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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The One Issue Holding A New Iran Nuclear Deal Back

  • With oil prices soaring and very few options available for new supply, rumors of a new Iran nuclear deal continue to surface.
  • If a new deal were reached, Iran would be able to bring more than the one million barrels per day of oil online and could significantly lower oil prices.
  • The one major issue stopping the deal from being made is the status of the IRGC, and the U.S. has made it clear that it won’t budge on this issue.

G7 leaders have been discussing the prospect of reviving the Iran nuclear talks, a French presidency official said last week and, given continuing high oil prices and an enduring tight supply profile, talk has turned again to the potential for new barrels to start coming into the global oil market from Iran. After all, the argument runs, there was a deal in place – the Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) – that functioned from when it was implemented in January 2016 to when the U.S. unilaterally withdrew from it in May 2018. Up until recently, the argument runs, it looked very likely that a new iteration of the JCPOA would be agreed upon by the two key sides in the negotiations – the U.S. and Iran – and that new Iranian barrels would soon flood the market, bringing oil prices sharply down and alleviating the economic suffering of all developed countries that are net importers of oil and gas. This is all true but the deal, as far as the U.S. is concerned right now, is “not a live issue,” according to a source very close to Iran’s Petroleum Ministry that exclusively spoke to Oilprice.com last week. To correct a few false numbers being bandied around in several non-oil-focused magazines and newspapers recently: if a new JCPOA was agreed upon tomorrow, then it would not just be a case of 1 million barrels per day (bpd) of additional oil coming back into the market very quickly but a lot more than that. In broad terms, Iran remains a great oil and gas power and, despite its already huge oil and gas reserves, its full potential has yet to be fully realized. It has a conservatively estimated 157 billion barrels of proven crude oil reserves, nearly 10 percent of the world’s total and 13 percent of those held by OPEC. As great as its oil reserves are, its gas reserves are even greater, with Iran having estimated proven natural gas reserves of 1,193 trillion cubic feet (Tcf), second only to Russia - 17 percent of the world’s total and more than one-third of OPEC’s. Additionally, Iran has a high success rate of natural gas exploration, in terms of wildcat drilling, which is estimated at around 75-80 percent, compared to the world average success rate of 30-35 percent.

Specifically, as highlighted by Oilprice.com most recently at the beginning of 2022, Iranian crude oil and condensate production could bounce back very quickly after a new iteration of the nuclear deal has been signed and Iran’s Petroleum Ministry orders the National Iranian Oil Company (NIOC) to ramp up production. According to a senior analyst at global energy markets intelligence company Kpler, spoken to exclusively by Oilprice.com at the time, in this scenario Iran could see an 80 percent recovery of full production within six months and a 100 percent recovery within 12 months. “[As at the beginning of Q4 2021] Iranian crude oil production capacity stood at 3.9 to 4.0 million barrels per day [bpd] according to the NIOC with current output holding near 2.4 million, of which 1.7-1.8 million is consumed in domestic refineries, and close to 1 million barrels per day of condensate and natural gas liquids are also being produced at present, primarily from the South Pars gas field, although total condensate and NGL production capacity stands at around 1 3 million barrels per day,” said the Kpler analyst. “Ultimately, we believe Iranian production could technically jump by 1.7 million bpd including 200,000 bpd of condensate and LPG/ethane, in a 6 to 9 month period from when sanctions are lifted and an immediate impact of a 5-10 percent fall in the oil price would be likely,” the analyst concluded.

