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Will Iran's opening be slower than expected?

Sanctions are about to be lifted but Iran is finding it difficult to convince foreign oil companies to invest in its ambitious oil and gas programme

When Iran's energy chiefs were mapping out scenarios for the country's post-sanctions re-entry to the international oil and gas market, they couldn't have imagined it happening in the inauspicious circumstances of early January. The raising of regional tensions after Saudi Arabia's execution a prominent Shiite cleric - and Iran's reaction to it - has soured positive sentiment just when the imminent lifting of sanctions portended better days ahead for the Islamic Republic.

This year is a big one for Iran, as it escapes a punishing sanctions regime and prepares the ground for new deals with the international oil companies (IOCs) which will be essential to long-term production under a new model Iran Petroleum Contract (IPC).

But with hardliners at home exploiting the tense regional standoff, oil minister Bijan Namdar Zangeneh may find it that much harder to convince foreign majors that Iran is a contender for their money. Iran wants lots of it, too: it thinks about $30bn of foreign capital will be needed to hike oil production capacity to 4.7m barrel by 2021.

Luring the IOCs is already a difficult task. International banks, which might underpin IOC investment, are notably reluctant to re-engage with Iran's banking system. The tepid international response when Iran's petroleum ministry unveiled proposed field developments at a Tehran conference in late November was another clear sign that Iran faces an uphill battle in bringing the likes of Total, Shell and Statoil back into its upstream.

The expedited oil-output schedule envisaged by Tehran was always likely to test credulity, despite Iran's boasting of commitments from former European customers to buy 200,000 b/d of its crude oil under contracts to take effect within hours of sanctions being lifted. Iran has claimed it could add 1m b/d within a year, taking total production to 3.7m-3.8m b/d.

Douglas-Westwood, a UK-based consultancy, sees this is an ambitious target given the maturity of many of these fields. "We are maintaining a conservative outlook relative to those targets, as the ability to increase output depends on fulfilling the terms of the Joint Comprehensive Plan of Action (JCPOA) - and that come could take months to implement," says analyst Katy Smith.

Even if Tehran avoids the dreaded "snapback" sanctions - the threat that the embargo could be swiftly reinstated if Western governments suspect Iran of breaking its side of the nuclear deal - issues of process must be resolved. After repeated postponements of much-hyped curtain-raising conferences, questions are being asked of Zanganeh's strategy with the IOCs. The minister has faced flak for putting the cart before the horse, prematurely announcing events to outline new terms only to postpone them when it became clear that Tehran wasn't ready.

Contractual uncertainty is a big turnoff for IOCs. Months have passed since the IPC was first touted to a sceptical global audience. But all that is so far known about the model contract is that it seeks to match reward more closely to risk, eventually allowing IOCs to book Iranian reserves; and that the reward system will allow companies to share both in the profits and risk of field development. Beyond that, much seems opaque. Quite how companies will book oil that, according to the Islamic Republic's constitution, belongs to Iran is also not yet clear.

Slow progress

Operational and political issues could also stymie progress. The initial optimism of last summer, when Iran passed the first sanctions hurdle set by the JCPOA, is being tempered by the growing recognition that whatever post-sanctions Iran is, a gold rush it won't be.

Some problems are basic. Any IOC engaging with Iran would face massive upfront capital costs, with significant investment needed to upgrade infrastructure. According to Douglas-Westwood's Smith, the land-rig market will need modifying, with some rigs within National Iranian Oil Company's (Nioc) fleet needing to be replaced, along with downstream infrastructure.

That leaves Iran under pressure to fashion a solid investment case; one that goes beyond flagging up its low per-barrel lifting costs, reckoned to be around $10 a barrel. While those costs are doubtless appealing, IOCs will be reluctant to commit until more information is forthcoming about the contract terms themselves. "While you want the low cost barrels, you also want clarity that you'll be able to extract them and produce them over time so you can utilise the low-cost barrels efficiently," says one Iranian former executive at a Western IOC.

Politics, inevitably, has reared its head. One reason for Zanganeh's reluctance to announce more detail on contract terms is a fear of triggering adverse debate in parliament about specific commercial structures. Hardliners are loth to let the relatively moderate Hassan Rouhani government win political credit for the opening, and will oppose any contract terms that they think are too generous to Western oil firms.

The future role of incumbent players in a post-sanctions Iran is another question This means the services-industry affiliates of the Islamic Revolutionary Guards Corps (IRGC), such as the engineering group Khatam al-Anbia - active in many oil and gas projects - or large semi-private players which, during the sanctions period, have built up powerful businesses. Understandably, these vested interests now want to defend their positions in the face of foreign threats. They also have their own concerns over Westner majors arriving in Iran and cherry-picking their best staff. For IOCs, meanwhile, the prospect of working with unknown entities linked to powerful political factions, or the IRGC itself, is equally off-putting.

Parliamentary elections set for 26 February pose another sizable challenge. The legislature is already heavily dominated by conservatives innately suspicious of the government's attempts to cut deals with Western IOCs. A further swing to the right could add a further layer of opposition and bureaucracy, with the prospect of demands for greater oversight into specific contracts. The prospect of signed deals being subject to post-facto scrutiny by conservative political interests is the stuff of nightmares for IOCs with longer memories of Iran.

Much will hinge on what happens in the London conference that is proposed to be held in February. A failure to announce more data on fields and contract terms would be a significant setback for Iran's putative opening. Detailed geological or commercial data may be asking too much, but a sense of the broad parameters and the per-barrel risk pricing would be a start. "If they fail to present enough adequate data they will get a lot of angry reactions, and rightly so," predicts the Iranian executive.

For now, the opening remains largely on track - the country's senior leadership is still behind it. But the inclement regional conditions suggest Iran's reformists may struggle to muster sufficient headway to keep the pace up. Tehran's offer of low-cost fields may be enticing but, until things are clearer, IOCs may wisely choose to keep no more than a watching brief.

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