Positive Signs for Investors in Iran but Oil Output Increase Still a Ways Off
May 30, 2017
- On May 20, Hassan Rouhani was convincingly reelected president of the Islamic Republic of Iran, winning 57 percent of the vote. President Rouhani ran on the campaign pledge to pursue further outreach to the international community for additional sanctions relief.
- Three days earlier, the United States fulfilled its commitments under the Joint Comprehensive Plan of Action (JCPOA) by extending its waiver on a number of sanctions against Iran for another six months, despite critical rhetoric from the administration against the deal.
- On the same day, the Treasury Department, in a separate move, imposed unilateral sanctions against Iranian and Chinese actors involved in the development of Iran’s ballistic missile program.
- Since nuclear-related sanctions were waived under the JCPOA, Iranian crude oil output has risen by 25 percent, and several international oil companies have shown interest in establishing operations in the country.
- The JCPOA is currently under a National Security Council–led interagency review, which aims to determine if lifting of sanctions against Iran is vital to the national security interest of the United States.
Overwhelming press sentiment in the days leading up to the elections indicated that Rouhani would have difficulties in garnering the support to carry him over the required 50 percent mark to win the election in the first round of voting. These doubts largely stemmed from reports that much of the economic progress that the Iranian economy has experienced since the nuclear deal was signed has yet to reach most segments of Iranian society and has been limited in general by the low oil price environment. However, Rouhani’s resounding victory has given a strong vote of confidence for his efforts to pursue further international outreach, to reduce other sanctions, and to attract foreign investors with the direly needed capital and technology to reinvigorate growth in its energy sector.
Despite Rouhani’s victory and the sanctions waiver being upheld by the United States, foreign investment in Iran’s oil and gas sector may still be slow to materialize. The specter of a tougher line on Iran from the new U.S. administration still looms over investment in Iran. While the waiver has been renewed and more recent reports would indicate that the administration will extend additional waivers next month, the JCPOA is still under an interagency review, and so foreign investors appear to be treading a cautious line until they can be certain as to the fate of the deal. Adding to these doubts is the potential of a broader set of sanctions on Iranian actors if the country does not pull back on the development of its ballistic missile program. The ability of Rouhani to steer Iran clear of additional sanctions could be out of his reach because the control of the armed forces falls within the remit of Supreme Leader Ayatollah Ali Khamenei. Khamenei, a hardliner, also controls the judiciary and holds veto power on laws passed by the Iranian parliament. This power structure may frustrate Rouhani’s efforts to further international outreach; however, a Rouhani victory bodes well for the opening of Iran’s oil sector.
Iran plans to launch its first tender under the new Iran Petroleum Contract (IPC) within the coming weeks according to the Ministry of Petroleum, now that the waiver on sanctions has been renewed and the elections have taken place. The IPC has replaced the buyback contract structure to help attract greater levels of foreign investment. With this, a total of 29 operators have qualified for bidding on designated fields. Several companies have expressed a keen interest in developing the giant oil fields of Azadegan and Yadavaran. Other companies have already forged ahead in direct negotiations, with Total provisionally signing on for the development of South Pars phase 11 with China National Petroleum Corporation (CNPC). However, Total has yet to make a final investment decision because of the lack of clarity surrounding the U.S. position on sanctions. Maersk Oil is also reportedly in the process of finalizing a technical proposal for the South Pars Oil Layer, located above the South Pars offshore gas field. Furthermore, India’s Oil and Natural Gas Corporation (ONGC) has also been involved in negotiations to strike a deal on the development of the Farzad B gas field.
In the meantime, Iran is willing to honor the Saudi-Russian led extension of the OPEC/non-OPEC production cuts for another nine months to support global oil prices. Under these production cuts, Iran is the only country to be afforded a production ceiling as opposed to a cut. In the months following the agreement, Iran marginally surpassed its allocated production cap based on OPEC data and has fallen short of achieving its allocated ceiling of 3.8 million barrels per day (mb/d) ever since. Having pretty much reached its production capacity limit for the moment, extending OPEC cuts is an acceptable outcome for the Ministry of Petroleum. In fact, Iran will face major challenges in lifting crude production beyond current capacity for a while yet, until potential foreign investments bring the required capital and technology. This foreign investment will be a crucial factor in determining if Iran can achieve its stated goal of lifting crude production to 4.8 mb/d by 2021.
While uncertainties remain, the outlook for the Iranian oil and gas sector and the potential for further gains to be made in terms of productive capacity growth is certainly improving with these recent events. The election of President Rouhani will see Iran attempt to build upon previous progress in pursuing means to reintegrate into the global economy. The oil and gas sector plays a pivotal role in achieving reintegration, and so the licensing of oil and gas fields, through direct negotiations and bidding rounds, will continue to move forward, albeit slowly, until the U.S. interagency review of the JCPOA is complete. While there is still the potential for sanction waivers not to be renewed upon the outcome of the interagency review, this increasingly appears to be an unlikely scenario given the softer tone that the administration has now adopted on this issue and the fact that the U.S. State Department has certified Iran’s compliance with the deal.