Iran-Asia Energy Partnership: Economic and Strategic Implications

47 Journal of South Asian and Middle Eastern Studies Vol. XXXIX, No.4 Summer 2016 Iran-Asia Energy Partnership: Economic and Strategic Implications Gawdat Bahgat* Few countries in the world can match Iran’s geo-economic and geopolitical significance in the global energy markets. The country holds the world’s largest proven natural gas reserves (18.2 percent) and fourth oil reserves (9.3 percent).1 It is a founding member of both the Organization of Petroleum Exporting Countries (OPEC) and the Gas Exporting Countries Forum (GECF). In 1908, Iran became the first country in the Middle East to discover oil. In addition to these massive hydrocarbon deposits, welldeveloped energy infrastructure, and long history as a major producer and exporter, the Islamic Republic enjoys a key strategic location. It has close and easy access to two major consuming markets—Europe and South Asia. Finally, the Strait of Hormuz, the world’s most important transit chokepoint, is off the southeastern coast of Iran. In 2013, roughly 30 percent of all seaborne traded oil and 30 percent of global liquefied natural gas (LNG) flowed through the Strait.2 *Gawdat Bahgat is a professor of National Security Affairs at the National Defense University’s Near East South Asia Center for Strategic Study. His areas of expertise include energy security, proliferation of weapons of mass destruction, counter-terrorism, ArabIsraeli conflict, North Africa, and American foreign policy in the Middle East. Bahgat’s career blends scholarship with national security practicing. He taught in different universities . Bahgat published ten books including Alternative Energy in the Middle East (2013), Energy Security (2011), International Political Economy (2010), Proliferation of Nuclear Weapons in the Middle East (2007), Israel and the Persian Gulf (2006), and American Oil Diplomacy (2003). Bahgat served as an advisor to several governments and oil companies. He has more than 25 years of academic, policy and government experience working on Middle Eastern issues. 1 British Petroleum, BP Statistical Review of World Energy, London, 2016, pp.6 & 20. 2 Energy Information Administration, World Oil Transit Chokepoints, available at http://www.eia.gov. Accessed November 10, 2014. 48 In recent years, the global energy landscape has witnessed key overlapping changes. These include the sharp drop in oil prices since June 2014, the rise in US shale gas and tight oil production, the gradual shift of oil and gas trade away from Western market toward emerging Asian markets, the significant improvement in energy efficiency particularly in Europe and the United States, and the steady alteration of the energy mix (i.e. rise of the share of renewables and natural gas). Against this background, it is important to examine the potential economic and strategic implications of the full-integration of Iran in the global energy market and the emerging energy partnership with Europe. The Islamic Republic has never been completely isolated from the regional and global systems. But, in recent years international sanctions over the country’s nuclear program have imposed restrictions on the development of oil and gas sectors. The signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015 is likely to gradually weaken and eventually lead to the lifting of these restrictions. To put it differently, one can argue, the process of fully re-integrating Iran in the regional and global systems is already underway and will be very hard to reverse. Oil and gas are not merely economic commodities. They are the lifeblood of modern civilization. Changes in the volume and direction of energy trade have significant strategic ramifications. This essay seeks to examine potential implications of the rise in Iran’s oil and gas production. The essay also analyzes the emerging Iranian-Asian energy partnership. Building pipelines and/or LNG facilities is a capital-intense adventure. In other words, trade in oil and gas on one hand and political relations between exporting and importing nations on the other hand reinforce each other. The next section examines the new dynamics in the global oil markets. This will be followed by an analysis of Iran’s oil and gas sectors and how they are likely to evolve in the coming few years. The third section focuses on the major Asian powers’ energy outlook and the policies to...