As Middle East goes nuclear, global warming goes critical. Part 1: Iran

Over the next three days we will be publishing a major new article by Brian Parkin exploring the inextricable links between climate catastrophe, capitalist crisis and imperial competition.

The three parts taken together form a single argument with serious ramifications for our approach to the international climate talks this autumn, and to the continuing bloody conflicts in the Middle East. We will publish the whole article as a pdf at the end of the week. In this first part, Brian looks at why Iran’s rulers are prepared to accept invasive UN inspections in order to obtain nuclear power.

Arak IR-40 Heavy Water Reactor, Iran. (cc)

Arak IR-40 Heavy Water Reactor, Iran. (cc)

Introduction

The UN Security Council decision of 20 July permitting Iran to proceed with a civil nuclear programme was greeted with a number of predictable responses. For Obama and the US negotiating team it was an outstanding success in diplomacy and peace-brokering in preparation for a phase of the reconfiguring of military and economic relations in the wider Middle East region- in particular a possible shift way the Gulf OPEC producers as the world energy hub.  For Benjamin Netanyahu and majority Israeli opinion it was no more than a betrayal that would leave Israel at the mercy of a nuclear armed Iran in the near future; a prospect that could only be anticipated with a pre-emptive armed response. And for Saudi Arabia it was a blow against its ongoing ambitions to destroy the perceived threat from its Shia mortal enemy to the north.

But aside from the headline geo-political noise it is important that the Iran nuclear deal is taken both within the context of dangerously rising imperialist tensions, and, as importantly, the looming catastrophe of global warming to which more cheap hydrocarbons further contribute to a run-away point of no return. Here we will attempt to demonstrate how the headlong drive to uncontrollable climate change is inextricably tied into a crisis of global capitalism and its increasingly fitful phase of late imperialism.

  1. OPEC and the oil price crisis

Virtually overnight in early January 2015 the price of world traded crude oil dropped by 50%. For the high cost producers this was bad news. But as long as it seemed to be a market blip then most producers could take a ‘hit’. Initially the oil price ‘shock’ seemed to be a short-term over-supply problem caused by evidence of global recessionary trends and signs of a Chinese economic slow-down. Yet on closer examination it was clear that the OPEC[1] states led by Saudi Arabia were actually increasing output in order to drive down prices.

The reasons for this seemingly counter-intuitive behaviour have since become clear:

  1. OPEC, and Saudi Arabia in particular, were attempting to recover market share by driving out the more high cost US shale oil and gas[2] producers- most of them debt financed- and thus eliminating the competition from ‘unconventional’ hydrocarbon fuels[3].
  2. Saudi Arabia also intended to use sustained low oil prices to destabilise the economy of Iran, which although an OPEC member state, is nevertheless a relatively high cost producer[4].

The sustained low oil price- currently just below $50 dollars per barrel is now beginning to hit high cost US producers hard but the impact on some OPEC states dependent by up to 90% on oil or gas export revenues is starting to tell. But here a seemingly paradoxical ‘fix’ comes into play: although the high cost states are losing dollar revenues, they have to produce even more in order to maintain their income. With its very considerable petroleum derived reserves Saudi Arabia increased oil production because it could and it wanted to. And as the price fell as a consequence, the other, less well-endowed producers increased production because they needed to. The result, as never before, has been the hydrocarbon markets awash with cheap petroleum and other fuels just at a point when the world urgently needs to kick its high octane carbon habit.

  1. Iran’s case for nuclear power

Iran has been seeking access to nuclear technology for over 30 years. Although initially more driven by military than civil nuclear ambitions, the post-Iran/Iraq war period of international quarantine and subsequent sanctions has brought about a shift in priorities. Now Iran wants nuclear technology for power generation purposes and is prepared to submit to quite invasive UN inspections to get it. And a quick look at the ramshackle state of the country’s power generation and distribution sectors is enough to know why. With 78 million people- of whom 60% are under 30 years old- Iran is second in size only to Egypt in the wider MENA[5] region. Also in terms of industrial activity Iran is by far the most economically developed and diversified. Also with the highest regional literacy rates and the greatest proportion of women attending university- at 58%, then by most standards Iran is a highly developed society.

Yet Iran is barely sufficient in domestic power production with winter peak times of demand punctuated with rota power cuts and with 30% of its populated areas without reliable power supply. Presently around 400 separate ‘generating units’ make up just under 70GWe[6]  which means that a dispersed and poorly integrated power system will have a low overall efficiency and reliability. Subsequently with a large number of ageing ‘power units’ and a margin of only 3%, power supply will be insecure.

A major problem for Iran as an oil and gas export revenue dependent economy is the sheer amount of annual hydrocarbon output that has to go into domestic power production – currently 45%. With 58% of Iran’s power coming from gas, 40.8% from heavy fuel oil and the rest from diesel generating sets, the retail cost of power has to be heavily subsidised with power costs of 8 cents per kw/hour being priced at 1.6 cents to the consumer.

For the ‘modernisers’ in the Iranian leadership the case for new nuclear base-load generating capacity is two-pronged:

  • firstly to release the massive proportion of hydrocarbon output ‘wasted’ on domestic energy production and redirect it into more lucrative exports,
  • and secondly to use a reliable non-fossil source of power production to modernise the overall Iranian economy.

There is also a third dimension to this strategy which is that by increasing oil and gas exports, the ensuing revenues can be directed into large scale investments in the extraction, storage, refining and pipelines infrastructure so neglected in the long years of war, embargoes and sanctions. An illustration of the present problem is the amount of natural gas now being injected into oil wells in order to maintain production pressure. This wasteful redirection of gas (the injected gas tends to remain trapped in the oil bearing strata) is yet another loss of Iran’s export earning potential.

