Crude Oil Helps Unfreeze US-Iranian Relations

By: Andrew_McKillop

SAVING PRESIDENT OBAMA
Missing in the diplomatic and media hoopla surrounding US-Iranian relations, for example the missing “photo op” handshake between the USA's Obama and Iran's new president Rouhani at the UN General Assembly, the three-letter-word oil was also absent.

For some, given Obama's often farcical and fumbling foreign policy initiatives, it might seem the mounting momentum for an end to Iranian sanctions is only another initiative with no real goal except saving the president. As we know, a phone call between the two turned out to be “almost as good as a handshake”. As we also know, ending sanctions and normalizing US-Iranian relation may move very rapidly – whatever Israel can do trying to slow it.

Since 2012, newswires regularly post encouraging news on Iraqi oil, for example Iraq's rising rank inside OPEC for oil output. On Dec 28, 2012, Bloomberg reported it jumped two places to No. 2 in OPEC rankings for 2012 – because sanctions-hit neighboring Iran had dropped three spots to fifth place. Not mentioned by the newswires, Iraq's rank was also helped by third-placed Venezuela's oil output continuing to decline – as it has, on and off since 1999 for a 25% decline in national output over 12 years.

Iran's output has been in decline since the end of 2008, OPEC and IEA data shows, and has accelerated this year as US and EU sanctions were tightened, aimed at curbing the Islamic republic’s nuclear program. Due to far greater social cohesion and political stability in Iran, however, an end to sanctions will rapidly trigger the return of foreign oil majors, unveiling the prospect of Iran's oil output decline being halted, and shifted to growth at a sustained rate.

LIBYA AND IRAQ
Libya like Iraq massively increased its output in 2012. In Libya's case its production doubled in one year, to about 1.3 Mbd (million barrels a day) from the lows attained during the NATO war of 2011. Iraq's oil output increased 24% in 2012 to attain about 3.25 Mbd in early 2013.

Operators including Total, BP, Shell, Eni, Wintershall and OMV returned to the North African Arab nation after the removal of dictator Muammar Gaddafi. This was however not sustainable. The same war that removed Gaddafi also unleashed widespread and continuing Sunni-Salafist extremist insurgency and regional sovereignty conflicts with the Tripoli government. By spring 2013 BP had begun reconsidering its operations, and Shell had abandoned its exploration program in Libya. National oil output fell about 70% in the first 7 months of 2013 to about 0.66 Mbd, close to its wartime low, according to oil minister Abdelbari al-Arusi in a Reuters interview of 27 August.

The potential for Iraq repeating its output-growth exploit of 2012, this year, is now zero. Converging factors, including near civil war and extreme insecurity, and the actions and policies of the unelected al-Maliki federal government in Baghdad make it likely that Iraq's oil out put will decline this year.

The reliability of Iraqi exports is not only at risk due to Iraq's federal central government in Baghdad refusing to agree to terms set by the KRG (Kurdistan Regional Government) on oil revenue and contract issues. The oil majors, who now ignore Baghdad's strictures on either dealing with or recognizing the KRG, have firmly reacted to the all-powerful Ministry of Oil's (MOO) attempts to force them to focus Iraq's southern fields, heavily invest in urgent oil infrastructure repairs and rehabilitation, and to mount costly exploration programs in “new and unexplored areas”. Iraq's fourth and largest energy auction since 2003, in May 2012, which was intended to add nearly 1 trillion cubic metres of natural gas and 10 billion barrels of oil to its huge reserves, flopped in major part due to the MOO writing-in conditions forbidding any deals between the majors and the KRG. The auction's financial terms for company netbacks were also rejected.

Eight “mega blocks” received no bids at all because none of the 39 approved bidders, including Royal Dutch Shell, BP, Exxon Mobil, Total, Lukoil and Chevron accepted Baghdad's terms. Apart from the KRG issue, which will not go away, and Iraq's heavily deteriorated oil infrastructures, oil executives speaking off the record called the MOO's terms on their netback from production “insanely greedy”. The MOO had set a netback of $5.38-$6.24 per barrel produced.

