By Akhil Shah Recent reports suggest that officials in the Sultanate of Oman and the Islamic Republic of Iran have given the go...
By Akhil Shah
Recent reports suggest that officials in
the Sultanate of Oman and the Islamic Republic of Iran have given the go-ahead
for the rumored 173-mile underwater gas pipeline connecting the two nations. As
of March 2013, only an “understanding” had been reached. The new reports raise
clear implications for the wider Gulf region, particularly Saudi Arabia.
For decades, and especially since the
“Arab Spring” uprisings several years ago, Saudi Arabia has attempted to bind
its smaller Gulf neighbors in a tight bloc to counter perceived Iranian
aggression. On numerous occasions, Riyadh has provided military and economic
support for its fellow Gulf Cooperation Council (GCC) states. The Saudis have
also pushed for the establishment of a Gulf union comprising the Council’s six
member states. The kingdom’s objective has been to further bind the GCC
together in a united political and economic front vis-à-vis Iran.
The
Sultanate’s foreign partners—particularly the United States—have, until
recently, strongly discouraged any relations with Iran. Yet Oman’s dealings
with Iran have not created major issues in terms of Muscat’s alliances with
Washington and Riyadh. Following the historic nuclear deal that the P5+1 (the
five permanent members of the UN Security Council plus Germany) and Iran signed
on July 14 in Vienna, however, Saudi Arabia finds itself increasingly threatened—politically,
economically, and militarily. Not only does Iran sit on the world’s third
largest oil reserves, it also presents a genuine challenge to Saudi Arabia’s
traditional role as the anchor of geopolitical order in the Middle East.
Iran and Oman: A Marriage of Convenience
According to the Oil and Gas Journal,
Oman is ranked twenty-third in the world in terms of its oil reserves, but much
of that is used for exportation instead of domestic consumption. As far back as
2005, the energy starved Sultanate of Oman agreed to buy gas from Iran, and in
2007 there was a draft deal in place for the Omanis to buy Liquefied Natural
Gas (LNG) as well. However, due to the complicated relations that Iran had with
the West, Muscat came under considerable pressure to find alternative sources
of LNG. According to WikiLeaks cables from the U.S. Embassy, Washington tried
to convince Oman to purchase LNG from Qatar instead of Iran.
However, with Iran and the P5+1 having
approved the nuclear deal, Oman is set to purchase more gas from Iranian
producers. In 2007, Oman was one of only three countries that were dealing
economically with the Islamic Republic. Before the decision was made to begin
to build the pipeline, Oman had already agreed to buy twenty million cubic
meters of natural gas per day from Iran. Figures suggest that this amounts to
ten billion cubic meters of natural gas each year, for 25 years, in a deal worth
USD 60 billion. This figure will increase significantly by around 2018, when
the pipeline is expected to be completed. It will stretch the width of the Gulf
region at an estimated cost of USD 1 billion.
Pipeline route
from the Middle East compression station (MECS) to the Gujarat pipeline
receiving terminal (GPRT) in India via an offshore gas compression system
(OGCS) on the Qalhat Seamount.
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Strategic Implications for Saudi Arabia
Currently Saudi Arabia exports roughly
USD 1 billion a year to Oman, the majority of which is oil and gas. However,
this gas deal with Tehran has Iran replace Saudi Arabia as Oman’s main source
of LNG. Economically, Oman will gain significantly from the switch to Iranian
gas. The pipeline will be a USD 1 billion investment that will come directly
from Oman. However, in return, the Sultanate will receive shares of the
revenues made from the sale of gas. While some of the gas Oman receives from
Iran will be used for domestic consumption, officials in both Muscat and Tehran
have stated that portions of the gas flowing through the pipeline may be sold
abroad through a jointly owned Omani-Iranian company to be set up at a later
date.
This latter point is potentially the
most worrisome from Riyadh’s perspective. Over the past year, Saudi Arabia has
considerably increased its market share in the oil market, but this has come at
a steep price. Oil prices are now below USD 44.2 and 46.65 per barrel
(according to both the ICE and NYMEX indices), deepening Saudi Arabia’s budget
deficit. Iranian oil and gas will soon be sold to a much wider market (the EU
has already lifted sanctions on two of Iran’s largest oil producers). Not only
will this crowd out Saudi market share, but if Iran is able to maintain its
relatively cheap prices, it may weaken Saudi dominance as well. This poses a
major risk to the kingdom, given its economic dependence on oil. In fact,
analysts have predicted that Saudi Arabia will be bankrupt within two years if
current market conditions do not change.
A partnership between Muscat and Tehran
would be a real blow to the Saudis. Oman is seen as a neutral country not only
regionally but also globally. Muscat played a significant role in the lead-up
to the P5+1 and Iran nuclear negotiations and consequently continues to gain
more respect on the international stage. Oman’s deal with Iran (cheap gas and
the potential for a lucrative partnership) may incentivize other nations to
explore deeper economic relations with the Islamic Republic. Qatar is already
rumored to be in discussions with Iran about constructing a pipeline to Doha.
In 2014 India was also in negotiations with Iran and Oman about extending the
pipeline to the Indian coast. Considering that Saudi Arabia annually exports
USD 29.2 billion worth of oil and gas to India, perhaps this is one of the many
reasons why officials in Riyadh have voiced grave concerns about the Iranian
nuclear deal.
If history is any guide, deeper economic
relations between Iran and the smaller GCC states, such as Oman and Qatar, will
affect political matters. Within this context, Saudi Arabia views the
Omani-Iranian pipeline with apprehension. As former Major General Anwar Eshki
indicated in a speech at the Council for Foreign Relations, Saudi Arabia is
worried about Iran’s alleged search for regional hegemony, a direct
geopolitical challenge to Saudi Arabia’s historic role as a dominant power in
the Middle East. From the Saudi vantage point, Iran’s ability to provide an
abundant supply of gas to the smaller Arab monarchies of the Western Persian
Gulf provides Tehran with a platform from which the Iranians can project their
power up to the very borders of Saudi Arabia.
Since the inception of the Islamic
Republic, the Saudis and Iranians have fought constant proxy wars in the
region. Differing religious and political outlooks have created tremendous
tension between the two sides. If the rumors surrounding Qatar are true, and
more countries begin to follow, Saudi Arabia will face intense pressure. Not
only will its leadership come under question as a result, but it may face
increased proxy fights as Iran seeks to displace it as regional hegemon.
For years, Riyadh has voiced concerns
about Iran’s alleged efforts to spark a revolution in the oil-rich Eastern
Province of Saudi Arabia, home to the vast majority of Saudi Arabian Shi’ites.
Yet the actual threat that Iran poses to Saudi Arabia relates far more to
Riyadh’s international status than to any domestic problems. Indeed, if the Islamic
Republic can provide more gas and oil to Arab countries and continue to
cultivate relations with Oman and other Middle Eastern states, Saudi Arabia may
find itself playing a less influential role in the region. As Iran’s economy
grows and its economic fundamentals strengthen, the country will become an
increasingly competitive broker of gas. Saudi Arabia, with its spiraling budget
deficit, is not in the same position. If Riyadh fails to implement sound
strategies to counter this geopolitical threat, the kingdom may find itself
increasingly sidelined.
About The Author:
Akhil Shah is a counterterrorism and foreign policy analyst based at the University of Chicago.
