Corporate Debt Review

A Dangerous “Gulf” in The Gulf

When & How Bad, Not Whether

Last week I completed my latest round of discussions concerning Persian Gulf energy and policy issues. It was in some respects one of the most exhausting and disappointing exercises I have had in some time.

For four days, I had both public and private meetings in London on Iraqi crude oil, natural gas, and policy matters. Those were followed by barely two hours of meetings with Iranian interests in Paris.

By the time it was done, I had the impression that even the more encouraging aspects would be buried by a wave of uncertain events.

As I noted here in ECRG Intelligence last week, the former sessions reflected more optimism than I have witnessed in some time. This even included the forum in which I provided public commentary on large project tenders for areas surrounding Kirkuk and Mosul recently taken back from ISIS.

Unfortunately, Paris was another matter. Geopolitics had intruded to the extent that there was little left to talk about.

It is discouraging that few I met believed war in the Persian Gulf could be avoided. Discussions ranged from how extensive to how soon, but rarely whether. The main new concern I brought back was something else entirely.

The difference between regional expectations and requirements on the one hand and US policy on the other is growing rapidly. And this “gulf” in The Gulf may be the most disconcerting development of all.

Every Nation For Itself

Security of the region may rely upon restraint from both US forces and the Iranian Republican Guard Corps (IRGC). In the current climate, unanticipated events or miscalculations may be enough to trigger a military confrontation, one that will likely spread as other nearby bordering nations like Saudi Arabia and Israel.

Yet the real problem moving forward is US credibility.

A factor little understood by those who are not involved in the region is oil, and its politics. Nations, leaders, sects, and movements here may support or reject American policy objectives. Yet, at least until recently, they thought Washington would at least be predictable beyond mouthing words that lack strength.

There is now a new arms race unfolding on the Persian Gulf. Nobody any longer trusts outside forces for the maintenance of their internal security. That essentially ends a centuries long reliance on Ottoman, British, Soviet (and to far lesser extent contemporary Russian), or American influence.

The most crucial casualty has become the underlying structure of how security in the region is perpetuated. Henceforth it is every nation for itself.

This is hardly the occasion to debate the pros and cons of US moves in the Persian Gulf. However, everybody with whom I met and in my broader network of regional contacts agree that what has been lost is the most important single element.

Consistency.

Regime Change ‘Not Going To Happen’

This is now showing up in places that should cause pause in Washington. The Iraqis will hardly oppose US moves in the Gulf, even if its leadership has misgivings. There remain the requirements of American investment and infrastructure support.

Nonetheless, Baghdad has declared in no uncertain terms that it will not allow its territory to be used for any US military strikes against Iran. There is one overarching consideration that colors everything else. Iran is the epicenter of the Shia branch of Islam; Iraq has a Shiite majority population.

Despite a constitutional structure that provides for representation of Shiites, Sunnis, and Kurds, Baghdad is run by a government attached by religion to Teheran. The southern section of the country surrounding Basra (where most of the country’s oil is extracted) is heavily Shia. For that matter, Iranian Quds Force commander Major General Qasem Soleimani led the defeat of ISIS forces in the very area within Iraq I was commenting upon in London.

Despite the close affinities, each nation strongly defends its independence, with memories of the 1982-1988 war era between them still fresh. That might have been precipitated by a now-departed Saddam Hussein (leading a Sunni minority-controlled government) but the conflict spilling over both banks of the Shatt al Arab had been simmering for over a thousand years.

On the other side, Iran has its back against the wall. Renewal of US sanctions has cut crude oil exports to about 300,000 barrels a day, or less than 15% of what was moving once the earlier rounds of sanctions had been lifted with the signing of the JCPOA (Joint Comprehensive Plan of Action) treaty in 2015.

JCPOA is the agreement of Iraq with the US, France, Germany, the UK, the EU, China, and Russia that succeeded in arresting Iranian purification of nuclear material to weapons grade. Trump pulled the US out and renewed sanctions. Meanwhile, all the other signatories are still in the accord, while the International Atomic Energy agency (IAEA) confirms that Iran has been living up to its obligations.

Trump’s move has no support from any of the other JCPOA nations. He claims a better deal can be had, but this flies in the face of how one negotiates. You take the best you have, even with its shortcomings, and move to improve it. You don’t throw it out and expect anybody else to come back to the table.

This makes for the frustration and occasional anger I was hearing all of last week. Nobody I talked to – Iraqi, Iranian, Kurd, Emirati, or European – accepts the US logic or believes that any “new, improved” treaty will be forthcoming.

The only conclusion on which there is wide agreement is also a non-starter. “Trump wants regime change in Teheran,” an Iranian said to me during our brief talks in Paris. “And that is not going to happen.” This conclusion has broad support in the region, even among those who oppose Iran.

Iran has begun purifying nuclear fuel and shortly will exceed the limits specified in JCPOA. Meanwhile, the remaining signatories have little left to offer. The INSTEX (Instrument in Support of Trade Exchanges) system was introduced to allow Iranian trade without recourse to any currency exchange or banking institution subject to US dollars.

While nice, this hardly provides Iran with prospects for increasing oil exports. Teheran has flatly rejected INSTEX as a sufficient European response.

And then there is the recent UK interdiction of an Iranian oil tanker off Gibraltar on its way to Syria. That was an enforcement of unrelated EU sanctions against Syrian entities. But it has also significantly eroded the Iranian belief it has any support from London.

Teheran will be making decisions on its own from this point forward. There are few genuine options remaining. At some point, probably soon, it will strike back.

I am next scheduled to be in the region early in September. It may well be a war zone by then.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.