Western investors’ hesitancy over Iran just went up a notch. Even before hardliner Ebrahim Raisi’s victory in Friday’s presidential election, oil companies such as TotalEnergies would have thought twice about working in the fossil fuel-reliant Islamic Republic. They are now more likely to hold back.
Judiciary chief Raisi will take office in August, replacing Hassan Rouhani, a pragmatist who was barred by the constitution from seeking a third term. Raisi’s victory was predictable given what has happened since the United States withdrew in 2018 from the Joint Comprehensive Plan of Action (JCPOA), an accord that had three years earlier seen the world’s biggest economy and other major powers lift multilateral sanctions in return for Iran accepting curbs on its nuclear programme. US sanctions were renewed, oil exports collapsed, and Iranian GDP plunged 12 per cent in the two years before Covid-19 hit.
Unwinding old sanctions
Rouhani’s administration may strike a new nuclear deal before it hands over the reins. If so, Iranian daily crude exports could jump from below 1 million barrels to their 2018 level of over 2 million barrels. Even better, the global oil market may be able to absorb the extra supply without prices dropping too far since the Organisation of the Petroleum Exporting Countries and allies such as Russia should still be pumping below capacity by the end of this year. But veteran Oil Minister Bijan Zanganeh’s hopes of boosting daily oil output above 6 million barrels are a stretch given this would require foreign investment.
When the JCPOA was signed in 2015, US assurances that Iran’s $385 billion economy was opening up generated genuine interest. TotalEnergies, for example, struck a $4.8 billion natural gas deal. But such plans had to be shelved after then-President Donald Trump scrapped the JCPOA. Foreign investors will now be hesitant about any new accord that promises to lift sanctions.
First, there is the risk of inadvertently working with the Islamic Revolutionary Guard Corps, the military grouping that controls a big chunk of the economy and which is sanctioned by the US. Second, given the US has sanctioned Raisi himself, the tone of his administration will probably be more confrontational than that of his predecessor.
In order to justify new fossil fuel investment as climate change considerations grow in importance, oil groups and financial groups will increasingly stick to less challenging markets. That suggests their money will stay away from the Islamic Republic.