So, what is the hold-up right now to just rubber-stamping a new version of the JCPOA, that had been “ninety-five percent agreed on,” according to highly-placed sources in Tehran and Washington spoken to by Oilprice.com just a few months ago? The answer is a technical point relating to the status of the Islamic Revolutionary Guard Corps (IRGC) – that might seem arcane and bureaucratic to many but in reality has extraordinarily deep and broad ramifications for Iran’s entire political, economic, military, and social structure, and the U.S. knows this. The point in question is that the U.S. still refuses to remove the IRGC’s designation as a ‘Foreign Terrorist Organisation’ (FTO), which was placed on it in 2019 during former U.S. President Donald Trump’s term in office. For Tehran, not only does the IRGC function as the guardian of the spirit of its 1979 Islamic Revolution but it is also the principal mechanism through which Iran can spread its own particular brand of Islamic faith across the world through whatever means it deems necessary. These means include the bankrolling and logistical and materiel support by Iran of multiple military proxies across the globe, many of which are deemed as terrorist organizations by the U.S. and its allies. These activities require funding - almost always ultimately converted into US dollars or gold - and for this reason, the IRGC has been allowed access to every layer of Iran’s business and financial networks to the point where now it is inextricably ingrained throughout the entire fabric of Iran’s economy, as analyzed in-depth in my new book on the global oil markets.

Related: Europe’s Power Prices Surge As Market Fears Worsening Supply Crunch

According to sources in Washington and London, current estimates are that the IRGC has placed top commanders at the heart of more than 200 Iranian companies and even back at the beginning of 2016 – around the same time as Implementation Day of the first JCPOA - Emanuele Ottolenghi, a senior fellow with the foundation for Defense of Democracies testified before a sub-committee of the U.S.’s House Committee on Foreign Affairs that the IRGC had significant ownership shares in 27 companies that are publicly traded on the TSE. This constituted a minimum of 22 percent of its total value, at the time US$15.8 billion between them. According to Ottolenghi in 2016, the IRGC was active in the Iranian oil, gas, petrochemical, automotive, transportation, telecommunications, construction, and metals and mining sectors, among others. Additionally, the U.S. Department of Treasury, Office of Foreign Assets Control, in September 2012, described the NIOC itself as an “agent or affiliate” of the IRGC and therefore subject to sanctions under ‘Iran Threat Reduction Act’. Therefore, by officially designating the IRGC as an FTO, together with many of its affiliate organizations of varying sorts, the U.S. sought to hit at the very source of the IRGC’s power and, by extension, Iran’s ability to project its influence across the globe. This U.S. strategy has, at varying stages, been successful in these objectives. However, as the schism between Washington and its allies, and Russia and China and their allies, becomes wider and more public – particularly after Russia’s invasion of Ukraine in February - then the willingness of Russia and China to openly flout the U.S.’s wish to keep economic pressure on Iran has increased dramatically.  

What the U.S. has cleverly done in terms of its stance on agreeing to any new version of the JCPOA is link its removal of the FTO designation for the IRGC to a broader concept that ties this into Iran’s ability and willingness to sign up to the rules and regulations of the Financial Action Task Force (FATF) and then to becoming a fully-regulated and constantly-monitored FATF member. With its 40 active criteria and mechanisms in place to prevent money laundering (an activity that is vital to the IRGC’s activities across the world) and nine criteria and mechanisms in place to do the same for the financing of terrorism and related activities (again, a core of the IRGC’s role in promoting Iran’s brand of Islam around the globe), the FATF has swingeing powers to wield against individuals, companies, or countries who transgress any of its standards and is extremely aggressive in using them by degrees, depending on whether the sanctioned entity is on its ‘grey’ or ‘black’ list. 

There had been some indecision in the White House on whether to just drop this FTO designation on the IRGC in name, whilst in reality continuing to monitor it and deal with it as a de facto FTO, according to a senior energy source close to the administration in Washington, but this idea has now been dropped. “The view right now in the Oval Office is that it is done talking to Iran about this [a new version of the JCPOA] unless it [Iran] offers up something tangible, serious, and wide-reaching in terms of the IRGC and all of its affiliates, and is serious about committing to the FATF, and that the U.S. is allowed to monitor properly all the time, and if that means no deal ever then that’s fine,” the source concluded. 

By Simon Watkins for Oilprice.com

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