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    Middle East
     Dec 9, '13


Iran's treasures start to be counted
By Chris Cook

An extraordinary shift in geo-politics is taking place as President Hassan Rouhani's team energetically addresses the catastrophic mess they inherited in Iran from the Mahmud Ahmadinejad administration by opening Iran for business.

But perhaps the greater shift is the US realization - after spending more time with sophisticated Iranian strategists in a few days than they did in the previous 30 years - of the sheer scale of the opportunity to completely rebalance Middle Eastern energy policy through what Iran's master strategist, Oil Minister Bijan Zanganeh has called energy diplomacy.

Reservations or reserves?
Many in the oil industry consider that claimed Saudi oil reserves are more apparent than real and have grave reservations that the Saudis can produce at levels much higher than the current 10 million barrels per day (bpd).

Iraq, on the other hand, shows huge promise, although while the Iraqi government makes ambitious claims of 9 million bpd, few in the industry think Iraq will produce much above 5 million bpd and



then only if demand increases so that the new production does not collapse the oil price.

The US became painfully aware from 2003 onwards that the consent of Iran is necessary to operate in Iraq, but it is now finding that US/Iran energy co-operation in Iraq is one of many positive items on the table. As for Iranian oil itself, the situation is not a million miles away from that in Azerbaijan and post-Soviet Russia, where a vast infusion of capital and resources has rejuvenated existing dilapidated production and galvanized new projects.

Beauty parade
This is not a phrase that comes immediately to mind when dealing with oil companies, but the principal business being conducted last week at the meeting in Vienna of the Organization of the Petroleum Exporting Countries was the beauty parade of meetings of the oil majors with Zanganeh.

Naturally, sanctions prevent formal engagement, but some interesting ideas were floated, not least that retired personnel from the oil majors might be deployed in Iran as consultants during the next few months in preparation for major investment to come.

We are also seeing a lot of work in Iran on the subject of the nature of the contracts within which the majors will engage, and the possibility of a new synthesis of buybacks (which producers such as Iran want and the majors detest) and production-sharing agreements (which the majors want, and producers detest).

Oil Minister Zanganeh is only now realizing the scale of the management disaster that he inherited, where far too many employees are in their posts due to whom they knew rather than what they knew, as oligarchic economic interests made a grab for oil and gas assets during the wave of privatization.

Interestingly, and I have personal experience of this, this cadre of officials were simply unable to manage an increasingly knowledge-based and ICT - information and communications technology - centered industry.

Energy co-operation
There is also a dawning realization, and not just in Iran, that energy co-operation transcends all ideological differences. By way of example, we have seen China is now looking to pull out from recent strategically unwise investments in downstream assets such as oil refineries that only make sense if there is no exposure to high crude oil prices. But for an oil producer, such assets, and other energy consuming assets like airlines, are a different matter since supply agreements and production sharing arrangements are quite straightforward.

Iran understands that security of demand for producing nations is a perfect fit with the need for security of supply required by consuming nations, and it is interested in supporting its nascent private sector in pursuing long-term energy and technology transfer/management relationships with suitable overseas partners. As I pointed out when I was last in Tehran in May, one of the Big Trades of the 21st century will be the exchange of intellectual value - knowledge, and knowhow - for the value of carbon fuel saved.

Least energy cost
Zanganeh's previous ministry committed to building massive petrochemical capacity with a view to capturing the "value added" for Iran which was lost when Iran simply exported cheap feedstocks, and this long-term investment is now bearing fruit.

The question of what to do with the stalled investment in the massive South Pars gas field is also being reviewed. It is not widely appreciated, but the liquefaction and shipping of gas as LNG (liquefied natural gas), or the pumping of gas thousands of kilometers wastes staggering amounts of energy. The fact is that the closer to the origin that energy can be used, the better.

The Saudis shudder at the thought of the US transferring affiliation to Iran, which is precisely what is happening, in my view, in a fundamental reappraisal by the US, which has no friends, only interests, and is in no doubt as to the true source of the radical strain of Islam afflicting many regional trouble spots.

But Iran's energy diplomats can see that energy co-operation with the Saudis may be a neutral first step to reassuring them that Iran means business and has no interest at all in either regional hegemony or energy competition to give the West cheap - and possibly environmentally damaging - fuel.

Iran observes Saudi Arabia - which has minimal natural gas - burning phenomenal amounts of crude oil and fuel oil, particularly in high summer. It is not difficult to envisage the Saudis investing in Iranian natural gas production and power generation in (say) Bahrain with the gas being exchanged for prepaid Saudi oil.

In the medium and long term, of course, the focus will be on prospecting for and mining oil and gas savings, rather than oil and gas itself.

Simply business
Iran represents one of the greatest repositories of natural and human resources on the planet, and I have no doubt whatever that the breakthrough recently made in Geneva can and will be followed up by the US.

Moreover, I think that the Israelis, who are entitled to be skeptical, are also re-appraising their position. The scope for regional energy co-operation which could maximize Israel's own natural gas windfall could also potentially extend to co-operation in relation to the looming crisis in respect of water resources, which cannot be distinguished from energy resources in arid regions.

The next six months promise to be a pivotal period in human history, I believe, but I am optimistic as to the outcome as the world shifts from dollar economics and dollar diplomacy to energy economics, and energy diplomacy.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

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