Despite being a world leader in oil production, Iran lacks the refining capacity to supply its domestic demand for gasoline. (image: s.wsj.net)

The US is still working on legislation to impose new sanctions on gasoline sales to Iran, but the threat of sanctions is already having an impact. On Monday, Reuters reported that oil trading firms Vitol, the world’s largest oil trader, and Trafigura are going to stop selling gasoline to Iran. The firms join BP, Glencore, and Reliance Industries, who have already stopped selling fuel to Iran as the fear of US sanctions convinced them to halt their supplies.

The US is trying to use sanctions to pressure Iran to abandon its nuclear program. Firms who have operations in the US would be penalized for trading with Iran if sanctions pass. Gasoline sanctions are considered one of the most severe and effective sanctions that could be levied against Iran. Though it’s the world’s fifth-largest exporter of oil, Iran lacks the refineries necessarily to produce adequate supplies of its own fuel products and imports 40 percent of its gasoline.

In December Iran cut its rations of gasoline, but so far its domestic consumption has remained steady, reported Israel’s Haaretz on Sunday. The current rations allow consumers to buy 80 liters (down from 100 liters) at a subsidized price of roughly 10 cents per liter; any gasoline purchased beyond the allotted amount costs four times as much. The failure to reduce demand, coupled with Iran’s generous gasoline subsidies, could make sanctions especially painful. As major suppliers stop doing business with the country, Iran will have to seek out smaller suppliers that demand higher prices.

Vitol will complete any fuel deliveries that stem from previous agreements, but told Reuters that the company had not made any new deals with Iran since the beginning of 2010. Chinese oil traders supply Iran with 30 percent of its oil; France’s Total, Malaysia’s Petronas, and Kuwait’s Independent Petroleum Group also continue to sell to Iran.

The proposed US sanctions have already been successful in curbing gasoline supplies to Iran, even if they do not become law. How Iran will respond is unclear—especially because no new sanctions have actually been imposed. The Iranian government already plans to phase out subsidies, and is working to expand its refining capacity to make the country more energy independent. Iran’s envoy to OPEC, Mohammad Ali Khatibi, reminded observers of the most powerful card Iran has to play when he said on Monday that current oil prices were too low and that crude oil should be closer to $100 a barrel—a price point that some think would bring global economic recovery to a grinding halt.

Whether sanctions on gasoline (or the threat of them) will successfully disrupt Iran’s nuclear program—or whether Iran will use its oil exports as an economic weapon to combat sanctions and create a shock in global oil markets—remains to be seen.

UPDATE: On Wednesday the Wall Street Journal reported that Royal Dutch Shell is the latest company to announce that it has stopped selling gasoline to Iran. A company spokesperson would not comment on how possible sanctions may have influenced Shell’s decision, saying only, “Shell is not currently selling gasoline to Iran.” According to the Journal, Western companies are being replaced by companies from Asia, regardless of the threat of sanctions. Petronas, Malaysia’s state-owned oil company, confirmed that it was continuing its gasoline sales to Iran.

Iran’s president may have to tone down his belligerent rhetoric if oil prices stay below $100 much longer. (image: vimooz.com)

Iran’s influence on oil prices appears to be a two-way street. Just as saber rattling by President Ahmadinejad or any other hints of possible armed conflict between Iran and its neighbors can push up oil prices, oil prices can force the Iranian government into negotiating with the international community. According to a report published by CNN Money on Thursday, the current price of crude oil (around $75 per barrel) is wreaking havoc on Iran’s economy and could force Ahmadinejad to the negotiating table over his country’s controversial nuclear program.

According to CNN Money, the economy of Iran, the world’s fourth-largest exporter of crude, requires an oil price of $100 per barrel for sustained economic stability. With current prices at just three-quarters of that target, many believe that the Islamic republic is already feeling the economic pain. The poor state of the economy in Iran is playing a role in the growing unrest among its people. As Fariborc Ghadar, a senior adviser at the Center for Strategic and International Studies and a professor of global business strategy at Penn State, explained, “[The regime] has to shoot their own kids. Women in the cities are angry. The economy is in terrible shape. The place is a mess.”

