Authors: dr Aleksander Olech, dr Joanna Gocłowska-Bolek
- France wishes Iran and Venezuela to rejoin the global oil market
- Iran is capable of producing 4,250 million barrels per day (BPD) which would greatly contribute to refill the market
- Both states possess one of the largest oil reserves in the world
- None of the countries from the Persian Gulf has the capacity to replace Russian deliveries to Europe in the short-term
- As a result of the sanctions imposed on Russia, both the US and Europe are in need of new sources of energy
France advocates for the return of Iran and Venezuela to the global oil market to avert further oil prices spikes and to ensure that future prices are predictable. It used an argument that major oil-producing countries should increase their production , but at the same time current and potential importers, whilst awaiting for the delivery would do everything to allow other major oil producers to operate on the global market. The oil crisis could affect all European economies, thus undermining their precious stability. In this situation disregard by major global players for such important issues as human rights or omitting sanctions in energy sector grows.
In June France called oil exporters to ramp up production. At the same time the EU was asked to carry on negotiations over restoring supplies from Iran and Venezuela into the European market. The main goals of these measures were to ease the economic hardship caused by the energy crisis, diversify suppliers and stock up for the upcoming winter season.
France is especially open to multilateral international cooperation which enables it to dissect political, military, social as well as energy-related issues from one another.
Paris sees a potential rapprochement between Iran and the United States as a chance for a breakthrough which could render Iranian oil viable and politically attainable for European countries. Furthermore they stress the reintroduction of Venezuelan exports as crucial for the stability of the global oil market.
Iran, which has suffered under sanctions imposed on the basis of its unabating nuclear program, has been forced to seek ways to limit the effects of the embargo on its oil exports. The key buyers of its crude primarily consist Chinese refineries and to a lesser degree Syria and UAE. After new sanctions on Russia were introduced, their market position had weakened due to additional supply of cheap Russian oil heading to its traditional export destinations. As a result, China has quickly emerged as a main importer of Russian oil. This new market reality creates a conflict of interests between two major oil-producers increasingly. Given this new competition Tehran sees a void created by Russian withdrawal from European markets as a great opportunity. Thus, the desire for renewed cooperation with the Western world reached new heights. Only in 2019 when the White House partially suspended Iranian embargo, allowing it to ship its oil to India, Japan, South Korea, Taiwan, Turkey, France, Italy and Greece. Furthermore, in the beginning of 2017 Europe was still receiving about 40% of its oil from Iran.
The French ideas were not the only ones. President Joe Biden also indicated returning to negotiations with Tehran. New plan of action could come to life as early as 2022, which would contribute greatly to reduce oil prices. In February last year, Iran stated that it could provide 2,5 million BPD. Due to the sanctions current exports oscillate to a mere 1 million BPD.
Considering its production capacity Iran is capable of producing 4,25 million BPD giving it a strong position on the global market. Currently in a post-invasion landscape and with Russians increasingly shifting their exports to Asia Iran exports at a maximum 900 thousand BPD and on average (as for instance in May) barely 420 thousands BPD. Despite the obvious constraints, Iranian president – Ebrahim Raisi stated that since August 2021 exports have doubled.
In 2022 Tehran was initially planning to export around 1,4 million BPD. Due to continuous damages caused by the sanctions Iran foresees an ability to sell its abundant oil as a possible way out. Therefore it pursues all possible means to avoid the embargo and get its oil to the market. France’s role here could be pivotal because its influence on public opinion and national policies among European states. If Paris would wish to renew the cooperation, Iran would drastically increase its perspectives for establishing similar relations with other European countries. These scenarios for economic partnerships on a European scale suggest that Poland would also be willing to boost its oil imports from the Middle East. In May, Polish Foreign Minister Zbigniew Rau visited Iran, confirming that comprehensive talks on economic cooperation were being held. One possible area of contention could be the planned Polish partnership with controlled by the Saudi state Saudi Aramco, – an arch rival of Iran. Aramco became a strategic oil supplier after being involved in a merger between PKN Orlen and Lotos. The deal does not however alter the fact that Poland would be willing to import more resources from Iran.
