Iran clears path to global markets

Iran’s 290-member Majlis approved a bill on October 13 to accept the historic deal on Iran’s nuclear energy program agreed with the international community in July. The Guardian Council must still ratify the bill before sanctions can be lifted and it is not entirely clear this sanctions-free era will begin. However, chief editor Gary Lakes reports, Iran is going to be a highly sought-after market for international trade when it does get underway.

NO sector of the global economy is more excited by the projected end to international sanctions against Iran than the oil and gas industry. Pistachio nuts and silk carpets are all very fine, and there is a huge market for foreign goods and services inside Iran, but the country is sitting on billions of dollars’ worth of hydrocarbons and international oil companies are keen to get in among those vast energy resources.

Iran’s energy sector recognizes the value of foreign investment and is keen to accommodate them. Tehran plans to entice the energy companies with a new model oil and gas agreement, the Integrated Petroleum Contract (IPC), that is expected to be far more lucrative than the buy-back contracts it offered previously. The ministry of petroleum will unveil the IPC at conferences scheduled for Tehran in November and London next February and will also unveil some 50 oil and gas projects that it will open for investment. Iran has already announced that it will build a new oil export terminal at Jask in the Gulf of Oman, outside the strategic Strait of Hormuz.

Within our grasp – the international oil companies line up.
Within our grasp – the international oil companies line up.

Not all sanctions will be removed – those concerning weapons and human rights will stay in place – but once Iran is certified by the International Atomic Energy Agency (IAEA) as having met its obligations under the Joint Comprehensive Plan of Action, probably between February and April of 2016, Iranian crude will be free to enter global oil markets.

“All American pressure on Asian buyers to curb their purchases will stop. China, India and others will be able to buy whatever amount they wish,” Robin Mills, based in Dubai and non-resident fellow for energy at the Brookings Doha Center, told Global Sources Magazine.

Robin Mills, non-resident fellow for energy at Brookings Doha Center, author of "The Myth of the Oil Crisis" and "Capturing Carbon."
Robin Mills, non-resident fellow for energy at Brookings Doha Center, author of “The Myth of the Oil Crisis” and “Capturing Carbon.” [LinkedIn]
“European markets accounted for about a quarter of Iranian oil exports and will become available, and payments will be straight-forward again, so there won’t be all these round-about routes to pay for Iranian oil or funds being locked up in other countries,” Mills said.

“Then, of course, there is the whole investment side and all the potential for international oil companies to invest in field developments, refineries and everything else. That will take longer and I think companies will be cautious for various reasons about going in,” he said, adding that Iran is keen to have foreign companies invest.

Mills said the energy companies will cautious about investing in anything involving the Iranian Revolutionary Guard Corps since this military organization will remain under international sanctions. The Revolutionary Guards control hundreds of companies in Iran and are a big contractor in the energy industry. Mills said foreign companies can be expected to carry out considerable due diligence to ensure that they are not dealing with any entity connected with the Revolutionary Guards, which could jeopardize their investment.

Wrong energy – Iranian Revolutionary Guards.
Wrong energy – Iranian Revolutionary Guards. [Reuters]
Prospects in Iranian oil and gas are so huge that oil giants BP, Shell, Total and Eni have sent delegations to Tehran to pre-negotiate possible deals before the end of sanctions, and indeed, Iranian media recently reported that Iran “had left the development of two oilfields to the energy giant British Petroleum (BP).” The Tehran Times reported on October 8 that the deal followed a meeting between the Iranian oil ministry and BP executives in September at which the ministry “agreed to transfer the development of two oil fields to BP based on the new model of Iranian oil contracts.”

An official from the National Iranian Oil Company (NIOC) who was attending an Oil and Money Conference in London, quickly denied the report. An oil ministry spokesman admitted talks with “a large number of companies,” but said that no deal had been made. However, the original newspaper report said nothing about an official agreement, only that the development of two fields had been set aside for BP, which said it would be “interested in reviewing opportunities in Iran once sanctions permit it.”

Sanctions against Iranian oil exports are credited with bringing Iran to the negotiating table over its nuclear energy program. Under sanctions Iran’s oil exports fell from 2.2 million barrels a day in 2012 to around 1.15 million, according to the International Energy Agency (IEA). At that time production averaged 3.6 million barrels a day and is now around 2.9 million. With 40 million barrels of oil and condensate currently in floating storage, Iran is anxious to get back in the game and reclaim its share of the market. The IEA estimates that Iran’s crude production could return to 3.6 million barrels a day within six months of sanctions being lifted and that more Iranian crude, around 600,000 barrels a day, could be put on the market during 2016.

But the return of Iran to a volatile oil market can be expected to put more downward pressure on prices, now around $50 a barrel for Brent. Mills reckons that more Iranian crude on the market could lower that by up to ten dollars.

“The return of around 800,000 barrels a day of Iranian oil might be expected to depress prices by $5-10 a barrel, all other things being equal,” Mills said. “There is also the release of crude oil and condensate from storage, perhaps 150,000 barrels a day over six months. The price impact will also depend on how other OPEC countries react.”

Iranian crude could be factored into OPEC leader Saudi Arabia’s market strategy he said. “Saudi Arabia’s high production, low price policy may be motivated in part by its looking ahead to competition with returning Iranian production.”

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