As a result of this “mess,” Ahmadinejad and Iran’s ruling theocrats have seen their political power diminish both domestically and on the international stage. As Thursday’s reported antigovernment protests and resulting crackdown on dissidents in Tehran shows, the ruling party’s grip on power in Iran is already less than firm. A feeble economy and crumbling political power are enough to make any government swallow its pride in efforts to improve the situation. In Iran’s case, swallowing its pride may very well mean entering into negotiations with the US and other Western powers to halt or restrict its nuclear program, which many world powers see as a quest to attain a nuclear weapon. Agreeing to such negotiations would lead to an end of, or at least reduction in, trade sanctions that have exacerbated Iran’s economic woes. The lower the price of crude falls, the more pressure builds on Iran’s leadership to negotiate with the West.

If oil prices stay at or below current levels for the next few months, we may see a major shift in Iran’s tack in international relations sooner rather than later. When and if that shift occurs, Iran will likely be perceived as less of a threat to relative peace and stability in the oil-rich Middle East, which could, somewhat ironically, bring about lower and steadier oil prices.

And so it seems that the price of Iran’s power to control global oil prices is its vulnerability to being controlled by them.

There is a flame of hope in the dark desert of Kurdish/Iraqi oil negotiations. (image: kurdistan4all via flickr.com)

In Iraq, what promised to be one of the greatest oil bonanzas of modern times is now looking less like the proverbial spouting geyser and more like a crude-based quagmire. Since 2002 more than 30 foreign companies have set up operations in oil-rich Kurdistan, a semiautonomous region in Iraq, hoping to cash in on the immense oil reserves recently discovered there.

However, according to Sunday’s New York Times, a complex political dispute between Kurdistan and Iraq, involving the scrutiny of at least one oil contract held between the Kurdish government and an outside company, still threatens to choke off oil production and send profit margins into the red, though there are some faint glimmers of hope.

The controversy first arose in November, in the wake of revelations that a former American diplomat maintained a business relationship with Norwegian oil company DNO while acting as a political adviser to the Kurds during the drafting of Iraq’s Constitution in 2005. The scandal helped to exacerbate the more contentious issue of profit sharing between Kurdish authority and the central Iraqi government, and led some officials in Baghdad to question the legitimacy of the region’s production-sharing agreements. Kurdistan contends that it has every right under Iraq’s Constitution to sign the contracts, while Baghdad maintains that they are illegal in the absence of a national hydrocarbons law, and has gone so far as to blacklist the companies operating in the region.

However, there is some promise of reconciliation, however slight. In an effort to ease some of the immediate business concerns of the heavily invested foreign oil companies now operating in the region, the Kurdish government recently presented Baghdad with a major compromise that would permit DNO, along with a Chinese-Turkish joint venture called Ttopco, to resume exports of about 100,000 barrels a day via Iraq’s pipeline network. The proposed compromise would require the two producers to offer their oil to Iraq’s State Oil Marketing Organization, which would compensate them initially just for their costs.

While the compromise is yet to be accepted by Baghdad, it could lead to at least some oil coming out of Kurdistan. With talk of peak oil and rising demand for crude in China and India, much of the industrialized world has begun to look to Iraq to provide a major boost in supplies in the near future. Whether this happens or not may depend on how and when the dispute between Kurdistan and Iraq is finally resolved.

Iraqi oilfield. (image: trendsupdates.com)

A conflict between Iran and Iraq that erupted in late 2009 over a seized Iraqi oil well has finally ended peacefully. Reuters reported Wednesday that the small contingent of Iranian troops has fully withdrawn from the disputed and inactive oil field inside Iraqi territory. Foreign ministers from both countries agreed to “maintain friendly relations and withdraw all military forces in the area to their original positions.”

