- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University. 

The nuclear agreement signed in 2015 brought greater hope for the future of Iran’s natural gas sector. With increased international investment together with advanced technology transfer, the Iranian energy sector was reinvigorated. However, Trump’s decision to pull out of the nuclear deal, combined with the threat of heavy sanctions, could bring all gains to a standstill sooner rather than later. 

For many decades, Iran’s natural gas production was almost exclusively consumed domestically. Apart from gas exports of around 10 billion cubic meters to Turkey per year along with marginal exports to Armenia and Azerbaijan, Iran’s domestic market gas consumption absorbed almost all production. The good news is that the South Pars project, the largest natural gas field in Iran, has almost doubled its production over a short period of time. While oil production remained relatively stable after the nuclear deal agreement, standing at around 3.8 million barrels per day (mb/d), the real improvement in Iran’s energy sector since 2015 has been in natural gas. 

Based on previous experience in Iran over many years, domestic gas consumption could increase during the winter months to such an extent that domestic demand could outstrip supply.  Should this occur again, gas supplies of industrial consumers could be cut off to provide supplies to households. With a positive investment environment after the nuclear deal agreement, the government decided to invest in storage capacity to cope with winter demand spikes. Increased storage capacity could well be the perfect solution to meet seasonal demand volatility, however, there are many unknowns regarding the details of this storage capacity project.

The state-run National Iranian Gas Company set a future target for exports of 50 million cubic meters of natural gas per day. To realize this target, the company has heavily invested in gas infrastructure. Basra and Baghdad are the cities that the state-run company has targeted as an entry point. With daily volumes of 12 million cubic meters (mcm) of gas exports, Iran is determined to increase this volume up to 25 mcm per day once gas transfer facilities are built. 

With a daily export volume of 30 mcm per day as of February 2018, Iran has successfully delivered natural gas to Turkey since 2001. Building on this experience, Iran was also able to smoothly implement a natural gas project with Iraq.  Given Iran’s close relationship with Iraq’s central government, Iran not only strengthened its relationship and influence on the government, but it also hugely helped Iraq combat occasional blackouts. 

Although Iran managed to deliver gas to the Iraqi market, the likelihood of Iran bringing a second natural gas pipeline onstream in a matter of years seems to be hampered with Trump’s nuclear agreement withdrawal decision. In spite of Iran’s determination to do so, there could be difficulties in accessing financial markets because of increased risks of sanctions, and this, in turn, could lead to financial bottlenecks putting the realization of projects on hold.

Since 2015, Iran signed a number of fruitful contracts with international oil and gas companies. In 2017, Iran signed a $4.8 billion contract with Total and the Chinese China National Petroleum Corporation (CNPC). In this consortium, Total owns 50.1 percent, while CNPC and Iran’s National Oil Company own a 30 percent and 19.9 percent share interest, respectively. After many years of Iran’s isolation, this memorandum of understanding marked the end of a stalemate and the beginning of a new era for the natural gas industry in Iran. The contract was welcomed by the government and engendered hope that other international companies would also become interested in further investments in Iran’s underutilized and promising energy sector. 

After the U.S. decision to pull out of the nuclear deal with Iran and following Trump’s warning that he would implement the highest level of economic sanctions against the Iranian regime, all political and economic gains have been put at risk. International companies that have invested in Iran have found themselves in a predicament. Total stated that unless it can secure a waiver, which it is actively lobbying to receive, it would not continue to operate in the country.

The company received a waiver back in the 1990’s with its involvement in the South Pars fields despite heavy U.S. sanctions. However, the company’s current request could well meet with resistance.  If Total fails to receive a waiver, the company has to leave its project leadership to China’s CNPC as lead operator. In this case, the already strained relationship between China and the U.S. could easily escalate to an undesirable level. 

The EU Commission’s press release on May 18 said the EU Commission would continue to fully commit to the Joint Comprehensive Plan of Action (JCPOA). With this increased energy cooperation, by opening new credit lines, and with the parties operating in euro-dominated trade, the impact of the re-imposition of U.S. sanctions could be limited.

The EU’s bold support for the Iran deal may keep companies engaged in Iran. The EU’s recent statement suggests that the EU is ready to take a hit against Trump’s strong threat on imposing sanctions on companies trading with Iran. However, the Iranians did not celebrate the EU’s stance, which was reflected in the Iranian Foreign Minister’s statement when he said, “the European political support for the accord is not sufficient”. Therefore, only through bypassing U.S. financial sanctions will the interests of EU investors in Iran be protected and serve Iran’s needs to enhance foreign direct investment. 

Technically, many legal restraints were gradually removed after the sanctions lift with the implementation of the JCPOA. Yet, many international investment banks refrained from financing Iran’s energy sector even after the nuclear agreement with fear of potential U.S. punitive measures. Total brought in its own financing by using approximately $1 billion from its cash flow. By sourcing alternative financing and reducing third-party financing withdrawal risks, Total was able to continue its operations in the South Pars field. 

Given Iran’s rich natural gas resources combined with relatively independent third party financing, Iran was able to succeed in increasing the levels of natural gas production. It is also important to note that after the nuclear deal agreement, Total only invested in the natural gas sector, rather than exclusively in oil. Furthermore, CNPC’s involvement in the consortium further ensured the feasibility of the project with the ability for China’s financial institutions to intervene in the case of any financial obstacles. 

At the beginning of 2018, Russia’s state-owned oil company Zarubezhneft signed a memorandum of understanding with Iran’s Dana company to develop oil fields in the southwest of Iran. According to a Reuters report, prior to this agreement, Russian Zarubezhneft signed a drilling deal with Iranian Ghadir Holding and with Turkey’s Unit International. The agreement, worth $7 billion, targets the drilling of one natural gas and three oil fields. The agreement’s shares are divided equally between the partners, marking the first trilateral deal signed by the Iranian company. 

The deal signed with Zarubezhneft has been important in that it was the first ever contract signed with a Russian energy company. Specifics about the agreement have not yet been revealed, but when compared with other international energy deals, its volume remains less significant. However, this agreement is set to strengthen Iran’s hand against Trump’s harsh stance on re-imposing heavy sanctions sooner. Russia’s defiance against any strong sanctions that could be implemented against Iran in the coming months could, to a certain extent, be alleviated with strong project financing. Therefore, any deal signed with other countries perfectly aligns with Iran’s political ambition to diversify its energy portfolio.   

Iran has seen production levels surpass that of its domestic consumption with the expansion of its natural gas production over the last couple of years, and this has allowed exports of natural gas to neighboring Iraq. However, all these gains have been put at risk with the Trump administration’s decision to withdraw from the nuclear deal. 

Although many companies were eager to invest in Iran’s oil and gas sector at the very beginning of the JCPOA, financial hurdles were the biggest impediment in attracting greater numbers of investors. Total's decision to push forward to obtain a waiver and the EU Commission’s decision to stay committed to the agreement, are some positive developments in support of continuing the JCPOA. Nonetheless, the U.S. withdrawal and the strong threat of re-imposing the highest level of economic sanctions not only on Iran but also on any nation that helps Iran could reset the course of progress to the beginning.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.