  1. Exporting climate crisis

In terms of restoring Iran’s hydrocarbons export earnings, a relatively quick fix will  be the completion of the so-far stalled pipeline and LNG (Liquefied Natural Gas) projects which although restoring the country’s economic fortunes will make a significant contribution to global warming emissions.

In recent years Iran’s hydrocarbon reserves estimates have been progressively upgraded. This has in part been due to the depletion of some reserves elsewhere whilst Iran’s output has been constrained by a combination of embargoes and investment starvation. Certainly in terms of gas, Iran with most output going into domestic power generation, industrial and household distribution[7] and oil well injection, the volume remaining for exports is paltry. In 2014 82% of Iran’s export earnings came from hydrocarbons of which 78% were from crude oil and condensates and only 8% from gas- with 90% of those gas exports now going to more ‘sanctions friendly’ Turkey[8]. According to the latest energy intelligence data Iran could be set to dominate the world gas market which is being increasingly stimulated by gas in some countries displacing coal as the fuel of choice in power generation.

Table 1.World gas reserves. Estimates 2014. (Trillion cubic metres).


 

Russia                                    47.8
Iran                                          33.8
Qatar                                       25.07
US                                             8.73
Saudi Arabia                          8.23
Turkmenistan                       7.5
UA Emirates                          6.09
Venezuela                             5.57
Nigeria                                     5.18
Algeria                                     4.5

Source: US Central Intelligence Agency, Energy Intelligence Yearbook 2014, Langley: West Virginia.


 

An even more recent estimate has revised these figures:

Table 2.Top four natural gas reserves (Trillion cubic metres).


 

Iran                                        34.0
Russia                                   32.6
Qatar                                     25.0
US                                          9.7

Source: BP Statistical Review of World Energy 2015.


 

In addition to Iran’s dominant position regarding gas reserves, its oil reserves are now ranked as the fourth biggest in the world which in terms of combined hydrocarbon resources places it in an emerging dominant position. These estimates are now providing a post-sanctions investment rush with $185bn designated to go into Iranian gas and oil production facilities by 2020. Also the Iranian Gas Corporation is reported to have secured credit of over $100bn for immediate gas industry improvements with the aim of increasing gas production from 800mcu/m per day as June 2015 to 1.2bn by 2020[9] .

Another development that could see Iran break into farther flung gas markets would be the completion of the above mentioned huge LNG facility at Abadan which on commissioning in 2018 will open up the possibilities of lucrative markets in South East Asia and Japan. Also yet another temporarily suspended project coming back on-line is a trans-continental pipeline development in partnership with Oman, Iraq and Pakistan which, with a northern spur, will feed into the burgeoning markets of the Indian sub-continent and China.

In terms of the joint ventures in both oil/gas and nuclear projects, it is probable that Iran will use revenues from hydrocarbon sales- or in the case of China- petroleum or gas credits written into either the construction times or operational lives of the plant. This is currently the case with much of Iran’s oil production infrastructure where Royal Dutch Shell, BP, Total and Eni (of Italy) are now entering into contracts from which the return on investment will be in the form of revenues from output. These contracts are expected to come into effect on 15 December 2015[10], after which it is expected that Iran will be able to produce oil at a rate of an extra 1m/bpd[11][12].

The impact of Iran into full production of both oil and gas is likely to have a two-fold effect. One is that additional capacity on an already glutted market will further depress prices.  And the second is the inevitable stimulus in demand and consumption that continued low fuel prices will create. And on the eve of a world climate summit struggling to get to grips with urgent emissions control agreements that can only be bad news.

In part 2 tomorrow, Brian will be looking at Saudi Arabia’s own nuclear ambitions, and an emerging reconfiguration of imperial alliances in the Middle East.

 


 

Notes

[1] OPEC. Organisation of Petroleum Exporting Countries- a 12 member cartel comprising Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

[2] All fossil fuels are traded on the basis of oil- and in particular two grades (North Sea Brent and West Texas Intermediate) providing price bands effectively coupling coal and gas to the daily traded price of oil.

[3] Hydrocarbons are fossil fuels with a molecular structure of carbon bonded by hydrogen atoms. This includes oil, natural gas (methane) and ‘condensate’ gas- a naturally occurring wet gas that is liquid at ambient temperature. Hydrocarbons do not include coal, anthracite and lignite.

[4] Several of the bigger OPEC producers have high production costs, among them Nigeria, Venezuela, Iran and Algeria.

[5] MENA. Middle East and North Africa. As a non-Arab state on the Caspian Sea, Iran is on the northern margins of this region.

[6] GWe. Gigawatts of electrical capacity. A standard measure of a power station output is measured in Megawatts- one thousand watts. A Gigawatt is one million watts.

[7] On current estimates non-power generation demand for gas within Iran is set to double every decade to 2030.

[8] Isis Almeida, Bloomberg, 15 July 2015. Also Stephen O’Rourke, Wood Mackenzie, Middle East Bulletin, 2014.

[9] Azizollah Ramanzi, deputy head, Iranian Gas Corp. Reported in Wood Mackenzie, ibid.

[10] Oil and Energy Insider. Energy Intelligence report, 11 August 2015

[11] OPEC Quarterly Oil Report July 2015.

[12] This showed that Iran produced 2.86bpd throughout June 2015 and also boosted sales by releasing stocks onto the market in anticipation of a further easing of sanctions.

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