THE DEAL between Iran and the six world powers - the P5+1 of China, France, Russia, US, UK, plus Germany, whereby Iran agreed to scale back its uranium enrichment programme brings Iran back into the international fold. The Iranians will be keen to scale up their gas and oil production but for foreign companies, there are strings attached, writes World Review expert Dr Carole Naklhe.
After several years of negotiations, Iran and six world powers reached a deal on Tehran’s nuclear programme on 14 July 2015. It creates exciting, new dynamics in the oil and gas markets. However, just how much oil and gas Iran will bring to the markets in the near future remains to be seen.
The uncertainty will not stop zealous investors from chasing potential opportunities. But in the end, it is the balance between risks and rewards that will determine capital commitment.
Iran’s ‘come back’ to the global oil and gas scene coincides with an important development: an oil price staying below US$60 per barrel, which is likely to put a premium on cooperation, especially within the Organization of Petroleum Exporting Countries (OPEC).
If Iran manages to ramp up its exports, the oil price will face additional downward pressure. OPEC may be forced to introduce production cuts, US oil shale production may not be able to keep up, and demand may respond positively to falling prices thereby reversing the decline.
It is unlikely that oil and gas from Iran will flood the markets overnight. It will take some time before the Iranians are fully able to unlock their hydrocarbon potential and deliver a significant quantity of additional oil and gas to international markets.
Despite the sanctions, Iran has remained a sizeable oil and gas producer.
It is the fourth largest gas producer after the US, Russia and Qatar. Despite this impressive level of production, the Iranian gas sector is underdeveloped, thereby offering significant investment opportunities.
Iran’s oil potential is equally important. In terms of oil production, the country ranks seventh in the world after Saudi Arabia, Russia, US, China, Canada and the United Arab Emirates. Iranian oil production reached a peak of more than 6 million barrels per day.
The international sanctions, which have targeted Iran’s energy sector since 2010, have limited Iran’s oil exports to an average of approximately 1Mb/d. There is no doubt that the lifting of the sanctions, which have almost halved Iranian oil exports, will restore some of the country’s export capacity.
Iran announced it would offer investors a new contractual arrangement - the Iran Petroleum Contract (IPC).
Long before the sanctions were imposed, the Iranian constitution had restricted foreign investment in the exploration and production of oil and gas. Furthermore, prohibitive contractual terms have impeded investment. Traditionally, international companies can operate in Iran only under very restrictive contracts, called Buyback.
Under this type of agreement, companies receive a fixed remuneration fee for their services, in addition to recovering some of their costs, but they are not entitled to any ownership of production. The Buyback contracts are also short term – less than ten years.
Further details are yet to be revealed about the new IPC, but Iranian officials have stated that they would be more attractive than the Buybacks, starting with a longer term contract (20-25 years). However, a cautious attitude needs to be adopted until the actual details are known.
Oil companies will have to assess whether the new contracts will be enticing enough to commit significant capital in the country. Offering more lenient contractual terms is surely an attractive feature for oil and gas companies but many complications remain.
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Publication Date:
Thu, 2015-08-20 05:00