By leveraging its strategic location and control over the Strait of Hormuz, Iran has a track record of multiple attacks against trading ships and tankers crossing this crucial chokepoint. Furthermore, Tehran had issued warnings that it could close the strait completely, what was not fulfilled because it would hit badly Iran’s economy. Considering all of the issues mentioned above, these statements are nothing more than attempts of gaining negotiation leverage with international rivals such as the United States and Saudi Arabia. Besides, Iran has provoked multiple times military and civilian foreign vessels which got close to its shores. These demonstrations were employed against US, British, Japanese, Singaporean and Korean crews.
The character of Iranian presence in the strait is purely military. On seas it relies mainly on patrol boats and frigates, on land it uses anti-ship batteries and observation posts. In addition, military as well as IRGC units monitor the airspace and sea. The entire structure around the Hormuz is tailored to military operations in order to project Iranian force in the region.
Tehran aims to boost its exports of oil and threaten the position of Saudi Arabia and Qatar as main global energy suppliers.
In June 2021 in the area of Hormuz Strait Iran launched the Goreh-Jask pipeline which extends 1100 km. This recent development lends credence to its previous statements about possible shutdown of the entrance to the strait. Thanks to the new project it is no longer forced to ship through the choke point. It is worth noting that the construction process involved foreign companies such as Russian Sberbank, Rosneftegazstroy, Russian developer VEB, German Marcon Ingenieurgesellschaft and Greek Archidron.
On the other hand, if Tehran is indeed capable of achieving its goal of restoring its oil to the market without resorting to a use of force it could tone down the activity of the IRGC in the region. It should take advantage of holding the 4th largest global reserves of oil (Top 3 are Venezuela, Saudi Arabia and Canada). Incremental easing of tensions with the US will be crucial for Iranian oil to flow back to the global markets.
At 300.9 BPD Venezuela has the largest confirmed oil reserves – equivalent to 17,6% of total globally. It also has the second largest reserves of natural gas in the western hemisphere at 5,7 trillion cubic meters which equals 3,1% of global reserves. In the first decade of this century it was the tenth largest producer and the eighth exporter of oil in the world. Revenues from this source amounted to 50% of its GDP and nearly 96% of all of its exports.
However, much of those reserves are composed of less conventional and harder to extract types of crude. Exploitation of those oil fields requires much larger expenses and use of more sophisticated technology. The types of crude found in these fields are in a solid state which requires diluting it prior to transportation and further refining. They are used as so-called „Orimulsión” only after mixing with the lighter crude. The overall costs increase because of additional requirements to use imported lighter crude from abroad to export its product to the global market. Before the imposition of sanctions Venezuela had received most of its supplies from the US. This double reliance on both the import and export of oil makes Venezuelan economy extremely sensitive to global oil prices.
Since 2011 the production in Venezuela is on a downward trend mainly due to ineffective management, shortage of investments, lack of qualified workforce and the impact of sanctions. The infrastructure is dilapidated and outdated to such a degree that full resumption of production could be achieved in several months at the earliest.
Furthermore, it would be conditioned upon enormous investments and influx of qualified workers of which as of right now there is a severe deficit.
At the outset of the 21st century Venezuela produced up to 3,7 million BPD. 10 years ago that number fell to 2,3 million BPD. The trend continued as in 2022 it sank to a mere 0,6-0,9 million BPD. From May exports have tanked even further as a result of the changes introduced by state company Petróleos de Venezuela SA (PDVSA), which started demanding payments in advance for its cargo. It turned out that previously it was not receiving payments for some of the shipments. They were taken over by trade partners to cover outstanding payments.
In addition, because of American and European sanctions imposed in 2017 and extended in 2019, oil produced by PDVSA could no longer be sold to Europe and other Western countries. Washington froze all government-held assets in the US and prohibited American and international companies to carry on any business deals with Caracas. These measures were aimed to undermine Nicolas Maduro’s regime which held its grip on power in an undemocratic way whilst committing human rights abuses.
Opportunity for Venezuela:
In a new landscape defined by the fallout of Russian invasion on Ukraine and energy sanctions, Venezuela is once again being considered as a potential supplier. In March this year US high representatives met with Nicolas Maduro, marking a breakthrough in the relations. Among other topics, talks concerned a prospect of increased exports of Venezuelan oil.
Italian Eni and Spanish Repsol after receiving a green light from the US State Department made their first purchases of Venezuelan oil. Europe received in the beginning of July a shipment of 650 thousands BPD by a ship chartered by Eni. These new supplies are meant to fill the void created by decreased imports from Russia.
In a broader sense the inclusion of Venezuela into the market is an important step towards potential normalization of relations between Caracas and Washington.
