The agreement by Royal Dutch Shell to explore for oil and gas in Iran marks another remarkable step in the transformation of the country over a period of less than 18 months from an international pariah state to a magnet for investment. There could be further steps to come, including Iran’s emergence as a source of stability rather than conflict in the region.
After another turbulent year across the Middle East, Iran is the only big country that ends 2016 stronger, both economically and politically.
Iraq is still torn by internal conflict and, despite a broad coalition of support, the attempt to win back Mosul from the militants of Isis is taking even longer than feared. Saudi Arabia has had to abandon its strategy of forcing others to cut oil production and has found itself instead promising a cut of 486,000 barrels a day in an attempt to stabilise prices. Economic reform in the kingdom is making no progress and living standards are falling. With Syria in the middle of an unresolved civil war and Turkey absorbed in its own problems after the failed coup in the summer, Iran alone is emerging as an effective power in the region.
Since the deal to halt the suspected development of nuclear weaponry, relations between Tehran and the outside world have been restored. Outsiders are investing regardless of the remaining US sanctions. At the November meeting of the Opec oil producers cartel, Iran secured a quota from fellow members that protects its current production levels. It has become the pivotal power in the organisation.
Iran has many problems but the direction of change is unmistakable. Perhaps the most important factor behind the shift that has taken place is that, despite much repression, Iran has remained a country with a genuine political culture – an authentic nation with a history of its own rather an accidental creation resulting from lines drawn on a map.
Oil production in Iran is up by more than 600,000 b/d since the start of 2016. If, as seems increasingly likely, we are in for an extended period of low prices, Iran is well positioned with huge reserves of oil and gas (157bn barrels of oil and 34tn cu m of natural gas, according to the BP Statistical Review), which can be developed at a very low unit cost.
French, German and Chinese delegations have been in Tehran in recent months but until the Shell agreement was announced the Russians seemed to be in the lead, with a five-year strategic investment plan signed in July. That includes a $1bn offshore rig contract and a €1bn investment in new power plants. Russia has become the preferred candidate to help expand Iran’s civil nuclear capacity and Russian companies will take many of the 50 oil and gas projects that are on offer.
The Shell agreement confirms that some western companies are now prepared to break ranks and to think beyond the current American sanctions regime. The deal, which is carefully labelled as provisional, shows that Shell has regained its nerve and ambition, and has understood that access to low-cost supplies is crucial for future competitiveness. The agreement cruelly exposes the timidity of others, who will now have to play catch up.
Iran has secured a generous production quota from Opec but it is hard to see the limit of about 3.8m b/d being accepted for long. It would be relatively easy for Iran to add another million barrels a day very quickly, especially given the active engagement of Russian companies and Shell. In the 1970s, before the revolution, Iran produced about 6m barrels a day. Money is needed now to rebuild the basic structures of a society constrained by two decades of isolation, and oil production offers by far the easiest way to raise that money. Over time other oil producers in Opec and beyond will have to step aside and make way for increasing Iranian output.
Will Iran’s progress be halted by the new US government? During the election campaign Donald Trump described the nuclear deal that allowed Iran’s re-emergence as one of the worst deals he had ever seen. But that was campaign rhetoric and the criticism was directed more at President Barack Obama and Hillary Clinton than at the Iranians. I agree with Robert Kagan, who says a military attack on Iran by the Trump administration is inconceivable. Some renegotiation is more likely and the Iranians are skilful enough to recognise that a mutually advantageous arrangement is well within reach.
Shell’s involvement in Iran will increase pressure on the incoming US government to allow US companies to compete on equal terms. Mr Trump likes a deal and it is conceivable that the quid pro quo will go well beyond energy issues. Having been a destabilising force in the Middle East for most of the past 40 years, Iran could now find it convenient to use its undoubted power and reach to be an agent of stability – something America’s more traditional allies Turkey and Saudi Arabia simply cannot deliver. In Syria and Lebanon, and in the fight against Isis and the Islamic terrorism that seems to be Mr Trump’s priority, Iranian involvement could be crucial and positive.
After a year of dramatic change on all fronts, the limits of the possible have moved. A strategic realignment of interests that only a year ago would have seemed fanciful is now entirely possible.