Implications of the Iran nuclear deal

After months of intense negotiations, Iran and the E3+3 (France, Germany, and the UK plus China, Russia, and the US) announced on  April 02 in Lausanne, Switzerland that they had agreed on a framework deal for the resolution of the nuclear dispute. On July 14, EU High Representative for Foreign Affairs and Security Policy, Federica Mogherini, and Iran's Foreign Minister, Mohammad Javad Zarif jointly declared in Vienna that solutions on key parameters of a Joint Comprehensive Plan of Action have been found. This includes the scope of International Atomic Energy Agency (IAEA) inspections and related sanctions relief. Under this framework Iran's nuclear activity will be limited in return for the lifting of international economic sanctions.

Both US President Barack Obama and Iranian President Hassan Rouhani have welcomed the Agreement but resistance to some aspects in the deal continues among Conservatives both in Iran and the US. The US Congress, it may be noted, will have 60 days in which to consider the deal, though Mr Obama has warned that any contrary efforts on its part would meet with a presidential veto. The Republicans in the US Congress have often expressed their opposition to any US-Iran deal. In this, they have been encouraged by the Israeli government which has called the Agreement a 'historic mistake'. Prime Minister Benjamin Netanyahu has already indicated that Israel will not consider itself to be a party of the Agreement as it believes that this step would provide Iran with "hundreds of billions of dollars with which it can fuel its terror machine and its expansion and aggression throughout the Middle East and across the globe". Russian President Vladimir Putin, on the other hand, has shared the views of the British Prime Minister David Cameron that this development will help "make our world a safer place" and has hailed the deal as a "firm choice for stability and cooperation." He has assured that Moscow would "do everything in its power to ensure the agreement worked". It is, however, being alleged that China and Russia are happy with the deal because they can now again export weapons to Iran, a valuable customer.

BBC analyst Jeremy Bowen has interestingly noted that the agreement is expected to change the Middle East, but one does not know whether it will reduce or increase the turmoil in that region. Such hesitation appears to be emanating from apprehension that its fault lines, especially the cold war between Iran and Saudi Arabia - and with it, sectarian conflict between Shia and Sunni Muslims might heat up with additional resources available with Iran.

It is, however, hoped that this agreement will bring to an end to more than a decade of tensions between Iran and the international community. Sceptics should understand that the agreement in Vienna removes Iran's nuclear programme from the danger list. Two years ago, Israel had threatened to bomb Iran which would have definitely triggered a major Middle East war. That does not seem probable now. That, in itself, is a major diplomatic achievement. But sceptics have pointed out that the agreement would not irrevocably prevent Iran from getting nuclear weapons, but would definitely make it harder to do so and put roadblocks in the way that would give world powers time to fashion a response if Iran changed course and started sprinting toward making a bomb. Consequently, President Obama now appears to be in possession of his own diplomatic bequest - his own "Nixon-in-China" moment - the signature foreign policy achievement which will define his historic legacy.

It may be recalled that sanctions were imposed not only on the grounds of nuclear non-proliferation but also because of Iran's alleged support for terrorist activities and human rights violations. Apart from the energy and financial sectors, Iran's arms and nuclear industries were also targeted in addition to the imposition of travel and trade bans, as well as asset freezes. The people of Iran are now hoping that this agreement will result in the lifting of several sanctioned regulatory measures which had been adopted against that country by the United Nations, the EU, and the US.

This deal has, as expected, sparked off serious interest among the world energy sector community about how Iran breaking out of its fetters will influence world business interests.

Iran's economy, and in particular, its energy sector, will now be the subject of worldwide attention. Crude prices, in a few days, have already fallen by as much as 2.3 per cent to $50.98 a barrel as investors reacted to the freshly inked deal. At the same time experts have warned that the deal could lead to a flood of new oil from Iran, as the country has 30 millions of barrels of crude in storage and ready for sale, according to Facts Global Energy, an industry consultancy.

