The Billion Dollar Natural Gas Frenzy America Will Miss Out On
One thing emerged clearly during my four days of meetings with the Iranians in Frankfurt last week. There is now enough European support to allow Iran to move forward with some of the biggest natural gas and LNG (liquefied natural gas) projects in a decade.
There are still long negotiations ahead, with considerable risk assessment necessary throughout the design and implementation stages.
Some of these projects will never see the light of day because, the risk factor will simply be too high. That’s despite the impressive bottom line potential here. You see, these deals will likely provide access to deeply discounted natural resources.
Both the governments in London and Berlin have announced intentions to increase business dealings with Tehran.
And major energy companies such as French Total SA (TOT) and Anglo-Dutch Royal Dutch Shell plc (RDS-A/RDS-B) are now well into what they hope will be multi-billion-dollar natural gas and LNG projects.
There’s just one stumbling block left…
American Sanctions Affect Even European Companies
Rumblings from the new Trump administration that new heavy sanctions should be applied on Tehran has thrown some cold water on the European rush into Iran.
That’s because Washington can apply secondary sanctions to anybody involved in Iranian hydrocarbons, applied directly to the miscreant’s U.S.-based assets.
Just ask major French bank BNP Paribas SA (BNPQY). They are on the receiving end of an $8.9 billion settlement agreement for violating U.S. sanctions against Sudan, Cuba, and Iran between 2004 and 2012. The bank also received a five-year probation.
What the bank did was not in violation of either French or European law. But it nonetheless ran afoul of U.S. restrictions. Now, I’m not defending what BNP Paribas did. They acted knowing they were in violation of U.S. law (specifically the International Emergency Economic Powers Act and the Trading with the Enemy Act), did so willingly in an attempt to evade statute, and were prosecuted accordingly.
But under the current conditions such prosecutions may be counterproductive.
Iranian Sanctions Relief is Staggered
The Iranian nuclear accord – technically the Joint Comprehensive Plan of Action (JCPoA) – was signed between the five permanent members of the United Nations Security Council (the U.S., UK, France, Russia, and China) plus Germany on the one hand (the so-called 5+1), and the Islamic Republic of Iran on the other. JCPoA was agreed to on July 14, 2015, adopted on October 18, and implemented on January 16, 2016.
In return for moving away from a nuclear program that could be used for military purposes (a goal Tehran has always denied) and subjecting itself to detailed scrutiny by the International Atomic Energy Agency (IAEA), the West has agreed to remove sanctions.
Much misunderstanding surrounds the agreement, with it being the fodder of numerous political debates in the U.S. JCPoA encompasses a text, five annexes, and is 159 pages in total. The entire document can be found here.
It’s important to note that the deal specifies that sanctions relief is staggered and occurs only after stages of compliance have been reached. The removal of sanctions is neither instantaneous or irreversible. Iran must comply and the monitoring international energy must provide conclusive evidence for that compliance.
With the actual content of the deal in mind, here’s what makes the current White House position more difficult…
America is Alone in its View of Iran
All Western observers agree that Iran has complied with all provisions of JCPoA. Now, Washington is touting Iran’s recent missile tests as a violation of UN sanctions.
To be clear here, the most recent UN Security Council (UNSC) resolution related to Iran (specifically, resolution 2231) has actually been superseded by the signing of JCPoA by the UNSC five permanent members. That 104-page document can be found here.
The contention here is over an earlier 2010 UNSC resolution (number 1929). This one is “lighter” reading, amounting to only 18 pages. You can find it here.
But the most recent ballistic missile tests by Iran, while fanning the flames of geopolitics, do not violate that resolution either. They are not capable of carrying nuclear warheads.
Don’t get me wrong. There are plenty of reasons why the U.S. should be circumspect of Iranian intentions and actions.
Yet when it comes to likely developments in international investment into Iranian oil and natural gas projects, we are placed with the latest “inconvenient truth…”
European Companies Will Soon Leave American Ones in the Dust
In December, Congress renewed the Iran Sanctions Act for another ten years. It obliges a Presidential Finding that Iran poses no threat to the U.S. before it is lifted. That was what happened in 2004 when President George W. Bush lifted the remaining sanctions against Libya, turning the Iran Libya Sanctions Act into the current version targeting Iran alone.
However, such a Presidential Finding with respect to Iran is not going to happen in the present political environment. Therefore, involvement by U.S. companies in Iranian hydrocarbons is effectively limited to $20 million.
As Europe moves close to a cautious opening of doors to Iran – in no small measure to support reform-oriented President Hassan Rouhani in a decisive upcoming election – the U.S. will remain on the sidelines.
In fact, as the only American to attend the Iranian meetings last week, here’s what I was hearing: As the prospects improve for secure Iranian natural gas supplies and thereby less reliance on volume from Russia, European governments will begin considering indemnifying their own companies from U.S. action.
That means that, as the race to profit from Iranian oil and gas sets in, there will be one group watching from the sidelines…
And they will all be American.
PS For more on why so many companies are interested in Iran’s natural gas fields, take a look at my 2017 natural gas forecast.