A new game on the energy chessboard
With President Donald Trump refusing to re-certify Iran’s compliance with the nuclear deal, new variables have begun impacting the global energy equation.
The original sanctions imposed on Iran had a devastating impact on the country. Yet, after 20 months of “arduous” negotiations, once the Joint Comprehensive Plan of Action (JCPOA) between the P5+1+EU and Iran was signed, things changed rapidly.
Iranian crude shipments to Europe surged to about half a million barrel per day after the 2015 agreement. Five countries that were standing with the US during the negotiations – Germany, France, UK, Russia, and China – all are now saying that the agreement continues to prevent Iran from building a weapon and should remain in place.
“Europe seems unwilling to re-impose oil-related sanctions,” Homayoun Falakshahi of Wood Mackenzie was quoted as saying.
Leaders of France, Britain, and Germany have instead, warned the United States against harming the nuclear deal.
“We encourage the US Administration and Congress to consider the implications to the security of the US and its allies before taking any steps that might undermine the JCPOA,” President Emmanuel Macron of France, Chancellor Angela Merkel of Germany and Prime Minister Theresa May of the UK said in a joint statement, after the Trump announcement.
However, it may be difficult for Europe to resist Washington for long. Goldman Sachs in a research note last Tuesday said European firms, which buy about 25 per cent of Iran’s oil, could stop their purchases for fear of triggering US sanctions. However, the bank is less certain how Asian buyers would react. “We believe the key to the global oil market is whether these flows will be curtailed rather than simply redirected to Asia,” Goldman Sachs said. Sanctions would initially impact several thousand bpd of Iranian exports, but the shipments aren’t likely to drop to pre-deal levels without full international backing, Goldman underlined.
Risk consultancy Eurasia Group’s assessment is similar. If the United States withdraws from the deal, the European Union would most likely try to avoid its companies from complying with renewed sanctions. However, European firms may still pull out of Iran. “Oil importers in Europe, South Korea, and Japan will also likely decide against purchasing Iranian oil. But it is far less likely that China or India will acquiesce to a US demand to significantly reduce, or halt, their imports,” Eurasia Group Chairman Cliff Kupchan wrote in a briefing. Iran’s sales to China, its biggest buyer, swelled in August to the highest level since June 2016, according to ship-tracking data compiled by Bloomberg. In this scenario, Eurasia Group estimates that Iran could limit its losses to about 300,000 barrels if it offers China and India significant discounts.
President Donald Trump’s announcement, however, has added to the existing uncertainty in the crude markets. Benjamin Salisbury, energy policy analyst at FBR Capital Markets, told the press that oil investors would need to be aware of potential risks down the road and not get complacent. “The president has made it very clear that he wants to escalate the pressure on Iran. So sometime middle of next year you could see the deal start to deteriorate and then you could have a meaningful impact on oil supplies right when the market is tightening,” Salisbury said in an interview.
Andy Lipow, president of Lipow Oil Associates believes Trump’s announcement introduces “a degree of geopolitical risk and uncertainty going forward that could increase oil prices.”
Companies such as Total SA, which in July became the first major Western energy company to sign a deal with Iran since the 2015 accord, may face new hurdles in contributing to the country’s estimated $100 billion need for oil and natural gas investment.
“Total is the only company with long-term commitment and investments and interests in Iran right now,” Iman Nasseri, a senior consultant at London-based researcher FGE said. “There will be extra risks.”
Trump’s focus on Iran’s Revolutionary Guards Corps, could become a particular problem because energy companies will probably have to do “a lot of extra due diligence before committing to any deal,” Wood Mackenzie’s Falakshahi added.
Iran has raised oil output to some 3.8m bpd since sanctions were eased and it’s seeking to boost production to 4.7m bpd over the next five years. Iran’s gas reserves are huge. As per BP Plc, it stands at 1,183 trillion cubic feet (33tr cubic meters) – almost four times the size of US deposits.
Trump’s decision has definitely made the global energy scenario still murkier.