iran is facing eight years of war. And then there is sanctions, lack of investment technology. So it was really – Iran was really behind, particularly about Khattar. It’s like the shared gas field between Iran and Khattar is just like a big milkshake. Though Khattar destroys this much big, and Iranian this much small. So they’re really losing. And although Iran put its priority for all the investment and putting money and developing the oil fields into the shared fields, and they were really successful for at the beginning of 2000 when all these companies came to develop these shared fields.
But still, they are much behind the neighbors. I’m mostly worried for the shared fields with Khattar that they have all these American and all these investors there, more than the shared fields with Iraq.
Denise: Yeah. And just about the shared fields with Iraq, on the Iraqi side, there has been stipulation – and no international oil company is even willing to bid on those fields. So they won’t even – they haven’t been and are unlikely to be developed on the Iraqi side. On the Iranian side, there have been some efforts here or there. But it’s not significant enough, and the Iraqis aren’t taking it enough as a threat. So they’re just leaving it there.
Audience: How large are these shared fields?
Denise: The one shared fields, it’s, again – I don’t have the figures, but it’s not significant enough for the Iraqis to develop, and nobody has done 3D seismic on it anyway. So a lot of this right now, by the way, is – are reserves based not on 3D seismic but on speculation of what they think it is. But it’s just too politically contentious that the Iraqis are not going to touch it.
Barbara: Okay. Perfect. I think we’re just about up. One more. Okay.
Audience: Hi. Naki Mendoza, Energy Intelligence Group. I’m just curious if say that a grand deal is struck sometime over the next several weeks between the P5 plus 1 and Iran and sanctions are eased allowing oil exports to resume, how do you think they’ll play out? Would oil exports resume back to business pre-2012? Or do you think markets have gotten comfortable enough living in this world without Iranian oil, and how would that impact the Iraqi exports as well?
Barbara: That’s a really good question.
Sara: That’s the unfortunate thing about Iran losing its position both in the OPEC reaching to No.5 and also losing its market because as we mentioned that currently that we have a surplus of supply in compared to the amount of demand that the market – at the situation that all the country producers are trying to increase their markets and secure their customers. And they’re seeking for security of supply and security of demand, Iran is losing its market. Saudi Arabia in case of oil and Russia, we already see that Russia is trying to capture Iranian market by having negotiations with Turks.
And if this happens, if this goes longer, and Iran – the world used to having Iran only exporting 800 barrels of oil only a day and losing its status for a long time, it’s going to be very hard for Iran to gain its previous position back.
Denise: Okay. But you need to look at Iraq. It will take a long time. It depends how long it goes for. And what happened to Iraq when we looked at my chart, whether that’s from 1980 to now, no one thought that Iraq could hit almost its pre 1980 levels. But that did not happen in two years. So there’s a larger trajectory of what’s going to happen in the region, and I would look at Syria. We have to see how that plays out and where Iranian influence in the region is going to hold after, if and when, the Assad regime.
Sara: That’s a very good point. Whatever we’re – I mean, my comment was if everything remains the same as it is. If we have any political tension or if you have any natural disaster that any major supplier is going to hit, or we have a major supply interruption, of course, you should look at the spare production capacity in the market that historically is really low because Saudi Arabia is already trying to fill the gap. So we are talking as if every day, everything remains the same. We don’t have any increased or expected political instability or major supply interruptions.
Barbara: And it’s the Middle East, so you can’t expect things every to remain the same. Thank you both very, very much. I think that was really fascinating and something that we need to take into account as we talk. I try not to be optimistic about the upcoming nuclear talks, but it does seem as though, at least in terms of the energy markets, the stars are aligned for some sort of compromise. So I hope we see that going forward. Thank you.
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Duration: 88 minutes