Iran Irritated Power Play on the Oil Field

Saudi Arabia faces growing criticism from other OPEC countries for its massive oil production. Iran's oil minister is calling for a new policy to level the playing field for Iran's eventual re-entry onto the global oil market.
Saudi Arabia has no desire to reduce the huge amounts of oil it pumps. Source. Bilderberg

Oil industry experts sit up and listen when Saudi Oil Minister Ali al-Naimi talks about OPEC. After all, Mr. al-Naimi represents the world's most important oil producer.

But his power is beginning to falter. Many OPEC countries are no longer willing to accept the fact that Saudi Arabia continues to increase production despite low oil prices.

One such critic is the Iranian Oil Minister Bijan Namdar Zanganeh. "There is a player on the market who is applying pressure to keep the oil price from rising – there is too much politics in the market at the moment," Mr. Zanganeh told Handelsblatt, noting that the current oil price is bad for everyone.

With the foreseeable end of sanctions on Iran, the resource-rich country is seeking a stronger role in the oil and natural gas markets once again. "We want to play an important role in securing global energy production, and we want to have a position that’s commensurate with our oil and gas reserves," said Mr. Zanganeh.

While German drivers benefit from the low gasoline prices resulting from all this cheap oil, the petroleum-producing countries face billions in shortfalls in their national budgets.

Since the end of June, the price of European Brent crude oil has fallen from about $115 a barrel (159 liters) to as low as $50. On Tuesday, the Wall Street Journal quoted an OPEC study that concluded that the price would not rise above $100 a barrel again before 2025. But the OPEC Secretariat released a statement on Tuesday, saying it “questions the factual accuracy” of the newspaper's report.

Those who produced more during the period when we significantly reduced exports must now scale back their exports. Bijan Namdar Zanganeh, Iranian Oil Minister

The price drop had been triggered by a glut of oil during the shale oil production boom in the United States. OPEC, in a departure from its earlier policy in such cases, did not react by reducing production. Instead, observers suspect that the Saudis increased supply to combat the new fracking competition.

The Iranian government, however, is unwilling to accept the current low oil prices and is calling on Saudi Arabia and other producing countries to reduce production. "Those who produced more during the period when we significantly reduced exports must now scale back their exports," said Mr. Zanganeh.

Many industry experts expect to see a new showdown in the oil sector. It is clear that Saudi Oil Minister al-Naimi, a man with experience in power struggles, is not about to give in.

Iran's return to the oil markets is already a hot topic in the market and in the business world. There is a lot of buzz surrounding the next OPEC conference in early June, when member countries could begin setting the course for an Iranian return.

"Saudi Arabia will not change its position," predicted István Zsoldos, chief economist for the Hungarian oil company MOL. "The country wants to preserve its market share, which is why it will continue to produce record amounts of oil."

Other OPEC countries also have no interest in curtailing production, the oil expert added. "I don't expect any major effects."

In fact, most member states simply cannot afford to place less oil on the market. Venezuela, Nigeria and Angola finance a large share of their national budgets with oil revenues, and the low prices have made things more difficult for them.

Even the Saudis are having financial problems. Last week, the International Monetary Fund (IMF) urged Saudi Arabia to address its budgetary problems. The country's deficit threatens to increase to 15 percent of GDP.

It would be extremely desirable if Iran, with a population of more than 80 million, opened up as a large market in the region. Joe Kaeser, CEO, Siemens

At least Saudi Arabia has begun to rethink its strategy. For instance, Oil Minister al-Naimi was replaced as chairman of Saudi Aramco, the world's most powerful oil company. A son of the new King Salman now heads the board of directors, and the company, which produces more than 11 billion barrels of crude oil daily, is being disconnected from the oil ministry. The new motto is "more market, less politics," say analysts in Riyadh.

This could even suggest a return to old behavioral patterns, in other words, curtailing production. On the other hand, Saudi Arabia, the dominant Sunni Muslim power, has focused on weakening Shiite rival Iran until now. The United States, for its part, has pressured Riyadh not to reduce oil production, to prevent prices from rising and to corner Russia economically.

Last weekend, Russian President Vladimir Putin voiced his renewed criticism of the "politically motivated, low oil price." By pursuing its current policy, he said, Washington is not only harming Moscow, but also the U.S. domestic fracking industry.

There are many facets to Iran's return to the oil market. The oil price is only one of them. Besides, the prospects for a substantial price increase are considered relatively poor. "We believe that OPEC will adhere to its strategy for now. The price of oil has increased by about 50 percent since its low in January 2015. This shows that OPEC's strategy can't be that wrong," said Hannes Loacker of Raiffeisen Bank International.

Other experts see the oil price remaining relatively unchanged by the end of the year, especially as the global economy is regaining momentum and demand for oil is increasing. This also makes a larger supply resulting from potentially substantial Iranian production less of a threat.

Elsewhere, a return of Iran following the end of sanctions is even a source of optimism. "The entire world is watching Iran at the moment," Wolfgang Büchele, the CEO of industrial gas supplier Linde, said at the company's shareholders' meeting. Linde is currently in preliminary talks, he added, noting that the company used to have close business relationships with Iran through its plant engineering and construction business. Linde wants to return to Iran when the sanctions are lifted.

Siemens still has a strong reputation in Iran but is biding its time. The international conditions haven't changed yet, said a spokesman. According to industry insiders, the technology group could aspire to new business in the oil and gas sector, as well as other infrastructure areas. "It would be extremely desirable if Iran, with a population of more than 80 million, opened up as a large market in the region," Siemens CEO Joe Kaeser said recently. "If lawmakers are willing, so are we as a company."

 

Mathias Brüggmann is an international correspondent, Regine Palm reports from the companies and markets desk and Hans-Peter Siebenhaar is the Vienna correspondent for Handelsblatt. To contact the authors: [email protected], [email protected], [email protected].