The IOCs are hurting, reflected largely by their cut back in dividend as well as profit falls and job cuts. Under these circumstances, IOCs need to look for exploration and production opportunities that require comparatively little capital and operational expenditure. As such, Iran presents itself as a great opportunity – with costs to produce a barrel of crude in Iran estimated at around US$ 12 compared to an average of around US$ 9 in Saudi Arabia, around US$ 36 in the USA and around US$ 52 in the UK. Provided the IOCs are willing to accept the risks and challenges that arise with investing in Iran, the offering of about 18 E&P blocks and 50 oil and gas projects worth US$ 185 billion by 2020 under the new ‘Iranian Petroleum Contract’ (IPC), might just be the need of the hour.
The country has gone through a series of tumultuous events, the more important being the CIA’s 1953 coup displacing the democratically elected Prime Minister Mohammad Mosaddeq, followed by the installation of Shah Mohammad Reza Pahlavi. This ultimately led to the Iranian Revolution in 1979, followed by an eight-year-long war with Iraq and various sanctions, which hit the country worst in 2011. Having faced such, it is surprising for many to see the country still being a dominant player in the Middle East and competing with Saudi Arabia. This very point makes the country hugely important – not only regionally but internationally – because a freely trading Iran, which will ultimately make the country financially secure, can reasonably change the power dynamics of the region, the dominance of Saudi Arabia and the fundamentals of relative stability left in the region.
The latest form of buyback contracts attracted billions of dollars of foreign investment in the 1990s and early 2000s, until nearly all investors left the country when the EU and the US enacted measures in 2011-12 that affected the Iranian energy sector more profoundly than any previous sanctions. As a result, oil & condensate exports in 2012 fell by around 1.0 MMbbl/d compared to 2011 and stayed around the same level until 2015. According to the International Monetary Fund (IMF), Iran’s oil and gas export revenues dropped by 47% from US$ 118 billion in the 2011-12 fiscal year to US$ 63 billion in 2012-13.
Although the finer details of the IPC are yet to be finalised, it is expected that the contract will be an improvement on the existing buybacks, presenting a new opportunity to the IOC’s. Under the new contract terms, companies will remain unable to have ownership of reserves, but will be able to establish JVs with NIOC, or its subsidiaries, to manage the entire life cycle of a project. Companies will have a longer time period of between 20 to 25 years to explore, develop and produce from a field, with the possibility to extending it to the Enhanced Oil Recovery (EOR) phases. Fiscal terms are also understood to have been reworked.
At a time when companies are looking to cut capital and operating expenditures, the low-cost barrels that are going to be available make an entry / re-entry in Iran look very attractive. However, entering Iran will require careful consideration of the challenges and risks, below, as well as above ground. Political risks remain high too, with the country having poor relations with a number of neighbours in the Middle East, as well as further afield. Companies will have to assess how entering Iran might affect their business elsewhere. However, the major risk for any company establishing operations in Iran is the potential of renewed sanctions, should the country fail to adhere to the agreements made regarding its nuclear programme.
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