One of the oil world's oldest powers is set for a long-term comeback.
Photograph by Vahid Reza Alaei — AFP/Getty Images
By Cyrus Sanati
April 3, 2015

Big business most likely played a major role in clinching Thursday’s historic nuclear framework agreement with Iran. Heavy lobbying by thirsty European companies hoping to reenter the Iranian marketplace may have even forced the United States to give in on some key issues in the negotiations.

While the particulars of the framework still need to be ironed out before the sanctions against Iran are officially lifted, European companies are already taking the first steps to reconnect with Tehran.

President Obama was defiant, and defensive, yesterday as he announced the terms of the nuclear framework agreement with Iran from the Rose Garden at the White House. He addressed his critics directly, challenging them to come up with a better deal given the circumstances. The next few weeks will be a slog trying to convince Congress, as well as allies like Israel and Saudi Arabia, that this deal is the best outcome to prevent Iran from developing a nuclear weapon.

He may not succeed.

Nevertheless, the President will likely fight till the very end to get this deal through. If Congress does somehow torpedo his efforts by either voting the agreement down or by imposing more sanctions, it would be devastating, not only for his legacy, but also for the international sanctions regime he painstakingly put together in order to isolate Iran.

“Iran has shown no willingness to eliminate those aspects of their program that they maintain are for peaceful purposes, even in the face of unprecedented sanctions,” President Obama said on Thursday. “Should negotiations collapse because we, the United States, rejected what the majority of the world considers a fair deal, what our scientists and nuclear experts suggest would give us confidence that they are not developing a nuclear weapon, it’s doubtful that we can even keep our current international sanctions in place.”

When the president says he is “doubtful” that the sanctions will stay in place, he isn’t talking about the U.S. sanctions; he is referring to those levied by Europe. It was just a matter of time before Europe cracked under the pressure. While the U.S. has had strong sanctions against Iran for decades, Europe only agreed to them three years ago under intense U.S. pressure. Before then, EU sanctions against Iran had been light or nonexistent.

Over the last few months, European courts have started to chip away at the foundations of the sanctions regime there, saying that they are unlawful. In September, an EU high court ruled that sanctions should be lifted against a number of major Iranian banks. The judge said that the EU had failed to prove that the banks in question, which are state-controlled, were complicit in helping Iran attain a nuclear weapon and those organizations should therefore be released from sanctions.

While the EU appealed the decisions, chances are they would eventually have no choice but to accept the court’s ruling on the matter and lift the sanctions on those Iranian banks. And if those banks were indeed free to operate in Europe, then the courts would have effectively reopened Iran’s financial system, undermining the heart of the U.S.-led sanctions.

In any case, Europe is champing at the bit to get back into Iran, and they are not waiting for the sanctions to be lifted to get the ball rolling. Germany, France, and UK have teamed up to form the European-Iranian Business Alliance in an effort to facilitate commerce between the EU and Iran.

Germany seems to be leading the way. Already, 100 German companies have branches in Iran, with 1,000 businesses operating through sales agents, according to the German-Iranian Chamber of Industry and Commerce. Germany was Iran’s largest trading partner in the EU before the sanctions ruined the party. In 2010, Germany exported around 3.8 billion euros worth of goods and services to Iran. By 2013,that number was cut in half due to the sanctions, coming in at only 1.8 billion euros.

But Germany is optimistic about its future with Iran. The German-Iranian Chamber believes that German exports will rebound to 10 billion euros annually once the sanctions are officially lifted.

Big industrial companies, like Siemens, which makes everything from railcars to medical equipment, will lead the way, along with auto manufacturers like Volkswagen and Daimler-Benz. Other big German companies reportedly looking for their piece of Iranian pie include Bayer, the pharmaceutical giant, and E.On, the power company.

The Germans aren’t the only ones looking to get back into Iran. The French have been seen lingering around trade shows and buying dinner for Iranian officials for months, according to people on the ground in Tehran. Members of the Franco-Iranian Chamber of Commerce include virtually all the big industrial French firms, such as Alstom, CGG, Faurecia, Legrand, Renault, Schneider, and SNF Floerger. Peugeot just inked a deal to start making cars in the country, joining French rival Renault, which has been making cars in Iran for a while.

But the real prize for European companies is of course Iran’s oil sector. Years of mismanagement and sanctions have wreaked havoc on the country’s once-robust energy complex. Iran possesses 10% of the world’s old supply yet it only pumps a measly 2.8 million barrels a day, which is around 3% of global oil demand. After the sanctions are lifted, Iran hopes to boost production by at least 1 million barrels a day to between 3.6 to 4.0 million daily. If it had European help, Iran could boost production even higher.

Back in 1974, when Iran was ruled by the pro-Western Shah Mohammad Reza Pahlavi, Iran was producing 6.4 million barrels of oil a day. Given Iran’s large proven reserves, it can easily get back to those levels if it gets its act together. One thing’s for sure, it can’t do it alone. Iran needs Western technology and Western help to get the job done.

But when Western companies were last allowed in Iran, the government insisted on working with so-called buy-back contracts, where oil companies weren’t allowed to have an ownership stake. This wasn’t an attractive structure, so many oil firms chose not to work with Iran.

Things may be different now. Given how low oil prices are at the moment, Iran can’t dictate such harsh terms. It needs to relinquish ownership to entice Big Oil to Iran. U.S. oil companies like ExxonMobil, Chevron, and ConocoPhillips are unlikely to be allowed to participate given the secondary sanctions that won’t be going away anytime soon.

Iran is said to have held meeting with European energy firms, including BP, Shell, Total, Eni, and Statoil. Each of these large oil companies bring with them a particular expertise in the oil patch, which could help turn Iran’s broken oil industry around.

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