Expert: Rising Tensions in the Middle East Will Not Impact Gas Investments
Francis Perrin, chairman of Strategy and Energy Policies Centre, comments to Natural Gas Europe (NGE) on the implications of the Saudi-Iranian dispute for gas developments before members of the Arab League meet in Cairo on Sunday to discuss the growing influence of Iran in the region.
NGE: Can the deterioration of the diplomatic relationship between Iran and its neighboring Arab countries in the Middle East derail the developments of gas infrastructure in Iran, the country with the world largest gas resources?
Francis Perrin: As of today, I don’t think the breaking of diplomatic relations between Iran and Saudi Arabia will significantly impact the ongoing oil and gas projects in either of these countries. The Iranian regime has expressed willingness to attract oil companies back into the country. It’s not in its interest to give up its new strategy unveiled at the Tehran conference last November, which was based on new contract rules to boost foreign investments when the sanctions will be removed first by the European Union and later by the US.
There is no reason for Tehran to reverse course or for foreign companies to suspend their projects just because two countries cut their diplomatic ties. It’s not as though excellent relations between two countries have been suddenly disrupted by a particular event. The tensions between Iran and Saudi Arabia have increased for a long time. The cut of diplomatic and business ties including air routes is a further step but without consequences on gas and oil projects at this point.
It’s certainly a major development but the absence of a huge reaction on the oil market is a clear indication that this particular event will probably not have a dramatic impact on markets, gas and oil projects and the energy developments strategies in both countries.
NGE: The new opening of the market in Iran is a huge opportunity for oil and gas companies given the large amount of gas resources in that country. Iran want to double its gas production in the near future and reach a 10% share of the global export market by building LNG terminals. Does the current environment in the region allow Iran to fulfill its ambitions?
FP: Iran owns the world largest amount of gas resources after Russia depending on the projections. It’s a gas giant looking international oil companies to develop its potential from South Pars field for instance in a way it cannot with national companies. Of course, foreign companies have a lot of interests to invest in Iran giving the potential but there are other factors that need to be considered such as the political environment (risks, instability) and the economic attractiveness.
International sanctions or security concerns have limited investments in the region whether it’s in Syria with the civil war and the rise of ISIS, in Yemen, or in Libya. But safety is not a real issue in Saudi Arabia and Iran. Iran is not Syria. There is no war and foreign companies have already worked in that country in the past. They can deal with the political risk.
The economic aspect, which is essential, is much more challenging. That’s why we could argue that rising tensions in the latest developments in the region would be another element for western companies not to invest in Iran. When companies like Total were forced to suspend their activities in Iran by sanctions against the Iranian regime, many professionals in the oil industry said that contracts were not very attractive at that time. In response, Iran has proposed a new type of contracts to replace the previous “buy back” contracts. The challenge for Iran is to know what oil companies think of the new contracts. Is Iran attractive enough to foreign investors to embrace and sign new contracts? When the economic sanctions will be (partly) removed, oil companies will have to decide whether or not investing and developing new projects in Iran is sufficiently cost-effective compared with another producing country. Very few countries have the potential of Iran in terms of resources but it can be the only decisive factor to invest in a country. Investments must be worth the money! The economic aspect is key for Iran.
NGE: What role does gas play in relations between Iran and its neighbours in the Middle East?
FP: First and foremost, Iran must meet its domestic needs in terms of energy. The country faces two challenges. The demand for gas is increasing rapidly and supplies can be short in winter. But Iran has the ambition to become a leading exporter of gas. As of today, the Iranian regime provides a very small amount of gas, mainly to Turkey. Iran is targeting Arab countries in the Middle East such as the United Arab Emirates, Oman and even Iraq. Those states are geographically close to Iran, which reduces transport costs.
Iran’s business strategy is also a way to improve its relationship with neighbouring Arab countries in the Middle East. A sort of “gas diplomacy” that could be weakened by the current political environment. Will Arab countries be willing to import gas from Iran? Iraq has already an agreement with Iran but it still needs to be implemented by the respective security concerns. Iran may also provide gas to Oman. The Sultanate has usually had a relatively independent foreign policy from its traditional Arab allies in the region, playing a pivotal role between both Arabic and Iranian interests. It would be much harder for Arab countries in the Gulf to import gas from Iran.
It’s a delicate situation from a political perspective not just because those Arab countries have strong ties with Saudi Arabia but because many of them, especially the United Arab Emirates, are very concerned about the actual or supposed influence of Iran in the region. It’s no coincidence that the Arab league is holding a meeting on Sunday in Cairo, with Iran at the top of the agenda. It reflects the concerns of the Saudis but also the concerns of Arab countries about what Tehran is doing and the “Iranian interventions” in some of the Arab countries domestic affairs, at least in terms of perception.
Kevin Bonnaud