By now barrels of ink have spilled over the Trump Administration's decision to violate the Iran Nuclear Deal. The announcement itself, full of colorful language and blunt accusations, instantly put the US on a distant shore from the international community and non-proliferation experts everywhere. This includes all other parties to the deal itself, known as the Joint Comprehensive Plan of Action (JCPOA), thus France, Germany, the UK, Russia, and China.
It also includes the International Atomic Energy Agency (IAEA). For more than 60 years the agency has served as global nuclear watchdog, the inspector primus on behalf of the Non-Proliferation Treaty (NPT). The IAEA has been instrumental in keeping the number of nuclear weapons states (9 as of 2018) far lower than ever believed possible in the first, tense Cold War decades after Hiroshima (JFK spoke of a world with25 such statesby the end of the 1970s). But the IAEA's extensive work with Iran, verifying compliance with the JCPOA, was tossed aside anddeclaredincompetent by Trump's pullout. Nonetheless, IAEA Director General (Yukio Amano) held his ground. Only a day later, he emerged witha statementemphasizing that was still in full compliance.
In a single, 12-minute speech, therefore, Trump fulfilled his most impressive foreign policy achievement to date. It is no amateur thing, at one blow, to so deeply damage "the credibility of the White House, the country's commitment to diplomacy as an alternative to war, the strength of America's alliances, and the mechanisms to limit nuclear proliferation," as delicately put by Robin Wright of The New Yorker (21/05/2018). The first of these sins may well be the most grave. It certainly travels to North Korea, where distrust of the U.S. has long been indulged but now is confirmed. The DPRK's leader, in fact, might even think to thank the American president for providing the reason to now switch from "good Kim" to "bad Kim," as seems to have happened this week.
Our focus here, however, is that this move against Iran has many impacts in the lands of energy. US pullout from the JCPOA has generated a firestorm ofcommentary, nearly all of it dealing with political and economic fallout. Energy-related matters are very much part of this. Most directly, the "powerful sanctions" again placed on Iran threaten to lower the country's export of oil, gas, and refined fuels and thus raise prices. Saudi Arabia could make up any supply loss quite quickly. US shale producers could do the same if given a year or so, since much new production from the Permian Basin is held up by lack of pipeline infrastructure. The Saudis are concerned about prices rising high enough to where demand begins to cool. So should both they and their arch rival (Iran) be worried?
Perhaps not. Iran is the third largest oil producer in OPEC, and hydrocarbons areroughly 75%of its major exports. Yet the impact of Trump's action has a good chance of not being so bad. True, sanctions pulled 1.2 million bbls/day or more off the global market before. But that was 2012. Today, the five biggest importers of Iranian crude, China, India, Japan, and South Korea, are thirstier than ever, and Europe's leaders are angry. Refineries in India and South Korea are set-up to take Iranian crude and may well ask for partial waivers. In fact, Indian refiners who paid for the oil in rupees, not dollars,were given such a waiverduring the last sanction period. European officials are conceiving plans toshield their businessesfrom the impacts of Trump's decision, and this could involve oil along with other commodities. Total, the one western oil firm with business in Iran, has said it will fold up shop. The signs seemed mixed, therefore.
The biggest sanction-killer, however, will likely be China. Its companies can find ways to ignore the new rules (e.g. shell companies with no business in America), perhaps even receiving price breaks from Iran, and thereby thumb their noses at the US. Like other parties to the nuke deal, the Chinese understand Trump's decision as saying they were fools to be so easily duped by an evil regime. More reason to find ways of returning the compliment and using the new sanctions as a chance to gain more oil for China's market.
Iran may not suffer a large volume of lost production in the short-term for another reason. It desperately needs international oil companies to help it develop its tapped and untapped reserves, including those in the supergiant South Pars gas field. Previously, Total was the only western firm engaged in such work (others stayed away, worried about Trump's possible pullout from the JCPOA), with Chinese and Russian companies also involved. Long-term, such companies will surely be needed to improve recovery from existing fields and to develop new ones. In the meantime, Russian companies, in fact,have talked aboutinvesting as much as $50 billion in Iran. China's major oil firms, like CNPC, havesignificant investments, including subsidiaries, in the US so may find it more challenging to expand work in Iran. Russia is a different story. Thus, US sanctions could prove an opportunity to firms under Putin's control.
Whether Iran's hydrocarbon sector suffers greatly or mildly, more volatility has been injected into the market. Between May 1, as anticipation of Trump's announcement kicked in, and May 18, prices went from about $73 to $80, the level that most of OPEC would like to stay at or below. Greater uncertainty seems more than likely for the months ahead, until it becomes clearer what US sanctions will actually mean for global supply.
Then there is the nuclear dimension. Oil, gas and nuclear are closely linked in Iran, as in a number of other Persian Gulf states. During the Bush Administration, in the early 2000s, much acid was poured on the idea that Iran has so much natural gas, it would never need nuclear power (NP) and so must be pursuing a weapon and nothing else. The statement turned out to be half right—up until 2003, Iran was indeed pursuing the facilities and capabilities needed to build both uranium and plutonium weapons. But the Bush statement was also half wrong and disingenuous.
