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How Trump's Decision on Iran Nuclear Deal Will Affect Energy

Nilanjan Choudhury
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U.S. President Donald Trump is expected to decide on the fate of the landmark Iran nuclear deal by the close of business this week.

As per various reports, the American administration might 'decertify' the 2015 accord – forged by then-President Barack Obama – declaring that the Persian Gulf country is in breach of the spirit of the agreement, which no longer serves U.S. national security interests. A declaration of that sort would then give Congress 60 days to decide on re imposing sanctions on OPEC’s third-largest oil producer.

The Iran Nuclear Deal

On Nov 24, 2015, Iran reached a temporary accord with six world powers – the U.S., Great Britain, France, Russia, China and Germany – to restrict its nuclear activities in return for the Persian nation’s relief from international sanctions on oil, auto parts, gold and precious metals. Ultimately, the embargo was lifted in January 2016 after certification from the UN nuclear watchdog.

What Trump Wants Out of Tehran?

For long, Trump has been expressing his opposition to the Obama-era agreement (the Joint Comprehensive Plan of Action or JCPOA), terming it as 'catastrophic' with bad terms for the U.S. His government now wants to delegitimize the pact in its entirety by asking for additional concessions from Iran on some key portions of the deal. The U.S. President is also trying to curb Tehran's ballistic missile program, cyberattacks and support for terrorist groups - issues mostly outside the purview of the JCPOA.

Renewed Sanctions Will Amplify Iran’s Struggles to Attract Foreign Capital

The 2015 deal was seen as a big win for Iran with the infusion of tens of billions of dollars into the Middle Eastern nation’s hobbling economy in return for curtailment of its nuclear program and site inspections. However, the country is still struggling to attract foreign investment, which is way short of the level required for it to achieve its economic ambitions. Things may become even tougher if U.S. President Donald Trump follows through with his rhetoric.

The non-renewal of the nuclear deal will likely lead to tougher U.S. restrictions against Iran. In particular, Trump's decision could choke off foreign investment the Islamic Republic needs to restore the health of its ageing oilfields and boost output following years of crippling earlier sanctions.

Scrapping of the Iran Deal Will Affect Energy Markets

Following the lifting of sanctions in January 2016, Iran’s crude oil production and exports have been on a rise. As per OPEC’s latest monthly report, the country’s daily oil output reached 3.8 million barrels in September, of which around 2.3 million barrels were exported.

The current statistics marks a considerable jump from an average of around 2.8 million barrels per day in 2013 when Tehran was under international sanctions for its nuclear program. Exports languished at about 980,000 barrels per day.

Therefore, it’s quite obvious that the return of sanctions would put pressure on Iran’s energy industry and affect the oil market in general. 

An American pullout of the nuclear agreement won’t immediately curb the flow of the Gulf country’s swelling crude exports as the U.S. is not a buyer of Iranian oil. Moreover, it is also quite unlikely that Trump will get Europe or China – Iran’s biggest clients – in reinstating the embargo on Tehran.

However, the U.S. might threaten the buyers of Iranian crude or any company with major investments in the country’s upstream sector, with financial penalties. This could force some of the companies, especially those with assets in the U.S., scale back purchases/investments out of fear of being kept out of the world’s largest capital markets.

A disruption to Iranian oil exports and investments in the country might cut off some of its supplies to the global market, thereby boosting crude prices.   

Which Companies Stand to Lose?

With the U.S. still maintaining certain bilateral sanctions, domestic companies can’t enter into physical partnerships with their Iranian counterparts. However, some U.S. firms have been trying to bypass this by approaching the Office of Foreign Assets Control (OFAC) – the Treasury Department’s sanctions administrator – for licenses in specific sectors including oil and gas, provided these do not hurt U.S. policy interests.

However, there is no such problem for European and Asian companies, who have already started negotiating with local players to expand and fortify their presence in the Iranian market. Biggies from across the pond like Royal Dutch Shell plc RDS.A and Eni SpA E are among the firms who have been shortlisted for work in the OPEC member’s upstream sector oil and gas projects. Oilfield services behemoth Schlumberger Limited SLB is also in the fray to potentially develop Tehran’s massive energy resources.

But it is French energy giant TOTAL S.A. TOT that stands to be the biggest casualty. In July, the Zacks Rank #3 (Hold) company announced that it has signed an agreement with the National Iranian Oil Company (NIOC) for the development and production of phase 11 of South Pars (SP11) – the world’s largest gas field. This project will have a capacity to produce 2 billion cubic feet of gas per day or 400,000 barrels of oil equivalent per day including condensate. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

The development contract marked the reentry of TOTAL in this reserve rich Middle-East nation, which it exited in 2006. TOTAL is the first among the global oil & gas major to strike a deal with the Iranian administration and begin work for the development of existing resources of Iran.

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