While Tehran initially dubbed the incident a “misunderstanding,” Iranian troops did move 100 meters into Iraqi territory in mid-December and refused to budge. The well in question was drilled in 1979 and has been inactive since 1980 due to war between the two countries.

As HeatingOil.com reported earlier this month, the border dispute tapped into two of Iraq’s most sensitive concerns: “sovereignty and oil.” The peaceful resolution to the conflict will likely go a long way towards bolstering relations between the neighboring, and oil-rich, nations.

An employee at the Tawke oil field, Iraq. (image: wsj.com)

In Iraq’s latest effort to expand its oil production, its Oil Ministry sealed a deal on Monday with a group of international companies led by ExxonMobil Corp. to redevelop the West Qurna-1 field in southern Iraq. According to Forbes.com, the field has reserves of about 8.5 billion barrels, and the new contract will boost production from 285,000 barrels per day to 2.325 million barrels per day.

The consortium is led by Exxon, and includes Royal Dutch Shell, which holds a 15 percent share. It marks the first time a United States company has been allowed into Iraq’s oil patch since the 2003 invasion.

Iraq opened its borders to foreign oil companies back in December, lacking the infrastructure, the experience, and the technology to alone tap into its 115 billion barrel reserves. Since then, HeatingOil.com has reported on the initial auctions, the deal with Royal Dutch Shell, and how Japan is trying to get in on the act.

Boosting production in the region should be a good thing for people around the world. An increased supply in the global marketplace will help to keep prices low for heating oil and other energy consumers alike.

Shell and Petronas aim to increase Majnoon’s oil production by more than 1 million barrels per day. (image: news.sky.com)

BBC News reported that on Sunday, oil leviathan Royal Dutch Shell and Malaysia’s state run oil company, Petronas, finalized a contract to develop Iraq’s 12.6 billion barrel Majnoon oil field. The deal includes a 20-year service contract and the companies will receive $1.39 per barrel of oil. Shell owns 60 percent of the venture and Petronas owns the remaining 40 percent.

The agreement was signed at Iraq’s oil ministry in the presence of Iraqi oil Minister Hussain al-Shahristani and Mounir Bouaziz, an executive at Shell.

This joint venture is the latest in a line of deals for Iraqi oil, and is part of Iraq’s plan to increase its oil production and make it one of the world’s largest oil producers. To revive its oil industry, which has been affected by years of sanctions and war, Iraq needs the assistance and expertise of foreign oil companies.

The size of Iraq’s known oil reserves ranks only behind those of Saudi Arabia and Iran. At about 2.4 million barrels, Iraq’s daily output is relatively small for a country with as much known oil reserves. However, the country aims to triple its output over the next several years.

Shell and Petronas have pledged to increase the Majnoon oil field’s output to 1.8 million barrels per day from just 46,000 barrels per day.

A wall along the Iran-Iraq border in Wasit Province. (image: cheeseitz87 via flickr.com)

The border dispute between Iraq and Iran over an inactive oil well that began in mid December has been taken up as a cause by some Iraqi nationalists. The Washington Post reports that the fighting for Fakka oil well No. 4 in Iraq’s Maysan province has “inflamed passions in Iraq.”

Differing reports surfaced about the showdown over this oil well, with conflicting reports about whether or not the dispute had actually been settled. The New York Times reported that, despite claims the skirmish was over, officials from Iraq were claiming there were still Iranian soldiers in the region. Then Reuters ran the news that the incident had ended, with Iranian officials dubbing the affair a “misunderstanding.”

Whether or not the issue is resolved—the Post says forces from both countries are still dug in on opposing sides of the well, which is outside of Baghdad—the dispute has put a spotlight on the tense relations between the two countries, issues which some worry could spark a larger conflict. As the Post’s Michael Hastings noted in his piece, the dispute over the inactive well has touched on two very sensitive topics for Iraqis in particular: “sovereignty and oil.” Hastings went on to say that the showdown in Iraq has “turned into a litmus test” for politicians and parties looking ahead to the national elections in March.