It isn't yet widely appreciated that an era of extensiveNP has come to the Middle Eastand that key reasons focus on energy security, rising need for power, and the strong desire to replace natural gas and oil for electricity and so preserve these sources for export. Solar power is also being pursued for this reason, and for image polish (OPEC loves renewables!), but no one believes the Sun in its current technological guise can do it all.
Iran was the first to have a NP plant finally completed and brought on line. That was in May 2011, in the midst of intense negotiations over its nuclear program. Russian contractors built the Bushehr reactor, and both they and Iranian companies are now at work on two more reactors at the Bushehr site. The deal for thesewas celebrateda few days after IAEA Director General, Yukio Amano, declared Iran in full compliance with the JCPOA.
It is evident that Iran wants to become a leading, perhaps the leading NP state in the region. Plansannounced in 2016include building 20 GW of nuclear capacity by 2030, replacing oil/gas for nearly a third of the country's current power, and potentially adding desalination capabilities as well. That would mean 16-18 large reactors, more than in any European nation. Each 1 GW of nuclearis estimated to save11 million bbls of oil (~$860 million at current prices of $78) or 1.8 billion m3 of natural gas. The last link also contains information about Iranian plans to have the Chinese help build and pay for a couple of small (modular?) reactors, 100 MW each, on the Makran coast, possibly to power military or other facilities in the isolated area.
Iran will need external help in technology, expertise, and financing for all this, and while Russia has signed an agreement for a number of these future reactors, it doesn't amount to an actual contract. The Iranians could well entertain deals from vendors other than Rosatom, Russia's state-owned nuclear firm, as they already have with China. But any such deal would need to be sweet for both sides. Since Iranian demand for electricity has soared in recent years, this shouldn't be too difficult. Moreover, the country's existing fossil fuel power plants arein poor shape, with low efficiency and thus wasteful consumption. In such a setting, every new nuclear plant would be close to a godsend. Yet, as always with Iran, there's a catch.
Should the JCPOA collapse entirely and Iran follow through on its promise to restart uranium enrichment, both Russia and China would likely demand continued compliance with the deal, dead or not, if their companies were to contract for the new reactors. IAEA inspections, that is, might well continue. Such would make any Iranian threats about reviving a weapons program mere "acts of the tongue," as Lord Acton once put it. On the other hand, Iran could possibly try a different path. In recent years, it has grown quite friendly with Victor Orban's Hungary, to the point ofcollaborating on a small nuclear reactor(25-100 MWe) of their own, possibly to be marketed in Asia and Africa.
Elsewhere in Iran's neighborhood, the first of four large reactors is now complete at the Barakah NP plant, United Arab Emirates (UAE), with the others to follow in each succeeding year. Saudi Arabia is considering which companies it will choose, among those from the U.S., China, South Korea, Russia, and France, to buildits first set of reactorsamong a total of 16, with construction to begin in 2019. Across the Red Sea,Egypt has signed Rosatomto erect the first four of its reactors, located at the Dabaa site, with the Russian firm to provide 85% of total costs. Rosatom hasalready broken groundin Turkey at the country's four-reactor Akkyu plant on the Mediterranean. Then there is Jordan, which imports well over 90% of its energy sources and is in strong need of more water resources,pursuing advanced, Gen IV reactor technology(high temperature, helium-cooled) with China National Nuclear Corp. And in Kuwait, Rosatom has this yearfiled an applicationfor a construction license to build that country's first NP plant.
To many in the West, including some non-proliferation experts, all this represents troubling news. The prospect of the Middle East being as densely nuclearized as Europe itself may seem to taunt the furies and fates. Yet the real source of worry for experts isn't how many countries have power plants, but how many feel they must match Iran's precedent of building the facilities to make fuel. The UAE, in a123 Agreementwith the U.S., has renounced ever having this capability, which the NPT allows any nation to develop. How many of the other states might follow suit is not clear. At the moment, the U.S. isnegotiating with the Saudisover this very issue. Though Riyadh wanted the JCPOA torn up, just like Israel, it is not likely to renounce all rights to nuclear fuel production, not when Iran will retain them. If the U.S. will not agree to provide expertise and technology because of this, there are always other nations whose companies won't mind stepping in.
A final point. Iran has now been punished for complying with an international agreement that took more than a decade to create. This is precisely what the Iranian hardliners warned would happen, and, beyond their wagging finger, it provides an excellent reason for Iran not to engage again in related negotiations and not to give up major ground in other areas of diplomacy. But Trump's decision favors American hardliners too. Bolton and other conservative hawks have long carried the bitter taste of the 1979 hostage crisis burning in their mouths. A sense of U.S. humiliation and helplessness, held up before the eyes of the world for more than a year, has never ebbed or waned. They are quite willing to sacrifice a crucial nuclear agreement for a real chance at seeing Iran poor and prostrate. If Trump, as president, has become the agent of such sentiment, a nuclear arms race in the Middle East has already begun.