CIVIL WAR THREAT
Most foreign oil executives inside Iraq, and oil commentators say that the explosive cocktail of Iraq's unpredictable or “freewheeling” politics, extreme and intensifying security concerns in nearly all urban areas, and often outside them, and Baghdad's peremptory rejection of oil company financial demands make it nigh-on impossible to rebuild and expand its all-important energy industry. Iraq's economic dependence on oil and gas is however almost total. 

According to the UN, since May Iraq has suffered its highest rate of violent deaths since the so-called “civil war” of 2007-2008. Many observers say the country is “standing on the edge of an existential precipice”. In 2013, the monthly death toll has often attained 1000 and injuries 5 times that.

Sunni extremists, similar to the Muslim Brotherhood in Egypt supporting ousted president Morsi can claim that they have been robbed of legitimate power. In the 2010 parliamentary elections, the Sunni-dominated Iraq National Movement of Iyad Allawi won most seats, but Shia prime minister Nouri al-Maliki refused to accept the outcome. Instead, he promised a national unity government with Allawi, and then reneged on that offer following irreconcilable disputes on oil revenue sharing, as well as regional sovereignty issues and the KRG national independence and secession crisis.

As previously in Iraq, the threat is renewed Sunni Salafist car bombing and assassination of Shia Muslims, attacks on Shia mosques and political parties, and bombings of Shia shops and commerces. In 2007-08, the US Army's "surge'' and a relentless Special Forces campaign of targeted killings gutted the Iraqi al-Qaeda movement. The military action had an essentially political goal – attack and destroy the “mid level ranks” of al-Qaeda, limit the insurgents' ability to move in southern Iraq – but did not include a post-struggle “hearts and minds” campaign, except in highly rudimentary form. With US troops gone and facing an Iraqi government that outside the MOO displays a fatal combination of incompetence, corruption, under-manning and under-financing, the “surge” has reversed.

In Iraq, The former AQI (al-Qaeda in Iraq) has been succeeded and replaced by the Islamic State of Iraq and al Sham (ISIS), also operating in Syria and Egypt. After the Syrian war, ISIS forces returning to Iraq could number 45 000 or more. The link with Libya includes the same factor – returning djihadists from “international brigade” operations in Syria – and the same Sunni-Salafi extremism, which in Libya is directed against the central government in Tripoli.

Also in both cases, the insurgents want a full scale civil war. Their sustaining objective is unambiguous -- foster a cauldron of chaos breaking down the already-weak and divided central government. In Iraq, ISIS aims for detaching the population into base-level sectarian alliances. In Libya, the goal of the  insurgents is to force a threefold division of the national territory after the central government has collapsed. In both cases the higher or final goal is to create a shariah-law caliphate.

THE IRANIAN ALTERNATIVE
Relative to Libya and Iraq, the country is a haven of relative stability and security – but its oil sector faces very similar problems to those in Iraq and Libya. In all three cases, oilfield and oil transport infrastructures are often 40-years-old and have been critically under-maintained. While Iran's output has gently but regularly declined for at least 5 years, Libya and Iraq have shown extreme volatility of output – bolstering premiums on oil prices in daily trading on major markets, due to continuing and increasing risk of oil export supply shortfalls from Iraq and Libya.

Their combined output, which in late 2012 was about 4.6 Mbd is now at or below 4 Mbd. When or if Sunni-Salafist terrorists in Iraq intensify their protection-racket attacks on oil production, oil transport and oil facilities, as well as their hostage-taking and murder of oilfield workers, Iraq's net export capacity can rapidly decline. Oil analysts with knowledge of Iraq estimate the potential decline as at least 0.5 Mbd on a rapidly executable basis.

Conversely, Libya's central government could or might seal lasting pacts with what its oil minister calls “disaffected youth gangs”, with sufficient payment to the gangs to lift its current very low oil output. In both cases however, their oil export capacity is now clearly “risk on”.

Iran has little or none of these risks. An end to sanctions against the country, needing some face-saving measures for its nuclear program – still seen by Iranians as a symbol of modernity and national self determination – may be relatively easy to achieve.  For Obama and other western leaders, who have literally “burnt their fingers” aiding Sunni-Salafist insurgents and gangstahs overthow local despots - and replace them with chaos – dealing with Iran will be easier and more predictable. The extent to which ending sanctions can cover Iraqi and Libyan risk is presently difficult to gauge, but the need for alternate and secure global oil capacity is clearly growing.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

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