May 2016, Vol. 243, No. 5

Features

Iran Takes First Bold Step Back Onto Energy Stage

After years of isolation, Iran has emerged from the economic shackles of sanctions and is rapidly trying to lock in energy alliances in the Gulf, Europe and Asia. The Islamic Republic’s ailing energy industry is expected to thrive in 2016, with up to 500,000 bpd of additional crude oil entering the market and a swathe of oil gas memorandums of understandings (MOUs) signed with both historic and emerging trade partners; China, Oman, Turkey and European clients. But, Iran’s reemergence comes against a backdrop of deepening political and economic discord; neither helped by oil prices sinking to 12-year lows and triggering a wave of budget cuts.

Still, Iran has seen its relations with the wider energy sphere start – albeit slowly – to return to normal after the nuclear program imposed by the five permanent UN Security Council members Britain, France, Russia, China, the U.S. and Germany (P5+1) was lifted on Jan. 17. The crippling effect of cumulative sanctions, combined with the election of moderate Hassan Rouhani as Iran’s president in June 2013, is widely considered to have played an important role in Tehran’s decision to agree to the establishment of a Joint Plan of Action (JPA) with the P5+1 in November 2013.

The opportunities that arise from a sanctions-free Iran spread further than the country’s borders. The opportunities that arise from the country’s vast energy resources mark the biggest bonanza for international energy companies since the 2003 ouster of Saddam Hussein in neighboring Iraq.

Iran, holder of the world’s fourth-largest proved oil and the second-largest proved natural gas reserves, was hard hit by UN and international bilateral sanctions imposed on the country in 2006 and 2010 on top of existing US sanctions. But it was the latest set of even more stringent measures enacted by the U.S. and the European Union in late 2011 and 2012 that had the most devastating effect on the local economy.

Iran recorded negative GDP growth for seven consecutive quarters between June 2012 and February 2014. The Islamic Republic’s energy sector has been among the most severely affected by the international embargoes, preventing it from securing much-needed foreign investment, technology and expertise for its energy sector and stymieing developments in upstream oil and gas and downstream refining. Still, signs of Iran’s economic resilience surprised many. Tehran reduced its 45% inflation rate in mid-2013 to 10% in 2015, raising questions as to how financial management in the Middle East could be bettered.

There is little doubt that Iran faces an uphill battle if it hopes to meet its bullish rhetoric. The country needs massive cash injections to restore its rusted energy infrastructure, as many projects were either canceled or delayed during the sanctions. Once OPEC’s second-largest oil producer, Iran now ranks behind Iraq in terms of oil and liquids production, averaging only about 3.2 million bpd in 2013, compared with about 4.2 million bpd in 2011. Iran is expected to try and get back some of its market share from Iraq as the year progresses.

Iran’s oil and gas export revenues slumped by 47% to $63 billion in the 2012-13 fiscal year from $118 billion a year earlier, according to the International Monetary Fund (IMF). The IMF estimates that oil and gas export revenues declined by another 11% to $56 billion in the 2013-14 fiscal year. These revenue figures will likely have been halved again with the collapse in oil prices since June 2014.

Companies that steered clear of Iran during the sanctions are booking flights to meet energy officials in Tehran, including Western oil companies like Shell, Total, Statoil and Repsol. While some withdrew during sanctions, Iran found economic solace in more willing investors to the East and the historic Sino-Iran relationship was reaffirmed in mid-January 2015 by a 10-year deal that could generate $600 billion in bilateral trade. Still, a sanctions-free Iran will have little choice but to take advantage of all foreign companies’ marketing expertise to help streamline its access into an increasingly competitive oil and gas export market.

The new Iran Petroleum Contract (IPC), which was announced in late-November, ends the country’s buyback system that lasted for two decades and stopped foreign investors from booking reserves and locking in equity stakes in Iranian firms. While the new contract stipulates that the National Iranian Oil Company will have exclusive ownership over resources, foreign investors may still have the chance to book reserves. It is still early in Iran’s economic reawakening and whether the theory behind the IPC satisfies investors in practice remains to be seen.

Iran’s new chapter will not come without its risks and challenges. But politics allowing, the potential upside for both Iran and international investors could be a win-win.

Author: Thangapandian Srinvasalu, Director, GP Group, is an oil and gas professional with over 30 years of experience in sales, marketing and trading of petroleum products from India to Nigeria. Before joining the GP Group, he was working at Essar Oil Limited as CEO – Marketing & IST. He also established PetroFina in India.