Other oil majors such as American Chevron, Indian Oil and Natural Gas Corp. and French Maurel & Prom. have also shown willingness to renew their operations in Venezuela. Interestingly throughout previous years they have been unsuccessfully lobbying the US government to grant its permission to operate in the country. Although Chevron is using a special license that allows it to keep minimal presence in order to maintain security and readiness of its installations. ExxonMobil is also primed for a quick return to the market. It is estimated that a full commitment of these companies could increase the oil production up to 1,2 million BPD in 8-12 months.
Easing sanctions is great news for European companies. Though it is important to note that the amount of oil expected to flow into the market will not restore the full energy security nor impact the global oil prices in a significantly. According to the most optimistic scenarios exports to Europe could reach 50-100 thousands BPD which translates to a marginal improvement and will not compensate for the loss of nearly 3 million BPD of oil from Russia which used to reach Europe before the war.
Possible solution relying on larger imports from Venezuela is thus problematic and would require additional efforts as well as prior investments. Firstly, currently Venezuela does not have capabilities to boost its production in a considerable way. Secondly, as mentioned earlier, Venezuelan oil requires additional refining and its transport comes with additional requirements associated with the use of adequate technology.
European infrastructure would have to undergo significant changes to accommodate shipments of Venezuelan oil. Most European refineries are not fit for that type of crude. In addition it is nigh impossible that sanctions would be completely annulled as Maduro’s regime is still regarded among the US and European policymakers as undemocratic. Russian and Cuban presence in the country is another hurdle that would have to be overcome for the talks to continue.
Notwithstanding all of the factors mentioned above, a full lifting of sanctions on Venezuelan energy and finance sectors are currently not on the table. Biden administration made it clear that any broader easing of sanctions would be conditioned upon an agreement between Maduro’s regime and the opposition. Negotiations seem difficult due to Maduro’s unwillingness to give to the Western countries any larger concessions, not to appear as a weak player. It is highly likely that the US will want to keep most of the sanctions in power before the 2024 Venezuelan elections in order to maintain pressure on the current government to restore democracy to the election process.
Emmanuel Macron brought up the subject of energy challenges with his two close allies – Saudi prince MBS and UAE President MBZ. The situation in the Middle East is particularly tense because of Iran’s aggressive foreign policy (participation in the Yemen war and its advancing nuclear program). It is also worth mentioning that France has military bases in the UAE. Furthermore, UAE is one of the main importers of French arms and military equipment and a key partner in industry and technology. Saudi Arabia is another major weapon buyer. Only in 2020 it signed contracts worth 703,9 million EUR. In addition, it entered a number of partnerships in the energy and technology sectors. One example is the deal involving French Veoila and Saudi Aramco. Besides, France maintains good relations with Qatar, which just like other Gulf monarchies imports French weapons and acts as a co-investor. At the same time itthe a largest producer of oil globally (I think it should be natural gas if anything)
From a European perspective it has to be underlined that none of the Gulf states is capable of replacing deliveries of Russian oil or natural gas in short terms. As a result, as long as energy resources are in deficit countries, it is crucial to utilize any reliable alternative. Therefore, the French proposal to engage with Iran makes sense from an economic point. Paris is known for its multilateral foreign policy approach what should not a surprise if it decides to engage in cooperation with Tehran, Caracas or other oil producers from Africa, where it wields significant influence.
From the US perspective, it is too early to portray Venezuelan oil as a direct alternative for Russian supplies. It is conceivable that France could start actions that lead to new series of talks aimed at diversifying European energy suppliers. Paris finds it easier to reach out to Iran, as it does not have major military commitments to its regional adversaries. In this instance when multimillion oil contracts are at stake, France does not seem overly concerned with issues regarding human rights either.
As a result of sanctions being imposed on Russia, the US and Europe are both on a lookout for new sources of energy supplies. It is worth pondering on the possible short-term impact by Venezuela and Iran on alternative exporters oil. It’s quite pretty certain that oil from alternative sources will reach Europe sooner or later. Although a question about it’s the price and time remains.
Photo: Nicholas Nhede
Dr Aleksander Olech – Director of Security programme at Institute of New Europe, lecturer at Baltic Defence College.
Dr Joanna Gocłowska-Bolek – specialist in Latin America, economist, Center for analysis of political and security studies. University of Warsaw.