COMING IN FROM THE COLD?
IRAN'S ENERGY SECTOR GEARS UP FOR THE POST-SANCTIONS ERA
The meeting is the latest indicator that, after years of isolation, Iran is positioning itself for the potential lifting of international sanctions, a move that would revive the Islamic republic's ailing energy industry, pave the way for its return as a major oil exporter and provide much-needed stimulus to the domestic economy.
Pending a final, comprehensive deal on the country's controversial nuclear program between Tehran and the five permanent UN Security Council members Britain, France, Russia, China and the US plus Germany (P5+1), the Islamic republic may see relations with the rest of the world return to normal as early as 2015, a development that would not only reverse the fortunes of its struggling economy; it would also open the biggest bonanza for international energy companies since the ouster of Iraqi President Saddam Hussein in 2003.
Iran, holder of the world's fourth-largest proved oil and the second-largest proved natural gas reserves, has been 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 US and the European Union (EU) in late 2011 and 2012 that had the most devastating impact on the local economy.
According to the International Monetary Fund's (IMF) latest Article IV Consultation report on Iran published in April, the sanctions have had a contractionary impact on the economy, with real gross domestic product (GDP) declining by almost 6% year-on-year in 2012/13 and by about 2.5% during the first half of 2013/14. Between June 2012 and February 2014, Iran
In a sign that frosty relations between Iran and the West
continue to thaw, British Prime Minister David Cameron met Iranian President Hassan
Rouhani at the UN in New York in late September – the first encounter between an Iranian president and a British prime minister since the 1979
recorded negative GDP growth for seven consecutive quarters.
The Islamic republic's energy sector has been among the most severely affected by the various embargoes in recent years, which have prevented it from securing much-needed foreign investment, technology and expertise, stymieing developments especially in upstream oil and gas. A large number of projects has either been cancelled or delayed. As a result, the country has struggled to expand production capacity at its oil and gas fields, and to halt and reverse declines at its mature fields.
Since the latest round of stringent sanctions was levied on Tehran, the situation has dramatically worsened. Aimed at impeding Iran's ability to sell oil, the sanctions led to a 1 million-barrel a day ( b/d) drop in crude and condensate exports in 2012 versus the previous year. 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 b/d in 2013, compared with about 4.2 million b/d in 2011.
The economic price of falling oil production and exports in particular has been hefty. According to IMF figures, Iran's oil and gas export revenues slumped by 47% to $63 billion (QR230 billion) in the 2012/13 fiscal year from $118 billion (QR430 billion) a year earlier. The IMF estimates that oil and gas export revenues declined by another 11% to $56 billion (QR205 billion) in the 2013/14 fiscal year.
Few would disagree that Iran has the potential to reclaim its status as an energy giant. But it won't be an easy task. The sector's infrastructure is in dire need of rehabilitation and upgrading worth tens of billions of dollars. Moreover, decline rates at the country's oil fields are relatively high, ranging between 8 and 11%, while recovery rates are quite low at 20-25%, according to energy consultancy FGE and the Arab Oil and Gas Journal. Going forward, the country will have to introduce and apply advanced technologies and techniques such as enhanced oil recovery (EOR), which it hasn't been able to get its hands on due to sanctions, on a much greater scale to maintain and boost output.
The need for Iran to invest in its oil and gas sector is therefore obvious. In a bid to create an environment more conducive to attracting foreign investment, Oil Minister Bijan Namdar Zanganeh–appointed following last year's election of President Hassan Rouhani–has started working on a new oil and gas contract model for international companies.
The Iran Petroleum Contract (IPC) is set to replace the unpopular buyback contract that was first introduced in the 1990s. Mohsen Shoar, Managing Director at Dubai-based Continental Energy DMCC and an expert on Iranian energy, says the new IPC varies markedly from the buyback model in that it proposes the establishment of a joint venture between National Iranian Oil Co. (or one of its subsidiaries) and a foreign partner for field exploration, appraisal, development and–for the first time since 1979–production.
Unlike the short nature of the buybacks, the IPC model will offer extended contract duration of 20-25 years, allowing for much longer cost recovery after first production. There will also be a provision for the IPC to extend into EOR phases. On top of this, there will be, for example, a risk-reward element linked to the complexity of fields that pays companies higher fees for ‘very high risk' on- and offshore fields compared with ‘low-risk onshore' fields.
Overall, the increased flexibility and improved terms offered under the IPC will provide some incentive for foreign investors to consider a return to Iran's oil and gas sector if and when sanctions are lifted. However, challenges remain. Continental Energy's Shoar says, among other issues, IOCs may be concerned over too much interference into operations by the local joint-venture party.
“Another potential sticking point for international oil companies may be the fact that any dispute arising under the IPC will be subject to the exclusive jurisdiction of the Iranian courts. Many international companies may not feel comfortable with this and would probably prefer international arbitration,” according to Clyde & Co.
Iran's new contract model has the potential to change the country's economic fortunes. It all depends now on world powers and Tehran to come to an agreement that will result in the lifting of sanctions