Since the U.S. invasion of Iraq in 2003, Iran’s influence in the country has grown and many Iraqis are concerned about what will happen when American troops leave the region. As Hastings elaborated: “Many of the Iraqi leaders installed early on by the Americans spent years in exile in Iran, and Iranian money, weapons and intelligence agents have flooded across a border that neither the Iraqis nor the Americans have been able to control.”

While different factions in the two countries are claiming different things—some say the showdown is a sign of an impending eruption of violence and others have dismissed it—there is no question that the Iran-Iraq border has been unstable for some time. The Post notes that the U.S. has spent over $1 billion on security there since 2003 and that “part of the U.S. withdrawal strategy involves arming Iraq with new weapons, border surveillance systems and aircraft to defend against Iran and other regional threats.”

While the Iranians are saying the issue is over, Iraqis still have their concerns—and fears. And, of course, the issue is ultimately about more than who controls one inactive oil well. As one Iraqi leader told the Post: “This is not an issue of resolving a dispute. We are quite sure this is our land. We have proof this is our land.”

Saudi Finance Minister Ibrahim al-Assaf. (image: arabnews.com)

As reported Sunday by the Economic Times, Saudi Arabia will invest in oil production and refining to “achieve stability in the international oil markets.” According to the nation’s oil minister, Ibrahim al-Assaf, the goal is to “increase production and refining capacity to maintain balanced and acceptable prices by both producers and consumers.”

It’s a good story, but does it make sense? Saudi Arabia recently completed a huge expansion of its production capacity, bringing it to 12.5 million barrels per day. However, it doesn’t actually pump anything like that—it’s currently producing 8 million bpd, which means it already has more than 50 percent surplus capacity.
Second, Saudi Arabia has so much surplus because it, unlike such OPEC members as Nigeria and Qatar, honors the organization’s production quotas. If the kingdom is voluntarily pumping less than it could, why does it need yet more capacity that—by its past practices—it will not use?

Third, most analysts who believe that oil prices will rise next year think prices will be driven by demand increases—particularly increases in Chinese and Indian demand. If demand, not supply, is in the driver’s seat vis-à-vis pricing, Saudi Arabia’s role in “stabilizing” price may be limited.

No, substantial expansion of Saudi capacity would seem to require some paradigm shift in the oil market to make sense. Two possibilities:

• The Saudis privately feel that oil demand will soar far more than even bullish analysts predict. Saudi Arabia’s existing capacity would support daily oil global consumption of almost 90 million bpd—substantially up from 2009’s 84.9 million bpd, and ahead of analysts’ 2010 predictions of 86.4 million bpd.

• The Kingdom intends to stop restraining itself and export as much oil as it can. For example, suppose that Saudi Arabia fears that structural shifts in energy markets, such as carbon emission reduction, the development of alternative energy, and/or increased focus on conservation and efficiency, have the potential to substantially reduce oil demand in the mid- to long-term. If that were case, it might make sense to monetize as much of their oil reserves now, while prices are comparatively high, as they can.

Of course, the above is pure speculation, and if there’s anything we know, it’s that speculation (in every sense of the word!) in or about oil is easy—divining the future accurately, that’s the hard part. However, it does seem that there needs to be something beyond what’s being said to motivate Saudi Arabia’s otherwise almost-inexplicable increases in production capacity.

