Friday, 03 June, 2016

Iran emerging as next destination for oil investors worldwide

By Priyanka Kodape

After most international sanctions against Iran were lifted by the U.N. in January, oil and gas investors all over the globe welcomed the landmark judgement and saw the birth of tremendous opportunities in the country.

With oil prices hitting rock-bottom recently, and likely to remain there for quite some time, international oil companies from countries like the U.S. are looking for profitable oil exploration and production opportunities that require considerably less capital and low operational expenditure. As per an estimate, costs to produce a barrel of crude in Iran is around $12, which is much less compared to an average of around $36 in the U.S.

Some U.S. bilateral sanctions are still in place, making it hard for institutional and individual investors to trade in the country since companies are barred from having physical partnerships with Iranian companies, although this hasn’t deterred everyone. Some U.S. firms are getting around this by pushing licenses through the U.S. Treasury’s Office of Foreign Asset Control (OFAC) to invest in some sectors including oil and gas, if these are shown to align with U.S. policy interests, and many investors and institutions are even exploring newer ways to invest in the region – such as through offshore entities, or through foreign subsidiaries based in Europe.

Looking across the pond, companies in Europe and Asia have already started to bite the bait by making deals and entering into talks with various market players to expand and consolidate their market presence in Iran. An initial sum of around $25 billion is expected to be invested by various leading European companies in the country’s exploration and production sector over the next four years, with top market players such as BP, Eni, Shell, Total and Statoil currently in active talks with policy makers in Iran.

Subhead: New Iran Petroleum Contract Model

Unveiled at the Tehran Summit in November last year, a new model of the Iran Petroleum Contract is considered by Iranian policy makers as a key component in attracting investors worldwide. The new contract is expected to boost investor spirit in several ways and puts an end to old buyback system that prevented any foreign country to have any physical stake or equity stake in Iranian companies.

Commenting on the new IPC, Iran’s Oil Minister Bijan Namdar Zanganeh admitted that the latest model was not perfect, but suggested it would help both IOCs and the country’s national oil company.

“We do not claim that this is an ideal and flawless scheme but it can address the needs of both National Iranian Oil Company and international oil companies,” he said.

Policy makers have also included a reward system in the contract that would make contractors eligible to earn a fee per barrel of oil that can be considered as profit to the company. Furthermore, at times of oil fluctuations, contractors can increase their profit ratio. The buyback scheme was already in place for the rest of the Middle-East but did not reap any financial benefit from the U.S. and Europe due to sanctions over Iran’s nuclear programs. With the U.S. still implementing its embargo on Iran, it’s unclear when, or if, the country will adopt the measures of the new IPC, or if it believes its European ties are sufficient to benefit from the updated structure.

Oil and gas industry players in general are expected to invest a large part of their spending in mergers and acquisitions across the Middle East, according to a recent report from Research Beam titled Oil & Gas Industry Business Confidence Report H1 2016, which suggests that the region offers the necessary momentum to assist with the growth of the industry.

The latest developments in Iran are expected to provide IOCs and regional players with an immense opportunity to remain competitive in a low oil price environment. Although some foreign investors are wary of sanctions being renewed in the future, these firms should carefully consider whether they can afford to miss out on investing in the country.

Priyanka Kodape is an industry research analyst at Research Beam, which is based in Portland, U.S. Research Beam is an online market organization which produces research reports for the energy industry and various other international sectors.

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