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Iran's brakes off

The Islamic Republic's ambitious oil and gas schemes will make progress against the background threat of more sanctions

The Iranian oil industry is familiar with being the hostage of the whims of US presidents. Eisenhower's permission for the CIA-inspired coup of 1953 after Mossadeq's nationalisation of oil, Carter's ban on American imports of Iranian crude following the 1979 Revolution, and Clinton's blocking of Conoco's deal to develop the Sirri fields in 1995 were all pivotal moments. Now Donald Trump's wish to scrap the nuclear agreement confronts the country's petroleum industry with an unusually binary future: access to investment and growth, or renewed sanctions.

When America's Secretary of State Rex Tillerson was chief executive of ExxonMobil, his company lobbied against sanctions on Iran. Now he works for a president who in October decided to decertify the Joint Comprehensive Plan of Action (JCPOA), negotiated under the Obama administration to halt Iran's nuclear programme. That meant Congress could decide by the end of 2017 whether to impose new sanctions on Iran.

Iran's compliance has been certified by all the other parties to the agreement—Russia, China, the UK, France, Germany and the EU—and the monitoring body, the International Atomic Energy Agency. The JCPOA is doing what it says: blocking for an extended period any paths Iran might have taken to nuclear weapons.

Trump's decertification has thrown a spanner in its works. Even if Congress eschews a tightening of measures against Iran, the White House could stop issuing sanctions waivers. And if more American sanctions do come, things get even more complex. After such a move, and particularly given European opposition to Trump's diplomatic actions in other areas, it's highly unlikely that his administration's short-staffed diplomatic team could reassemble the wide-ranging sanctions on the Iranian oil sector achieved by the Obama administration.

Instead, America would have to use its control over the global financial system, denial of access to the US market and cruder diplomatic pressure to repeat the earlier results: severely reduce Iran's oil exports, block Tehran's access to its own export revenues, and prevent foreign investment in the Iranian energy industry. This would be far harder to achieve in the face of active opposition from the EU, Russia and China. As long as Iran is receiving some of the deal benefits and splitting the Europeans from the Americans, it will probably continue to abide by the JCPOA—the default scenario for 2018.

There's a good chance that the high-priority oilfield contracts will be awarded in 2018

Some of the most important sanctions that originally brought Tehran to the negotiating table were largely European in origin: blocking access to the Swift financial-transfer system, and cutting off shipping and insurance. Conversely, the EU backed up its oil companies against unilateral US sanctions during the late 1990s and early 2000s; the threat of action at the World Trade Organisation compelling President Clinton to issue waivers in favour of Total. Total, Eni, Repsol, OMV and Wintershall are now all leading contenders to invest in Iran.

Post-Brexit, the UK oil companies may be in a weaker position, but BP has shown little interest in Iran anyway and has too much US exposure at risk; Shell could rely on support from the Netherlands. The Russians and Chinese will be confident of backing from their home governments; Japan will be more cautious.

So although renewed American sanctions—if they come—are likely to constrain energy investment in Iran, they won't stop it or significantly dent exports. Iran needs some $200bn of petroleum investment in the next five years to meet its targets. This is probably unachievable given Iranian bureaucracy, even if there were no sanctions concerns.

Veteran oil minister Bijan Namdar Zanganeh has laid out eight goals for the oil sector in his current (and probably final) four-year term:

  • Increase Iran's oil production from around 3.8m barrels a day to 4.7m b/d by 2021, preferably growing its world market share;
  • Develop cross-border fields shared with Arab neighbours;
  • Sign new contracts for international investment in field development;
  • Renovate decrepit parts of the industry;
  • Extend the petrochemical value chain;
  • Boost the export of refined products in preference to crude;
  • Promote local petroleum-equipment manufacturing; and
  • Build an oil terminal at Jask on the Sea of Oman, providing an export point not reliant on the Gulf.

In gas, the priorities are to complete the outstanding phases of South Pars gasfield development; to remain the world's third-largest gas producer and reach 300bn cubic metres of annual output by 2020 and 360bn cm a year by 2025 (from about 200bn cm/y today, excluding gas used for reinjection); replace oil products in domestic consumption with gas and keep gas's share of the energy mix above 70%; supply gas to industry and petrochemicals to create value-added products; inject gas for enhanced oil recovery; export gas to Arab neighbours, the Indian subcontinent and Europe; and eliminate flaring. It's immediately apparent that these competing priorities place a heavy burden on the sector to keep gas output rising.

Oil production will only inch up in the absence of major outside investment, while gas is also set for a hiatus of new projects. Iran will remain in the Opec production limits deal for now, since it practically can't exceed its quota by much anyway. But in 2018, it will sign more of the new Iran Petroleum Contracts (IPCs), to follow on the one concluded with Total and China National Petroleum Corporation (CNPC) for Phase 11 of South Pars. With at least one fully termed IPC signed with a Western oil company, it should be much easier for others to use the same template.

So far, the Ministry of Petroleum has concluded memoranda of understanding with a variety of players, with a list of about 80 upstream opportunities. Negotiations will be constrained by the limited legal and commercial bench strength on the ministry's side, and the shortage of capital and human resources from the mandatory Iranian partners. But there's a good chance the high-priority fields will be awarded in 2018. A few smaller projects, some to lesser-known companies, will also be signed where agreement is straightforward.

The tender for the giant Azadegan oilfield, along the Iraqi border, has been delayed by several months. Shell, which is withdrawing from the linked field of Majnoon in Iraq, will be a contender alongside Total, Inpex and CNPC. Sinopec has been working slowly for years on nearby Yadavaran. These fields, along with Darkhovin where Eni wants to renew its involvement, form the West Karoun area, intended to increase from a current 425,000 b/d of output to 0.9m b/d or more in the mid-2020s, and to underpin a new, heavier crude export grade.

Elsewhere, Russian companies are prominent, with Lukoil, Gazprom, Zarubezhneft and Rosneft interested, particularly in the Azar and Changuleh fields which adjoin Gazprom Neft's Badra development in Iraq. Before its acquisition by Total, Maersk was studying the South Pars oilfield, the extension of Qatar's Al-Shaheen, where Total recently took over operatorship from Maersk.

Shell and Eni have also been interested in the giant Kish gasfield in the southern Gulf, which could produce 36.5bn cm/y and supply Oman. Iran has been trying to promote completion of its Iran LNG project as well as some smaller-scale LNG export schemes, but these face a difficult market outlook and sanctions constraints on technology. Pipeline gas sales to Iraq have begun, but long-planned exports to Oman and Pakistan will make only slow headway against American and Gulf Cooperation Council opposition, and unrealistic Iranian price expectations.

There's a strong incentive for Zanganeh and President Rouhani to lock in deals quickly, before sanctions can be re-imposed, and while they still have post-election domestic political momentum. Investment from a variety of countries will help the national economy finally see a JCPOA dividend, and win Iran influential supporters against US intransigence. In general, 2018 will be the year when the Iranian oil sector at last lurches forward.

Robin Mills is Chief Executive of consultancy Qamar Energy

This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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