Peter Davies, former head economist at BP, says fears about peak oil production are “overstated and exaggerated.” (image: telegraph.co.uk)

An article in Emirates Business 24/7 this week announced new studies and figures aimed at proving that claims about peak oil are “exaggerated.” This latest round in the high-stakes game between oil producers and climate-change whistleblowers, however, isn’t exactly from the most neutral of sources. The primary claim reported was made by Peter Davies, a former chief economist for BP, while delivering a speech during a recent seminar held by the Saudi Association for Energy Economics (SAFE)–the article notably omits that Davies is no longer in BP’s employ. While paying lip service to the fact that global oil resources are, in fact, finite, Davies countered “theories” about peak oil by saying generally that technology and economics will find a way to stretch our oil resources much farther into the future than predicted:

Those who believe in peak oil tend to believe that technology and economics don’t matter, and I think this is false. The application of technology, the innovation of new technology and economic forces especially mean that recoverable oil resources can increase. If there is a peak in oil, it will come from the demand side. There are always fears, but these remain overstated and exaggerated.

BP’s estimates of word oil reserves (broken down by region) at the end of 2008. (image: bp.com)

This of course, would be a balm to the anxieties of any oil-producing nation, and the article goes on to cite statistics from the Organization of Arab Petroleum Exporting Countries (OAPEC),which appear to back up Davies’ statement. According to OAPEC, there are some 1,809 billion barrels of oil in the Gulf region beyond proved reserves, which cannot be extracted using current technology but which could be potentially tapped in the future. The article claims: “These quantities, if they can be extracted, will meet the world needs for 60 years.” But that is a rather large “if.” The figure falls as low as “enough oil for seven years” if only 10% of the deposits are usable and obtainable.

As we’ve reported previously, Colin Campbell, a former BP geologist and founder of Association for the Study of Peak Oil and Gas, has stated that peak oil occurred in 2008, and that numbers like OAPEC’s are based on poor reporting practices for oil reserves. It is apparently common in the industry for oil companies to report the minimum of reserves upon the discovery of a field, and then revise the public estimates upward during the course of its life, so that the true reserve numbers are based on research done at the outset and don’t reflect newly discovered oil. In addition, he believes that “conventional” reserves peaked in 2005, and that since that time, the shortfall between demand and what the world’s oil fields could put out has been met by oil from more expensive and difficult to extract locations such as the Canadian tar sands. By Campbell’s logic, we are already tapping the sort of resources that the Gulf is counting on for its future productivity, and that shift was largely responsible for the oil price spikes we saw in the winter of last year. Another peak-oil believer, Swedish physicist Kjell Aleklett, claims that overestimation of Gulf reserves by the International Energy Agency may be partially responsible for the current financial crisis in Dubai. The Emirates city-state is surprisingly poor in oil resources, and dependent on petro-fueled tourism from its wealthier neighbors and other parts of the world. So, if Akelett and Campbell are correct, Dubai’s problems may be a harbinger of things to come – a canary in the oil field, if you will – if petroleum energy use doesn’t shift in a more sustainable direction.

Sonangol logo. (image: brandsoftheworld.com)

On December 30, the BBC reported that the Angolan national oil company, Sonangol, inked a deal with the Iraqi government to develop two fields in the country’s south, the Qayara and Najmah oilfields in Nineveh province. The deal is the latest in a series of partnerships Iraq has forged with foreign oil companies to help develop its outdated oil infrastructure. Iraq has the third-largest proven oil reserves in the world, but its crude output has hovered below 4 million barrels a day, and often below 2 million, since the late ‘70s.

Earlier development bids went to international giants such as BP, Royal Dutch Shell and Lukoil; Exxon Mobil was the only American company to make a successful bid, and the geopolitics of the region may have been a factor in that result. Despite its rich reserves, Iraq’s political instability is a high risk for the shareholders of American conglomerates, whereas state companies such as Sonangol, which is used to operating in politically tense areas, are beholden only to themselves. The Qayara and Najmah fields are located in a region that is a hotbed of Al-Qaeda and Sunni Muslim insurgent activity, but the dangers of extracting oil there also earned Sonangol a price per barrel of between $5 and $6 from the Iraqi government, higher than the price paid at other larger, more lucrative and safer fields. Sonangol has said it will invest $2 billion in Qayara and is in talks with several other companies that have shown interest in joining in on their development plans.