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Iran - now it gets harder

Iran has made the big post-sanctions output gains. Now it must make its upstream attractive to outside investors

In October, Tehran signed the first upstream deal under its new Iran Petroleum Contract (IPC). The identity of the counterparty was not the expected foreign oil company-but instead a local firm, Persia Oil & Gas Industry Development Company (POGIDC), a subsidiary of Supreme Leader Ali Khamenei's Setad, a holding company. It was a sign of progress. Then, at the end of November, Iran agreed to a new Opec quota from January 2017 of 3.797m barrels day. That's a virtual cut from the near 4m b/d Iran claims as its baseline, but 90,000 b/d more than it produced in October. A political fudge therefore allows for Iran to keep adding output.

Since sanctions were lifted in early 2016 production has been on the rebound. But the bounce has been fading, and had Opec tried to clip Iran's wings in any meaningful way it might well have walked away from the table in Vienna.

Production surged from January's 2.925m b/d to more than 3.6m b/d in May-but since then hasn't taken off the way the country would have wanted it to.

In Tehran the agreement has been hailed as a victory. The country's oil minister, Bijan Namdar Zanganeh, was celebrated on the cover of one newspaper for his "powerful diplomacy". Iran won't be responsible should a fall in oil prices occur, the paper said the day after the meeting. But the agreement lasts just six months, and the country has far greater long-term plans.

Before the meeting, Zanganeh said Iran wants $130bn-200bn of upstream investment between now and 2021 to reach its production targets of 5.7m b/d in oil and 0.511 trillion cubic metres per year of gas. National Iranian Oil Company (Nioc) is less bullish, suggesting a more modest 4.8m b/d. Either way, cash-strapped Iran badly wants foreign investors to step in and help ramp up production. Such challenges added significance to the identity of the IPC's first signatory.

POGIDC signed to boost production at the Kupal, Marun and Yaran fields from 185,000 to 260,000 b/d, at a reported cost of $2.2bn. At first sight the agreement doesn't meet the objective of attracting foreign investment. What it does, though, is legitimise the IPC and protect it against attacks from hardliners. In September, for instance, Hossein Shariatmadari, editor of newspaper Keyhan, held an anti-IPC conference at Tehran University. Securing the implicit approval of the Supreme Leader's holding company, as well as including Revolutionary Guards-linked organisations in the shortlist of approved Iranian partners, is intended to undercut such opposition.

The IPC itself has been presented as a major improvement on the buyback terms offered in the late 1990s and early 2000s. For foreign partners, it offers long-term (20 years') involvement, upside for increased production, and flexibility in development plans. The investor will recover its cost, plus a fixed fee per barrel of oil or cubic foot of gas produced, with higher rates for more difficult fields or those shared with neighbouring countries. The IPC structure is attractive in principle for investors, though as with all such contracts, it depends on the details of some key terms, and the fees agreed.

On the IPC list are 49 upstream projects, 29 for oil and 20 for gas, with 216bn barrels of oil and 229 trillion cf of gas in place. During the period of the most intense sanctions, only Chinese international oil companies were active on the ground, and their progress was slow. Sinopec has been working on Yadavaran for years, and CNPC on North Azadegan in the West Karoun region in Iran's southwest.

The government hopes to boost output there from 250,000 b/d today to 0.6m-0.7m b/d by 2017-18, to supply a new 24°API heavy crude grade. But much of this is needed to compensate for declines in older fields.

Since sanctions were lifted, Iran has concluded several memoranda of understanding (MOUs) with foreign companies. The latest was with Polish firm PGNiG to study the Sumar field.

Iran had earlier signed study agreements with Total on the South Azadegan field (with which it has a prior association); Indonesia's Pertamina for Mansouri and Ab Teymour, west of the oil-hub city of Ahvaz; Eni on Darquain; and Russia's Lukoil and Gazprom Neft on the Azar and Changuleh fields-Azar being the continuation of Gazprom Neft-operated Badra in Iraq. Two other Russian firms have concluded study arrangements: Zarubezhneft for the West Paydar heavy oilfield, and Tatneft for the Dehloran field. OMV of Austria will study the Band-e-Karkheh and Cheshmeh Khosh fields, and Germany's Wintershall four fields in western Iran. Shell has previously worked on Yadavaran, which forms part of the same structure as the Majnoon field it operates in Iraq.

Nioc has also announced that Maersk might be interested in the South Pars oilfield-the extension of Qatar's al-Shaheen field, which the Danish firm operated until its contract expired earlier this year. Reports suggest that BP is studying four fields in southern Iran.

Though limited to studies, these agreements do position the companies to use their knowledge to negotiate IPCs for those fields.

But these contracts are all for oil. Despite their size the gasfields have attracted less attention. The main discussion so far has been for the offshore Farzad B field, discovered in 2008 by India's ONGC Videsh, which was unable to develop it because of sanctions.

A consortium of ONGC, Oil India and Indian Oil Corporation has now returned to negotiations.

Hemla, a Norwegian company, is discussing the idea of installing a floating liquefied natural gas plant using flared gas near Kharg Island in the northern Persian Gulf, though this is not under the IPC. A joint venture of Total, CNPC and Petropars is reportedly ready to sign a non-binding deal for Phase 11 of the South Pars field, which had been intended to feed the half-finished Iran LNG plant. CNPC was expelled from the project in 2012, which currently needs around $8bn-10bn for completion, after failing to make progress. Otherwise, Iran is targeting gas exports by pipeline, so far mostly under its own efforts: an expansion of supplies to Turkey; the start of sales to Iraq, delayed by insurgent attacks; new pipelines to Oman and Pakistan; and a possible sub-sea line to India.

International companies need to understand not just the exact terms of the IPC, but also the qualification and negotiation procedures.

They need to find suitable Iranian partners with the finance and technical capacity to participate, and the new US president's lack of policy clarity on Iran hasn't helped matters.

Iran will press ahead with the IPC. As Opec rivals watch carefully following the Vienna meeting, the country will want to show just how welcoming it can be for foreign investors, as well as how capable it is to jump ahead of the game when the group's agreement comes to an end.

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