An international settlement by November 24 could put Iran on a path to becoming an energy superpower, says Friedbert Pflüger, Director European Centre for Energy and Resource Security (EUCERS) at King’s College. And not just in fossil fuels – but even in renewable energy, which Iran now supports with feed-in tariffs and currency guarantees for foreign investors. US Secretary of State John Kerry meets with his counterpart this weekend.
Iran is one of the most resource-rich countries in the world. Still, its potential is hampered by international sanctions due to the nuclear programme it pursues. However, negotiations are currently at a tipping point, and may place Iran on a path to reaching its full potential as an energy superpower – both in the field of fossils and renewables. The impact on international energy markets as well as Iran’s economic environment would be significant.
Iran flares almost as much gas as Azerbaijan produces
Even though both sides of the negotiation table emphasise their stern positions, it is possible that we will see a nuclear agreementwith Iran this year and, consequently, the sanctions on Tehran lifted. We are in the crucial phase of the P5+1 discussions, which will conclude on November 24th – the deadline for the talks and following the US mid-term elections – with potential gains for both sides.
President Obama has signalled a strong interest in seeing a deal finalized during his term, following strong public criticism of his foreign policy, particularly his handling of Syria. Moreover, his aides have indicated that they may even attempt to bypass a vote on the deal in Congress. Secretary of State John Kerry will meet Iran’s Foreign Minister Javad Zarif in Oman on the 9th and 10th of November in an effort to support the nuclear negotiations before the final talks take place in Vienna. While U.S. officials have voiced cautious optimism that a deal could be reached by the deadline, there is also talk of extending the diplomatic process again absent an agreement.
President Rohani, too, has a strong interest in reaching a comprehensive agreement. He knows he has to lead his country out of isolation in order to solve severe internal problems. The oil embargo alone has halved Iran’s oil export revenues within two years, from 118 billion to 56 billion USD. The calls from elites, including large parts of the religious establishment, for a quick end to isolation is unmistakable. On the other side, the United States and Europe have realized that the real threat they face is the Islamic State (IS), not Iran. Iran, too, shares this fear of IS. This is why Tehran supports the Kurdish Regional Government in Erbil and is exerting pressure on the new government in Baghdad to unite with the Kurds in the fight against IS.
Iran’s return to the international community will likely change the balance of power in the region and spark an energy “renaissance”. Iran has the 4th largest conventional oil reserves and the 2nd largest gas reserves in the world, but production is far behind its potential. Reasons for this include the sanctions, the lack of modernisation and mismanagement. Iran desperately needs new technologies. Most oil fields were discovered before 1965. Each year their output decreases by ten percent.
Furthermore, substantial volumes of natural gas released during the production process are flared. As a result, Iran wastes almost as much gas as Azerbaijan produces. Iran has to open up in order to benefit from its oil and gas wealth. Plans for LNG terminals have already been put on hold for the past 30 years.
A stronger civil society, environmental NGOs and many small firms have taken up the cause of climate protection and energy efficiency
In a first step, Iran wants to enact a new law aimed at creating a more attractive environment for foreign investment. Should it pass and sanctions be lifted, Iran could become one of the world’s leading oil and gas producers. Investors, who have been avoiding Iran until now, will line up, as the success rate for gas drilling is 79 percent, more than double the global average.
These are the conditions that can help Iran, which today exports little gas, to become an export giant in the future. Demand for gas in Asia, Europe, Turkey and the Middle East is enormous. This would be a particular challenge for Qatar, which so far is the largest LNG exporter. If Iran starts to export LNG, the pressure on gas prices will be felt worldwide. The same is true for oil: Iran’s oil exports, which fell to one million barrels a day, could rise back to 2.5 million barrels a day within two or three years after the sanctions are lifted.
What is more, Iran has also finally recognized the vast potential of energy savings and renewable energy. Recently, the first major solar park was inaugurated on the capital’s doorstep in Malard – using Swedish panels and German inverters.
A stronger civil society, environmental NGOs and many small firms have taken up the cause of climate protection and energy efficiency. The Iranian government has established agencies to support this development and has approved feed-in tariffs set at EUR 0.13 cents/kWh for the next five years. Moreover, the Ministry of Energy has guaranteed to purchase all electricity produced from renewable energy.
The Iranian government has approved feed-in tariffs set at EUR 0.13 cents/kWh for the next five years
Realizing that foreign investors could still hesitate to invest in the sector due to the country’s volatile currency, Iran’s policymakers have introduced an index formula to correct for significant fluctuations and also provide power providers the option to be compensated with oil instead of Rials. Iran, a land of fossil fuels, is thus also facing a revolution of “green” energy. In the coming years, Iran will need these additional sources of energy for its domestic market of 80 million consumers, half of whom are under 25, as well as the development of priority industries such as the automobile and petrochemical sectors.
Certainly, many question marks remain. Political setbacks are almost unavoidable given the continuing difficult political situation in Iran. Nevertheless, all signs point to cautious reforms. An Iranian economic miracle, and thus a gradual opening – maybe even a confined secularisation – now all seem possible. An Iran that is re-integrated into the international community is a challenge for all countries in the region but, even more, a chance for peace and prosperity.
Prof. Dr Friedbert Pflüger is Director of the European Centre for Energy and Resource Security (EUCERS) at King‘s College London. He was Deputy Minister of defence in Angela Merkel’s first parliament.