WHAT COULD HAPPEN IF TRUMP KILLS IRAN DEAL

More nuclear sanctions, then less overseas investment in oil and gas

Iran, struggling to attract investors to its energy industry, may find things tougher still as US president Donald Trump tries to undermine the nuclear deal that eased sanctions on Opec’s third-largest crude producer.

His efforts will not immediately curb the flow of some 2.3 million barrels of daily Iranian crude exports – more than three times the amount of oil the US has sold abroad over the past year. For investors, however, the risks could be higher. Companies such as Total, which in July became the first major western energy company to sign a production deal with Iran since the 2015 accord, may face more hurdles in contributing to the country’s estimated US$100 billion need for oil and natural gas investment. Q

How could a US decision affect energy markets?

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A declaration from Mr Trump this week that Iran is in breach of the spirit of the agreement intended to prevent it from developing nuclear weapons could splinter the pact that world powers reached with the Arabian Gulf nation two years ago. Iran denies that it seeks to build atomic weapons, and its foreign minister, Javad Zarif, has said the US “failed to implement its side of the bargain”.

If a Trump decision leads to tighter US restrictions, it could choke off the foreign investment Iran needs to rehabilitate energy assets and boost oil and gas production. Earlier US energy sanctions, suspended in January 2016, targeted Iran’s oil exports by threatening its customers with financial penalties if they did not reduce purchases.

The US has leverage to impose similar punishment on energy companies doing business with the republic, as many have operations in the US and use dollars to pay for equipment and contractors. “Project finance and investment will become even tougher than they are today,” said Iman Nasseri, a senior consultant at the London-based researcher FGE.

What would happen to Iran’s oil exports and production? The US has not bought Iranian oil for nearly 40 years, but its exports have flooded back into Asian and European markets, about doubling to between 2.2 million and 2.4 million barrels a day since sanctions were eased last year. Shipments to Europe surged to about half a million barrels a day after the EU lifted its embargo. Iran’s sales to China, its biggest buyer, swelled in August to the highest level since June 2016, according to ship-tracking data compiled by Bloomberg.

“Europe seems unwilling to re-impose oil-related sanctions, as was the case in 2012,” said Homayoun Falakshahi, an analyst at consultant Wood Mackenzie. But the US could seek to bring pressure to bear on buyers of Iranian crude, especially those with assets in the US, he said.

If the US pulls out of the agreement and persuades Europe to reinstate its embargo, Tehran could find oil exports capped at around a million barrels a day, or about the same level targeted by sanctions between 2012 and 2015, Mr Nasseri said. A more plausible scenario would be for the US to uphold the deal but intensify financial pressure, he said.

Could Iran still develop oil and gas fields to boost output? Iran’s gas reserves, estimated by BP at 1,183 trillion cubic feet, are the world’s largest. Iran has raised oil output by about a third to about 3.8 million barrels a day since sanctions were eased in January 2016, and it is seeking to increase production capacity for crude to 4.7 million barrels a day over the next five years.

A unilateral US decision to re-impose sanctions on Iran “would curb the enthusiasm of European and some Asian corporates for following through with plans to invest in the Iranian upstream sector,” said Helima Croft, the global head of commodity strategy at RBC Capital Markets. This, in turn, could “force foreign refineries to source less crude from Iran, especially if the threat of being locked out of US capital markets was revived”.

Who would be most exposed under new energy sanctions? International companies have been wary of signing contracts with Iran because sanctions on financial transactions with the country remain in place. Total agreed to develop Iran’s share of the world’s biggest gas field, the offshore South Pars deposit, in the country’s only deal with a foreign energy major since sanctions were scaled back. Paris-based Total estimated the project needs an initial $1bn to get started.

“Total is the only company with long-term commitment and investments and interest in Iran” right now, Mr Nasseri said. “There will be extra risks.”

Total can pay for the South Pars project with its own funds, instead of borrowing from banks, to minimise its exposure to the US financial system, he said.

Officials at Total did not reply when asked to comment. “We are respecting international laws,” the chief executive Patrick Pouyanne said in July. “If rules are changing, we have to adapt.”