View all newsletters
Receive our newsletter – data, insights and analysis delivered to you
  1. Uncategorised
May 16, 2016

Iran post-sanctions: oil riches unlocked?

The lifting of sanctions on Iran will have a profound effect on its oil industry – that much is certain. Whether the unleashing of vast quantities of oil into an already oversaturated and depressed market will be good for either the country or the industry is a billion dollar question.

By Taylor Heyman

Iran oil

The International Atomic Energy Agency (IAEA) certified on 16 January that Iran had met its commitment to reducing its sensitive nuclear activities, signalling a lift of the sanctions imposed on the state over the past decade. It was a day brought closer by a historic deal made in July 2015 between Iran and the US, UK, France, China, Russia and Germany, where the parties agreed sanctions would be lifted upon a 98% scaling back of Iran's nuclear capabilities. Once it was confirmed that Iran's part in the Joint Comprehensive Plan of Action had been upheld, the years of crippling sanctions on the Islamic Republic of Iran began drawing to an end.

The UN has lifted all sanctions on the country and the EU has also removed the majority of its restrictions, includingits embargo on Iranian oil imports. The US, which has had some form of sanction against Iran since 1979, is yet to introduce a full-scale roll-back on the restrictions instituted in 2012, but has lifted the freeze on Iranian funds in international banks and removed over 400 Iranian businessmen and politicians from its sanction list. These three actions combined make for an Iran now able to compete in the global oil and gas market. It is now up to Iran to manage its re-entry into the market in a period of depressed prices and over-supply and to make the most of its proven crude oil reserves; fourth largest in the world, according to the World Bank.

"70% of Iran's crude oil reserves are located onshore, with the remaining 30% offshore"

Facts Global Energy approximates that 70% of Iran's crude oil reserves are located onshore, with the remaining 30% offshore, mainly in the Persian Gulf. The Dorood and Salman offshore fields produce 130,000bpd. Further reserves may be located in the Caspian Sea, but various disputes over territory with Turkmenistan and Azerbaijan have forestalled exploration efforts. The lifting of sanctions will bring urgency to the negotiations over territory; resolution of the issues will allow Iran to begin exploration and production activities in the area.

Rebuilding an industry

Post-sanctions, the country is starting to put together the broken pieces of its oil export capabilities. Many of its onshore and offshore oil wells have been moth-balled and bringing them back to life will be costly and time-consuming, requiring significant investment. "It takes lot of time and effort to restart a shut-down oil well," says managing partner at Apta consulting, Santosh Singh.

"It takes lot of time and effort to restart a shut-down oil well"

This isn't the only problem with Iran's wells. The International Energy Agency estimates that half of Iran's current production is from fields over 70 years old, including the Gachsaran and Ahwaz-Asmari fields.

"The quantity and quality of the infrastructure within Iran will be the deciding factor on how soon they can bring their production to pre-sanction levels. Most likely they will need international know-how and capital investments before they realise their full potential." To make maximum use of its ageing wells and fund exploration, a cash injection and up-to-date knowledge is needed. The cash injection could be funded by the Iranian Government or but outside investors will certainly be needed for skills.

Iran needs to speculate to accumulate, but spending vast sums to bring old wells back online in a time of crushingly low oil prices will be difficult, as will attracting outside investment. Iran now has access to $100bn-120bn in frozen assets, which could help speed up the process, but other industries such as mining and manufacturing are also clamouring for internal investment.

Courting foreign investment

To encourage investment in the long-term, the Iranian Government has changed the model of agreement it undertakes with petroleum companies and foreign investors. The old 'buy back' contracts which placed most of the risk with the developer and only lasted eight years will be phased out in favour of the new Iran Petroleum Contracts (IPCs). These incentivised 20to 25-year service contracts follow a joint venture model, teaming foreign investors up with the National Iranian Oil Company (NIOC) to balance the risk.

Three snagging points remain, regardless of the new contracts. The Iranian local content requirement dictates at least 51% of staff must be Iranian, which could deter companies requiring specific skills of an international workforce.

Secondly, a major concern is that all disputes will be settled by the Iranian courts, rather than being subject to international arbitration. This is taking on considerable risk in a nation in which an elected, more liberal government rubs up against unelected, largely religious figures in the guardian council and Supreme Leader.

The third issue is whether major oil and gas companies have the appetite to invest in exploration in the current climate. Low prices coupled with OPEC's refusal to cut production make for an uncertain environment.

Vice-president of Lukoil, Russia's second largest oil company, Leonid Fedun told the Russian TASS news agency: "Iran will not be able to seriously increase output without major foreign investment. Also, Iran's domestic demand is very high; this is a highly populated country."

Return to market

Iran has some making up to do; the sanctions cost the country more than $160bn in oil revenue in the last three years alone. Whether Iran receives foreign investment or not, the government is determined to regain its standing in the world oil markets, particularly in regards to the Organisation of Petroleum Exporting Countries (OPEC). As Mohammed Bagher Nobakht, economist and adviser to Iran's President Rouhani told CNN Money: "Iran has decided to win back its share of OPEC production at all costs."

OPEC has largely controlled oil prices in the last decade by coordinating its member states' production to carefully keep oil prices buoyant. However, the entry of US shale oil and oil sands produce onto the market began the glut the market is now drowning in and OPEC has refused to temper the production of its members to make room for the US. In this hostile environment, who will make room for a resurgent Iran seeking to restore itself to its former glory, when it exported 2.5 million barrels a day?

It certainly won't be Saudi Arabia. The hostilities between the two countries are beginning to pervade every part of their international dealings. So far, Saudi and the other OPEC countries have refused to blink when it comes to cutting production in order to let prices recover. There has been tentative talk of a freeze at current levels of production for OPEC countries, but this is not enough to discontinue the downward spiral of prices.

All may not be lost to stubborn wills and political games. Singh thinks the severe cut backs in capital investment due to the extended lull in prices may yet create room for Iran to regain its share without destabilising the market. "There is no way non-OPEC producers can maintain their supply with reduced capital expenditure," he says. "So while lifting of sanctions will add more supply on the one hand, the decline in non-OPEC producers will probably compensate the extra Iranian supply. The net impact on price will most likely be less severe than many anticipate."

The story so far

In the months since sanctions began to be lifted, Iran has made considerable progress in emerging back on to the market. It is placing particular focus on rebuilding ties with the EU, which in 2011 was the largest importer of Iranian oil, at around 600,000 barrels per day. Thomson Reuters reported Iran's move to request all future payment for oil in Euros, a way around some US sanctions still in place, and Iran's first post-sanctions shipment of one million barrels of oil reached Algeciras, near Gibraltar, in March.

So far, so good on the road to achieving the Iranian Government's target of eventually exporting two million barrels a day. Whether this is sustainable in the long-term and if the investment required will bring the income Iran needs is yet to be seen.

Related Companies

NEWSLETTER Sign up Tick the boxes of the newsletters you would like to receive. The top stories of the day delivered to you every weekday. A weekly roundup of the latest news and analysis, sent every Friday. The industry's most comprehensive news and information delivered every month.
I consent to GlobalData UK Limited collecting my details provided via this form in accordance with the Privacy Policy
SUBSCRIBED

THANK YOU