Iran After the (Potential) Nuclear Deal: What’s Next for the Country’s Natural Gas Market?
Iran is the perennial “elephant in the room” of international gas trade, a country which could, one day, become a major game changer of international gas markets but the potential of which still remains today fundamentally untapped due to a number of geopolitical and commercial reasons. Among the others, the main reason of the current under-exploitation of Iran’s natural gas resources is clearly linked to the difficult political relations evolved over the last decades between the country and the West. However, the history of international relations has shown several times that relations between major actors in the international system could rapidly shift if the political willingness to do so is there. An example of these sudden shifts is the rapprochement between the United States (US) and China occurred in the early 1970s after a great diplomatic effort of the US Secretary of State Henry Kissinger. Furthermore, the more recent political developments in the southern shore of the Mediterranean clearly exemplify the need to be able “to think the unthinkable”, particularly when dealing with the Middle East and North Africa (MENA) region. No one would be able to predict the Arab Spring and its rapid development, but the turmoil actually occurred, radically changing the geopolitical equilibrium of the region in a structural dimension.
The dynamism of international relations exemplified by these two different historical moments could now be well applied also to Iran and its relations with the other actors of the international system (and notably the US). As a matter of fact, the presidents of the US and Iran talked for the first time since 1979 when Barack Obama called Hassan Rouhani on September 27, 2013 -when the Iranian leader was heading to the JFK airport in New York after having addressed the UN General Assembly-. Moreover, after years of frustration and impasse in negotiations between Iran and six world powers (the five permanent members of the UN Security Council plus Germany, known as the P5+1), an interim deal on the Iranian nuclear program was finally reached in Geneva on November 24, 2013.
Under the terms of this six-month deal, Iran and the P5 + 1 agreed to a series of steps to be carried out while a conclusive agreement is negotiated. On the one hand, Iran has agreed to a number of points, including: a) Halting enrichment of uranium above 5 percent purity; b) “Neutralise” its stockpile of near-20 percent-enriched uranium, either by diluting it to less than 5 percent or converting it to a form which cannot be further enriched; c) Not build any more enrichment facilities; d) Not increase its stockpile of 3.5 percent low-enriched uranium; e) Provide daily access to Natanz and Fordo sites to International Atomic Energy Agency inspectors and access to other facilities, mines and mills. On the other hand, the P5+1 has agreed to: a) Provide “limited, temporary, targeted, and reversible [sanctions] relief”; b) Not impose further nuclear-related sanctions if Iran meets its commitments; c) Transfer US$4.2bn to Iran in instalments from sales of its oil.
This occurrence certainly represented just a first step toward a truly complete resolution of the Iranian nuclear issue, but it could be seen as a positive sign for the future. If these recent developments will have a resolutive follow up, great opportunities could open up in Iran, also with regard to the natural gas sector.
Considering the world-class size of the country’s natural gas reserves, such a shift could well make Iran a real game-changer of international gas markets. In order to fully understand this potential the first section of the paper will present an accurate analysis of Iran’s natural gas market fundamentals, focusing on the reserves, on the current levels of production and consumption, and on the current trade dynamics. The second section of the paper will widely discuss the main commercial and political barriers to the development of the country’s natural gas market, such as the country’s petroleum legal framework, the country’s system of energy subsidies and the international sanctions affecting the country. The third section of the paper will finally present an outlook of Iran’s natural gas market in the aftermath of a potential nuclear deal, discussing both the prospects for the domestic market and the various export opportunities, but always taking into account the commercial issues that will need to be resolved in order to allow a sustainable development of the country’s natural gas resources.
Simone Tagliapietra is a researcher at Fondazione Eni Enrico Mattei and a visiting researcher at the Istanbul Policy Center