This Week In Energy: Iran Nuclear Deal Has White House Walking A Tightrope

By Evan Kelly
Posted on Fri, 15 May 2015 17:02 | 0

Iran is not done sending a message to indebted tankers in the Persian Gulf. For a
second time in three weeks, the Iranian Navy fired across the bow of a commercial
ship near the Straits of Hormuz. On May 14, Iran fired shots near a ship with a
Singaporean flag. The Alpine Eternity, as the tanker is called, fled to waters
controlled by the United Arab Emirates to avoid further confrontation with Irans
Revolutionary Guard Corps Navy ships. Iran insists the incident is a commercial one,
relating to a debt owed on damage done to an Iranian platform. The previous
incident blew over, but a pattern seems to be emerging, raising the prospect of
higher insurance rates for tankers traveling near or in Iranian waters.

The incident came just as US President Barack Obama was hosting top officials from
the Gulf Cooperation Council. Although Saudi Arabia and three other Gulf states
declined to send their heads of state in an apparent protest over unsatisfactory
security guarantees, President Obama and Arab nations from the Gulf discussed the
details of the pending deal with Iran over its nuclear program. With Saudi Arabia
telegraphing its unease, Obama was under pressure to offer yet more security
assurances.

Related: Are US Drillers Actually Making A Comeback?

Emerging from the meeting came a stronger pledge from Obama on the defense of
the Arabian Peninsula. Obama said US commitment to the security of Arab allies
was ironclad. He laid out new promises of air, maritime, and cyber defenses to
ward off Iranian threats. But he resisted Saudi pleas for a more comprehensive
defense pact that would require the US to commit militarily to fight Iran in the event
that Iran attacked one of the Gulf States.

He is treading a fine line as he seeks to assure his Arab allies of US support while
still keeping the US out of a commitment it wouldnt want to follow through on.
Immediately after the meeting it was unclear whether or not the American offers
would be enough to bring Arab states on board with the nuclear negotiations. Saudi
Arabias Foreign Minister was non-committal.

Meanwhile, there are more talks behind the scenes that Saudi Arabia may be
considering the pursuit of its own nuclear program. At the heart of Saudi Arabias
concerns are the sunset clauses in the deal with Iran that will lift restrictions on their
nuclear program after ten years. Saudi Arabia fears that Iran will be able to obtain a
nuclear weapon after that period and that the US-Iran agreement that could be
finalized in June essentially acknowledges Irans right to enrichment. That has Saudi
Arabia considering its own weapons program, at least unofficially. If Iran went
behind the international community with its weapons program and could be
rewarded for it Saudi thinking goes then maybe Saudi Arabia should do the
same. The US has its work cut out for it the Americans are trying to assure Saudi
Arabia, but not commit to a defense pact, while still bargaining for a strong deal
with Iran in order to convince the world of its merits. That is a lot of balancing for US
negotiators, and the outcome in June should be interesting.

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At the same time, Iran is not exactly sitting in the best position either. Even if the
government can overcome its own hardliners and reach a final deal, the road ahead
will be bumpy. Sanctions may be lifted, but it will still be a struggle for the Islamic
Republic to attract new investment. Reuters reported that an array of large
multinational banks, mainly European, will balk at going back into Iran even if a deal
is signed. That is because while international sanctions on doing business in Iran will
be lifted, there will still be a series of US designations on Iran related to its
sponsorship of terrorism. The US Treasury Department will still not necessarily give
Iran a clean bill of health, and that could scare away banks from returning en masse
to Iran.
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Back in the US, there is growing evidence that US shale drillers could be on their
way to making a comeback. After a parade of companies insisted that they will
restore some of their drilling activity this year if oil prices remain stable, more and
more news outlets have begun predicting a comeback. Continental Resources
(NYSE: CLR) chief said that his company and other American drillers will not be
killed off by OPEC. They want to stop shale oil, Harold Hamm told the FT. They
might for six months, but not for the rest of time. Once prices rebound, so will
drilling, he says. But Hamm also predicted that Saudi Arabias strategy to kill off
shale will likely spur strong momentum in the US Congress to lift the ban on crude
oil exports. That would lead to a renewed push for drilling as US exploration
companies would have access to a wider market for its product. Indeed the
Republican Senator from Alaska, Lisa Murkowski, the top Senator on energy issues,
introduced new legislation this week that called for scrapping the decades old
prohibition on oil exports.

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Speaking of a US shale comeback, conflicting data came out this week on the state
of the industry. The state of North Dakota released figures that showed that
production in the Bakken actually increased for the month of March. The uptick in oil
production came as a surprise, as the number of drilling rigs in the state now
standing at 85 is far below the 130 or so the state says is needed to keep
production flat. At the same time, the EIA released fresh data that predicted overall
US production will decline by 86,000 barrels per day in June. The data suggested
that cut backs in drilling are finally trickling down to actual production levels.

In Seattle, Royal Dutch Shell (NYSE: RDS.A) defied the city by sending its Arctic
drilling rig to the port despite the lack of a permit. Activists promised to meet the rig
in the harbor in kayaks, but Shell had no trouble in docking its ship. Shell will be
fined a pittance by the city, but plans on moving ahead. It is gearing up for its
much-anticipated return to the Arctic this summer, and just a few days ago received
the go ahead from federal regulators.

By Evan Kelly of Oilprice.com