It would be worthwhile to remember that Iran possesses, according to reliable statistics, the biggest combined oil and natural gas reserves in the world. It may be mentioned in this context that at 157 billion barrels, Iran's oil reserves are the world's fourth largest, while its natural gas reserves are the largest at 33.8 trillion cubic meters. Before the Islamic Revolution, Iran was producing about 6.1 million barrels per day. By 1988 the output had collapsed to a low of 1.3 million barrels per day but with great effort it climbed back to about 4.4 million barrels per day by the end of the 2000s. EU and US sanctions however again took their toll after 2010 and average output again decreased to 3.6 million barrels per day in 2014.

Compared to this scenario, natural gas production has developed more steadily in Iran. From 13 billion cubic metres per year in 1988, production has slowly risen to more than 173 billion cubic metres per year in 2014. This is, however, lower than other world's large producers - Russia and the US - who are each producing more than 500 billion cubic metres per year.

Despite this roller-coaster ride, Iran's supply side has experienced major changes due to its consumption of oil and natural gas remaining constant. Economists have observed that on the domestic energy demand side, the combination of Iran's economic and population growth, as well as steady over-consumption due to extensive subsidies, have caused a substantial increase in oil consumption which has risen from  0.9 million barrels per day in 1988 to 2.0 million barrels per day in 2014. There has also been a gradual transformation in the domestic market with regard to gas and demand has risen from 13 to 170 billion cubic metres per year over the same period. This dynamics has evolved and Iran's domestic energy mix has now shifted from oil to natural gas.

David Ramin Jalilv of the Freie Universität Berlin has noted in this context that "a nuclear accord would substantially benefit Iran's energy sector, especially regarding co-operation with Europe. Unlike US sanctions, the EU's energy and financial sanctions were adopted only in relation to Iran's nuclear activities. As such, a nuclear accord would open the door for trade between the two sides as well as the return of European energy companies (some of which already have declared their interest) who have long seen Iran as an untapped market. Moreover, at least in some form, Iran would be able to access the European banking system again, including access to the SWIFT network.

The nuclear accord is unlikely to resolve all the problems related to sanctions. This will be so because according to the agreement, current sanctions are to be transformed into 'snap-back sanctions', which would be reinstated automatically, should Iran (be perceived to) violate the nuclear accord. This denotes that there could be risk of Iran-related activities becoming subject to sanctions again. This could accordingly evolve into an obstacle to major investments in the energy sector, which normally materialise on a mid- to long-term basis.

Similarly, it would be correct to point out that only some of the US sanctions against Iran's energy and financial sectors were brought into place because of the nuclear programme. There are other sanctions related to terrorism and human rights violations. It is not clear whether these will remain in place after this final agreement. This assumes importance because US courts have continued to apply extraterritorial jurisdiction in relation to Iran. This raises the possibility of facing continuing punishments from US Courts. This is bound to impact on future investment in Iran by companies with business interests in the US. There is speculation that this factor could influence European banks in hesitating in the facilitation and financing of projects in Iran's energy sector.

Another significant aspect must not be overlooked. Sanctions relief is not going to take place immediately. Sanctions will be lifted only after the IAEA has confirmed that Iran is abiding by the agreement. This would involve the dismantling of a certain percentage of the centrifuges and the modification of nuclear facilities. This is likely to take several months. It is consequently being presumed that it might take almost another year before energy-related sanctions are lifted.

l Nevertheless, one thing is certain. The impact of sanctions relief is expected to be multifaceted. Iran will be able to access to some of its frozen assets held in international banks abroad (estimated to be around $120 billion) and this capital could be used for investment in the energy sector to increase efficiency of Iran's oil and natural gas production. As for exports, Iran's present stockpiles could be made available to the international markets. However, it is also being surmised that the volume of additional Iranian oil exports would essentially depend on the price at which the oil is to be sold. Should Iran seek to recover its pre-sanctions market share through an aggressive pricing strategy, this could contribute to a further decline of global oil prices. Producers of unconventional oil, especially in North America, might then find themselves under additional pressure as a result.

It is expected that the implementation of the Vienna agreement will eventually begin in September after the US Congress gives its final approval. That would provide a historic opportunity for all of the parties involved in the deal to meet on the sidelines of the UN General Assembly session that would be underway at that time in New York and sign the document together - lending even more solidarity to this moment in history. [See another article on Iran nuclear deal on Page 6.]

The writer, a former Ambassador, is an analyst specialised in foreign affairs, right to information and good governance.

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