Qatar Today - - OIL & GAS > VIEWPOINT - BY SEAN EVERS Man­ag­ing Part­ner Gulf In­tel­li­gence

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

Is­lamic revo­lu­tion.

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

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