The Fuse

Seznec: Oil and Gas Give Saudi Arabia and Iran Scope to Reconcile

by Matt Piotrowski | October 13, 2015

Adversaries Iran and Saudi Arabia, while having to overcome sectarian strife that has persisted for hundreds of years, will eventually take a realistic approach to their relationship and forge paths of cooperation, with energy at the forefront.

The Middle East is continuing to explode with multiple conflicts and there’s the danger a wider regional war could breakout at any point, but escalating conflict is not inevitable. The fact that the situation is so dire could ironically bring different sides to move ahead with compromise and coordinated efforts to solve key problems in the region. Long-time adversaries Iran and Saudi Arabia, while having to overcome sectarian strife that has persisted for hundreds and hundreds of years, will eventually take a realistic approach to their relationship and forge paths of cooperation that have energy at the forefront, according to a leading expert in Arab studies.

Iran and Saudi Arabia have the political will to move forward with deals in oil and gas that will benefit both sides, despite the animosity the two countries have toward each other and ongoing conflicts in the region, says a new paper by Jean-Francois Seznec, an adjunct professor of Arab studies at Georgetown University and a Senior Fellow at the Atlantic Council’s Global Energy Center.

“In reality, the relations between these two powers may be less antagonistic than they appear,” Seznec wrote in his report “Crude Oil for Natural Gas: Prospects for Iran-Saudi Reconciliation” published by the Atlantic Council. He added: “Just as the Gulf powers have set aside sectarian strife in the past periods of détente, overlapping economic and political interests today make reconciliation possible, despite extremist activity in both countries.”

Much of the animosity between the two countries has been stoked by leaders who use the ongoing tension for their own political gains. “The sectarianism is used by leadership at home to rally citizens,” Seznec told The Fuse in an interview. “Sectarianism is not a cause, but rather a consequence” of poor relations.

Although energy markets have been used as a wedge in the struggle between the two ideologies, that dynamic can be reversed because each side needs the other. With Saudi Arabia having the upper hand in crude oil output and Iran having an advantage with its vast gas reserves, there is scope for the two to bargain. Seznec sees Iran and Saudi Arabia coming to a “gentleman’s agreement” regarding oil production in order to boost prices and bring in more revenues for both sides. “Oil is an inelastic commodity,” Seznec told The Fuse, noting a 5 percent output cutback would help all regional producers. “You can produce less, but make more money.”

Oil deal between Saudis, Iran is possible

Although many market analysts see Saudi Arabia continuing to pump at high levels to fight for market share versus other OPEC producers, some experts such as Seznec see the need for cooperation. Iran could increase production slower than expected, or Saudi Arabia could throttle back to make room for Iran’s increase in exports once sanctions are lifted next year. Iran is forecast to increase exports by roughly .5 million barrels per day next year, with the ultimate goal of boosting volumes by 1 mbd from current levels of around 1.2 mbd.

For the Saudis, their main motivation to cooperate with Iran is in gas.

For the Saudis, their main motivation to cooperate with Iran is in gas. Iran has the largest gas reserves in the world, according to some estimates, and will tap a number of different markets, such as Pakistan, Gulf countries and Turkey, once sanctions are lifted and it gets the investment it needs. Saudi Arabia has large supplies of gas, but much of it is costly non-associated gas. The Saudis could strike a deal with Iran to buy gas at an attractive price. Iran’s biggest gas field, South Pars, which is shared with Qatar, is located in an ideal spot to feed the Saudi Arabia market. Buying from Iran would lessen reliance on direct crude burn for power generation and in turn free up more oil for export. “Where Iran is envious, if not resentful, of Saudi Arabia’s role as the region’s leader in crude markets, Iran’s substantial natural gas reserves hold the key to alleviating Saudi’s surplus in natural gas demand,” Jean-Francois Seznec writes.

First, Syria needs to be resolved

As noted above, there is longstanding distrust that must be overcome. Iran feels threatened by the U.S.’ military presence in the Gulf region, while Saudi Arabia is worried about Iran’s growing influence in the Middle East. Saudi Arabia’s air strikes on Yemen are a prime example of a show of force in order to establish a bargaining position in relation to Iran.

The biggest obstacle to improving relations between Iran and Saudi Arabia is Syria.

The biggest obstacle, according to Seznec, is Syria. Iran, along with Russia, which has thrown itself front and center into the Syrian conflict, is worried about a leadership vacuum, and ensuing anarchy, if President Bashar al-Assad, were removed from power.

The Saudis align themselves with the U.S. on this issue and have reportedly stepped up support for Sunni rebels in Syria. But Seznec believes the Kingdom will show its rational side and be able to coexist with the Assad regime for the sake of stability in the country, and the region as a whole. More importantly, both have a common enemy in ISIS, though neither one has the resources to fight the militant group on its own. “Only through a compromise forged between Iran and Saudi Arabia, and including other Sunni powers such as Turkey and Egypt, can either state see the demise of ISIS,” says Seznec.

Lessening tensions surrounding Syria and cooperating in defeating ISIS would pave the way for deals on the energy side.