Iran's nuclear agreement could boost oil market
Tehran’s mid-July nuclear agreement provides space for its re-entry into the global oil market, and for international oil companies to plant their flags back in the Islamic Republic
Now that the ink has dried on the historic nuclear agreement between Iran and the P5+1 group on 14 July, international oil company chiefs are revisiting old plans and tentatively re-engaging with the Islamic Republic’s hydrocarbons leadership. Meanwhile, some of Iran’s biggest customers are in talks over buying greater volumes of crude, anticipating some hefty discounts as Tehran seeks to claw its way back into the Asian market.
International sanctions imposed to force Iran to curb its nuclear programme have halved oil exports to just over 1m barrels/day (b/d) since 2012. But the International Energy Agency has estimated that Iranian oilfields, which pumped around 2.87m b/d in July, could increase production to 3.4-3.6m b/d within months of sanctions being lifted.
The European and Asian oil companies that gradually eased themselves out of Iran in the mid-2000s as the international sanctions noose tightened appear eager to be back in the frame. Japan’s Inpex Corporation – which five years ago pulled out of the 33bn South Azadegan oilfield near the Iraqi border – has already laid down a marker, its deputy managing director Yoshikazu Kurasawa confirming the company was looking at a return to the upstream during a visit to Tehran on 9 August.
The Japanese company’s appetite appears to be reciprocated by the Iranians. Kyodo News reported a senior Iran official as saying 10 August that Japanese companies could resume work on the field, boosting ties that were severed in October 2010 when Inpex withdrew and the project was transferred to China National Petroleum Company, which then failed to register progress.
Other IOC chiefs have been in talks with senior Iranian officials, with reports that the European majors Shell, Eni, and Total have already visited Tehran recently. As with Libya’s post-sanctions oil and gas opening, the returning majors are eager to return to their old projects. Shell will be eyeing the Yadavaran field, close to the Iraqi Majnoon field where it is also an operator; Eni the Darquian field; and Total the Azadegan field, where it was a partner with Inpex. Gazprom Neft is believed to have negotiated over the Azar field, where it was replaced in 2011. The giant multi-phase South Pars gas project is also likely to figure prominently in the IOCs’ plans.
None of this will be straightforward, either for the Iranians or the oil companies. According to the deputy head of Middle East North Africa at consultancy Verisk Maplecroft, Torbjorn Soltvedt, while the deal will present foreign oil and gas companies in particular with a broad range of opportunities, the operating environment in a post-sanctions Iran will almost certainly remain challenging. “While Iran has committed to improving the fiscal terms offered to oil and gas companies, the country’s petroleum bureaucracy remains bloated and inefficient,” he notes.
Work is still in progress in drafting the proposed Iran Petroleum Contract (IPC) to replace the buy-back contracts, which is likely to be similar in style to Iraq’s technical services contracts but will be tweaked to be more favourable for IOCs, in order to encourage them back to Iran.
“There’s a realisation among senior officials in the National Iranian Oil Company (NIOC) that they can’t go back to where they were in the late 1990s and early 2000s, before sanctions really began to bite,” says the president of consultancy Varzi Energy, Mehdi Varzi. “The buyback deals have gone way beyond their sell-by date so they are going for something approaching a production sharing contract that will involve equity participation by foreign oil companies.”
Whereas Iran’s Iraqi neighbours negotiated their tough TSC terms at the height of high oil prices, the current low price environment is another factor that will force Iranians to offer more favourable terms.
Majors will be looking for internal rates of return (IRRs) in the region of 20%, given the cost of capital and perceived risk of operating in Iran.
“If NIOC is willing to offer them something in the region of 20% the majors will be back big time, as Iran is the oldest and most mature oil producing province in the region but there’s still a lot more oil to be discovered,” says Varzi.
Much more work will be needed. More than 50% of Iran’s oil production comes from fields discovered more than 50 years ago.
That entails a massive increase in the intensity of investment and the transfer of capital and management know-how to get Iranian production up and running. “The majors can dust off their old seismic, but time has moved on and in order to be able to maximise flow rates, first they will need the best agreement in place, and secondly they need experts to come in and reappraise the fields based on the latest technology,” says Varzi.
Indications are that Iran’s oil minister Bijan Zanganeh is especially keen for US majors to be included in any oil and gas expansion plan, despite their absence from the Islamic Republic.
The likes of ExxonMobil and Chevron are still constricted by additional US sanctions, and so too will be Europeans such as Shell and Total in the pursuit of Iranian opportunities. But they are in the frame.
“There’s a crying need for the best technology and the best upstream technology is held by the Americans. This is why Zanganeh has repeatedly said he welcomes US companies coming back in again,” he said.
New deals with IOCs are still some way off. The major oil-related sanctions were imposed by the US and the EU in 2012 and will take some time to roll back.
Iran has postponed a previously-announced international conference unveiling the terms of the new IPC, to be held in London. There is talk of January 2016 being a possible date for a new unveiling, though this will require Iran’s creaking oil bureaucracy to work at a breakneck pace over the next few months.
Above all, Zanganeh and the NIOC leadership will be anxious not to repeat the sins of the past. Buybacks may have secured $30bn in investment over the years, but this amount is considered wholly inadequate given the scale of the challenge confronting Iran’s oil and gas sector.
Oil companies have bitter memories of wasting too many hours in Tehran hotels, failing to negotiate favourable buyback terms, and baffled by the model’s complexity. This time around the hope is the favourable international political atmosphere will give a stronger impetus to forge a new and lasting entry for big oil in the Middle East’s oldest hydrorcarbons play.
How the nuclear deal works
The clinching of the Iran nuclear deal in Vienna paves the way for the Islamic Republic’s re-emergence into the global oil market by freezing Iran’s nuclear activity for 10 years, in exchange for a gradual unwinding of sanctions. Tehran stands to gain access to tens of billions of dollars in frozen bank accounts, as well as a flood of foreign investment. But under the terms of the US Iran Nuclear Agreement Review Act passed in May, the deal is still subject to a 60-day congressional review period in what is a Republican-dominated Senate. Internal US opposition to the deal is still strong, and backed by powerful lobbies.
The P5+1 group instituted terms to reassure sceptics that Iran will be punished for any transgressions. The so-called “snapback provisions” provide a strong incentive for Iran to stick to the terms of the deal, since the penalties would seriously damage its economy and prevent it from regaining its share of the oil market. This though gives caution for international investors. If they commit large amounts to Iran only to be hit once more by sanctions, they could be subject to significant losses.