Economy
Oil & foreign policy
Short-term need for cash prompt excuses
February 24, 1999
The Iranian
The ultimate objective in penning "Just
pretend we have no oil" was to provoke debate about the debilitating
nature of Iran's dependence on revenues from international sale of oil.
The essay elicited a range of feedback, some brutally unkind, but most
raised issues which are worth exploring further on this occasion.
The original essay had stated that at these ludicrously low international
oil prices, Iran might consider preserving its reserves on the theory that
"A barrel of oil left in the ground is one saved for future."
A number of readers pointed out the impracticality of this idea.
Where an oilfield straddles the international border, the oil is subject
to the rule of capture. If Iran's neighbor is pumping, wrote one reader,
it is a "pump
it or lose it" situation. A comprehensive analysis of the subject
notwithstanding, readers identified three general areas where fields straddle
the border -- Masjid Suleiman and Iraq's northern wells, the Persian Gulf,
and the Caspian region.
A field wholly situated in Iran but near the international border may
invite directional or oblique drilling by a neighbor. This is actionable
in international law as theft, pure and simple. What poses a greater challenge
is the regime governing the exploitation of shared reserves.
This writer is neither an economist nor a petroleum engineer. Yet it
would seem reasonable to observe why the axiom "pump it or lose it,"
if practiced by both sides, would in all likelihood work to the reckless
detriment of both parties. First, the practice results in a short-term
glut which, in absence of enforceable cartel pricing, will pitch one producer
against the other thereby depressing the price for both. Second, the practice
dissipates the oilfield's natural pressure thereby causing the premature
aging of the field, forcing the producers to resort to various forms of
recovery technologies; this eventually drives up the cost of production
and sends the buyers to cheaper oil.
Mr. Hashem Farhang is a petroleum engineer. In his
comments to he wrote "With the exception of one field in the Persian
Gulf, where the reservoir straddles across sovereignty borders between
Iran and one of the Emirates, there is no other reservoir even close to
other countries' jurisdictions. In the Caspian Sea we may, in future, also
run across a possible similar scenario." This raises the intriguing
possibility that the Iranian government, which is in possession of the
relevant information, may be using this as an excuse to make up in volume
of sale the shortfall in revenue because of falling prices.
The management's solution to competitive partisan or uncooperative exploitation
of a shared field is called "unitization." The practice leaves
the production of the field in the hands of one operator, who exploits
the field with the best economic and structural interests of the field
in mind, while the parties share in the cost and profits. One reader called
attention to the Semnan oilfields being tapped into by the Soviet Union
and subject presumably to a few Iran-USSR production sharing agreements.
Mr. Farhang also pointed to a field in the Persian Gulf which Iran shares
with an emirate and subject to joint exploitation.
No doubt engineering and economics may argue for unitization or production
agreements. Yet to replace a policy of "pump it or lose it" with
a common exploitation regime is possible only if the parties possess the
necessary cooperative spirit and goodwill to enter into a common regime.
Mr. Farhang's reminder that in the case of shared reserves Iran "can
always make some kind of arrangements" with its neighbor requires
a foreign policy toward its neighbors based on mutual trust.
Good and trusting neighborly relations conducive to joint project management
rests on respect for the other's territorial integrity, and economic and
political independence; noninterference in the affairs of the other; steadfast
dedication to peaceful resolution of disputes, and mutuality.
In an atmosphere of mistrust and suspicion, the government seems to
favor a "pump it or lose it" policy because of its short-term
need for cash and excuses the "pump it" policy anyway on ambiguous
geological grounds. In effect, the failure of the government to foster
good neighborly relations impedes mutually beneficial exploitation of a
shared reserve. The "pump it" oil policy therefore perpetuates,
encourages, subsidizes and finances failures in foreign policy. This observation
holds true and applies equally to Iran and any other neighboring country
seized by its peculiar brand of myopia.
The poverty engendered by a questionable foreign policy may be overcome
some time in the future; the oil squaddered presently for reasons of a
questionable foreign policy will be lost forever. For each and both reasons
one would be all the more improvished.
The author
Guive Mirfendereski is an international lawyer and adjunct professor
of law at Brandeis University.
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