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Iraq Crisis May Lift Iran Oil Prospects

Does Iran have a role to play with respect to the future of global oil market dynamics as the conflict in Iraq continues to escalate?

Since the onset of the crisis, oil prices have risen (Islamic militants attacked Iraq’s largest oil refinery) and at the same time, Iran is in the final leg of negotiations that could finally result in the end of punitive sanctions that have crippled its economy for the past several years and made day-to-day life very difficult for many Iranians.

Of course, Iran’s nuclear program is the key issue that’s still on the bargaining table, but even as Iran has stated that it may undertake military action to protect Shiite shrines from attack by Isis insurgents in Iraq, it also seems as though the U.S. and Iran, after decades of strained relations, appear to be on the same side of the current conflict, thereby improving prospects for Iranian oil.

It’s well known that Iran holds the world’s fourth largest reserves of oil and the second largest natural gas reserves and even before the current conflict occurred, the country had already planned to increase its daily oil production by one million barrels – a decision that caused some concern about excess capacity to OPEC countries, said Nader Habibi, Henry J. Leir Professor of the Economics of the Middle East, in Brandeis University’s Crown Center, but that risk has now dissipated since the onset of the insurgency in Iraq.

“That means there’s good prospects for Iranian output to increase, particularly if sanctions against Iran are reduced or removed,” Habibi said.

When he came to power a year ago, Iranian president Hassan Rouhani pledged to reform and revitalize Iran’s oil and gas sector in a big way, and definitely, the quality of management of Iranian oil –which had deteriorated significantly during the tenure of former president Mahmoud Ahmadinejad—has improved dramatically, Habibi said.

Rouhani has entrusted the oil ministry to Bijan Namdar Zangeneh, a seasoned and well respected professional who has succeeded, Habibi said, in bringing back on board a team of top-notch experts “who know what they’re doing.”

The Iranian government has also launched a significant reform program aimed at reversing many of the policies instituted during Ahmadinejad's presidential terms, one of the most important of which is reducing the capacity of the much-feared Iranian Revolutionary Guard Corps (IRGC)— a paramilitary group whose mission is to protect Iran’s Islamic system— to interfere in the oil and gas sector. That means, “management does not have to deal with that center of power,” Habibi said. If sanctions against Iran are reduced, there’ll be two very important consequences for Iran’s oil and gas sector.

First, “Iran will be able to increase its output significantly and it does have the excess capacity to be able to do that because production went down so dramatically in 2012 when the United States and the European Union introduced new sanctions against Iran’s oil exports and put pressure on countries that were buying hydrocarbon products from Iran,” Habibi said. “Many customers had canceled their orders for Iranian oil at the time so there’ll be a huge benefit now if and when Iran can increase production.”

The reduction and/or removal of sanctions will also mean that Iran can finally gain access to the state-of-the-art oil and gas technology the country sorely needs to extend capacity and increase daily production, Habibi said.

International firms are already showing some interest in providing Iran with the know-how and technology it needs. However, nothing is written in stone yet, Habibi said, as most are waiting for the July 20 deadline, when the future of sanctions against Iran which were eased six months ago, will be decided.

That aside, though, there are some challenges within Iran itself that can also impact and perhaps even hamper future production, namely a large number of mid-level oil ministry employees who are still loyal to former president Ahmadinejad and could cause some problems.

“The ministry is also bloated and firing these officials could cause some problems,” Habibi said.

Also, in return for getting the IRGC to step aside in some areas of economic activity, President Rouhani has promised to offer several large-scale construction contracts to the IRGC’s engineering arm. And of course, because of its strategic significance, the oil and gas sector is subject to more intrusive oversight and interference by Iran’s nexus of power, notably Supreme Leader Ali Khamenei and the IRGC itself, than other government ministries are, and this could result in ongoing competition among elite factions for access to the business and profit opportunities that the oil and gas sector presents, as well as limit the access of foreign companies looking to invest in Iran and export their technology there.

“Still, one would hope that better sense would prevail and there would be a common interest in increasing oil production after sanctions are lifted,” Habibi said.

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