Back to Square One? Iranian Energy after the Re-Imposition of US Sanctions
Once more, Iran is confronted with sanctions. They mark a turning point, reversing the complicated and gradual return of Iran to global energy markets following the conclusion of the nuclear deal in 2015.
For Iran, the consequences of sanctions are profound. Both the economy and the government budget have been hit hard. The energy sector plays a central role in this context. Here, on one side, the impact of sanctions is dramatic. The post-JCPOA recovery of oil exports and production has been undone. With respect to upstream capabilities, on the other side, the impact has been rather moderate in the sense that Tehran did not succeed anyway in making IOCs engage meaningfully in Iran after the conclusion of the JCPOA. Matters will largely remain the same insofar as local companies will continue to play the central role in running the industry. In the mid- to long-run, due to sanctions, the Iranian energy industry will not only remain below its potential relative to its reserve base. Iran will also face a strategic setback as it is losing market shares while the oil market is becoming increasingly competitive. In this context, Iran is further disadvantaged as it cannot join competitors like Saudi Arabia or the UAE in investing and making acquisitions in Asian downstream markets with the objective of securing future demand. In natural gas, in contrast, Iran’s production is set to remain on a growth path. Already the backbone of economic activity in Iran today, natural gas is therefore set to further increase its importance – not only relative to oil but also to the economy as a whole.
Amid the re-imposition of US sanctions, this comment reviews recent developments in Iranian energy. An assessment of the sanctions’ immediate impact is followed by an analysis of the fallout from sanctions among the main importers of Iranian energy. Thereafter, the political and economic consequences for Iran are studied, before attempting to assess what is ahead as the industry attempts to cope with sanctions.