Tuesday, 14 January, 2020

Iran to Open Door to International Oil Companies, Daily Telegraph Reports

International oil companies are lining up to return to Iran as new contract terms take shape, Daily Telegraph reported.

According to the report, Iran is poised to flood the market with another 1m barrels per day (bpd) of crude oil should it achieve a nuclear deal by the next deadline on June30. Re-opening the Iranian spigots after years of nuclear sanctions will set up a monumental battle between Iran and Saudi Arabia for control of the Organisation of the Petroleum Exporting Countries (Opec). It will also pile pressure on high-cost shale oil producers in the US who will struggle to compete with a tidal wave of Iranian crude which could hit the markets within months.

The scale of Iran’s potential to flip the global oil market on its head has been highlight in the latest report on the country’s energy sector produced by the Energy Information Administration (EIA) - part of the US Department of Energy. An agreement with the so called P5+1 powers - the US, UK, China, Russia , France plus Germany - would trigger a rush by international oil companies (IOCs) to return to the country which has been off limits.

In its latest report, the EIA said: “Iran is planning to change its oil contract model to allow IOCs to participate in all phases of an upstream project, including production. However, international sanctions have affected foreign investment in Iran’s energy sector, limiting the technology and expertise needed to expand capacity at oil and natural gas fields.”

The scale of Iran’s potential to transform world energy markets is vast. The country holds the world’s fourth-largest oil reserves and the second-largest natural gas reserves. Production of both has fallen sharply since sanctions but the re-introduction of IOCs and their new technology would allow Iran to fully exploit its natural assets.

According to the EIA’s research: “Iran’s exports of crude oil and condensate dropped from 2.6 million barrels per day (bpd) in 2011 to almost 1.3 million bpd in 2013 as a result of US and European Union sanctions that targeted Iran’s oil exports. Iran’s exports increased by nearly 150,000 bpd to 1.4 million bpd in 2014. The largest buyers of Iranian crude and condensate are China, India, Japan, South Korea, and Turkey.”

At its peak before the Islamic revolution in the 1970s Iran was producing anywhere between 5m bpd and 6m bpd of oil and has the potential to return to this level if it can be relieved from the yoke of sanctions. That would add significant downward pressure to oil markets which continue to be oversupplied despite growing signs of rising world demand.

Crude prices would struggle to hold their current levels around $65 per barrel should Iran reach agreement on its nuclear programme at the end of this month. Saudi Arabia’s likely response would be to attempt to increase its own output to its full capacity of around 12m bpd. Although members of Opec have discussed the return of a binding quota system for the group once Iran is free from sanctions such a deal will be tough to negotiate.

Meanwhile the Iranians are sweetening the terms of their contracts for IOCs to come invest and develop the country’s oil fields. Despite concerns over the tough terms and the high level of political risk associated with the country IOCs would be foolish to ignore the potential of one of the world’s last great conventional basins.

According to the IEA, Iran has recently unveiled a new contract model called the Iranian Petroleum Contract (IPC) to entice companies such as Royal Dutch Shell, Total and BP to return. “The purpose of the new framework is to attract foreign investment with a contract that contains terms similar to a PSA (Production Sharing Agreement),” said the EIA in its report.

Although the terms of the new deal are still open to negotiation and change it is understood that the Iranians are keen to offer IOC’s a better deal in return for their investment and technology.

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