Iranian Oil Maneuver

Patrick Doherty

June 28, 2005

Yesterday, I discussed the Chinese bid for Unocal and how progressives ought to view the move. Today the Financial Times reports that Iran's newly elected president, Mahmoud Ahmadi-Nejad, is considering a "total overhaul" of the Iranian oil sector, to include increased foreign investment under conditions that favor Chinese investors. The timing could not be more interesting.

So I'm still arguing that progressives are better served by allowing China to enter the global energy major leagues rather than excluding them and thus pushing China to seek out energy supplies by non-economic means. Today's Iranian development just reinforces the conundrum for Bush's fossilized energy strategy.

First, the Iranian move. The FT article, by Carlos Hoyos and Gareth Smyth (sorry, this one is subscription only) describe conditions that are not economically attractive to private-sector energy companies like those in the United States, Europe and Japan. The new Iranian president has vowed to protect Iranian oil companies by continuing to back a type of contract, a "buy-back," that presents an obstacle to foreign investors. Here's a clip from the FT:

On the surface Mr Daneshyar's comments and Mr Ahmadi-Nejad's position to favour domestic companies make it appear unlikely that Iran will improve the restrictive buy-back terms, which make Iran one of the most difficult petro-states in which to strike an oil deal. Additionally, Mr Ahmadi-Nejad's defence of Iran's nuclear programme will probably make it even more treacherous for companies fearing reciprocal sanctions by Washington to do business in Iran and could prompt a harder stance by Brussels, one executive said.

But Manouchehr Takin, analyst at the Centre for Global Energy Studies, said that Mr Ahmadi-Nejad's promise to shake up Iran's bloated Oil Ministry could also speed up a process that had helped stymie negotiations. He said that Mr Ahmadi-Nejad might be better placed than any liberal president to move things along. "They will go back to having foreign investment in six to 10 months. They will be quicker to make decisions now because they are all part of the same system."

And yet, foreign investment will be happening. Who will be the investors? My bet is China. China has been scouring the planet for energy reserves it can lock in, paying prices that do not stand up to pure economic criteria. The reason is that the firms purchasing these assets are state-owned and the Chinese government sees energy security as a key to its very survival. With 200 million newly urbanized consumers all driving or wanting cars, threatening the new "Chinese Dream" will threaten the Communist Party's mandate of heaven.

Back to the White House. So the picture is now even more tantalizing. Dick Cheney has been calling for a massive increase in foreign investment in OPEC, particularly in the Persian Gulf. Indeed, the attempted privatization of the Iraqi oil fields were evidence of this. He's been putting huge pressure on the Saudis. Now, Iran is saying it will allow more foreign investment at the same time it is reaffirming its right to pursue civilian nuclear energy. As long as Iran stands by its nukes, its oil assets will be radioactive, so to speak, to any firm that wants to stay in the good graces of Washington.

So the scenario starts to take shape where Iran gets even more energy revenues but this time from China, a regime that will not pressure Tehran to change its ways. That provides Iran with a layer of strategic depth it desperately needs, now being surrounded by American clients and, indeed, American forces. With China able to absorb any slack in Iranian oil sales should the United States pursue tougher economic sanctions and with China producing much of the consumer products (and with India, the technology) that Iran will need to stay modern, U.S. leverage is diminishing.