Deal opens opportunities for Western oil firms

PARIS — The Iranian nuclear deal, which heralds a lifting of sanctions choking the country's economy, could offer an unparallelled opportunity for foreign oil companies, but may take time to tap.

Thursday's deal "could represent a first step towards a return of Western oil companies" to Iran, said an analyst.

The sanctions imposed on Iran by the United States, then by the United Nations and European Union, led to the gradual departure of major Western oil companies, leaving just Chinese and Indian firms.

The lifting of sanctions offers a rare opportunity: entry into a country that is both a major oil and gas producer.

Despite sanctions cutting oil output by over a quarter, from 4 million barrels per day (mbpd) in 2008 to 2.81 mbpd on average in 2014, Iran still remains the fifth largest producer in the Organisation of Petroleum Exporting Countries (OPEC). It exports around 1.1 mbpd of oil.

Iran holds the second-largest gas reserves in the world behind Russia.

"Iran is a country with considerable oil and gas potential," said Francis Perrin, head of the SPE group of energy policy trade journals.

But any return is at least months away, according to Pierre Terzian, head of the Petrostrategies weekly.

Once sanctions are lifted, Iran will no doubt be looking to market the oil stocks it has accumulated in order to raise cash.

It could then "before the end of the year increase its [production] level significantly", said Guy Maisonnier, an economist at IFP Energies Nouvelles Research Centre, pointing out it produced 3.4 to 3.6 mbpd in 2012. 

But the hike in production depends upon the condition of Iranian oil wells and refineries, which haven't had access to spare parts and technology from the West for several years.

Iran wants the best

Iran has made no secret of its desire to see Western energy companies return.

At the Davos forum of international business elites in Switzerland last year, Iranian President Hassan Rouhani called on them to invest in his country's energy sector.

But their interest in doing so will depend greatly upon the conditions Tehran offers.

"For the energy companies to return to Iran, the fiscal terms of the contracts are attractive, which wasn't the case before the sanctions," said Bertrand Hodee, an energy analyst at the Raymond James brokerage.

"The Iranian system of buy-back contracts was too risky for international companies," he added.

While most oil investment deals globally are in the form of production sharing agreements, with the state getting a slice of the output in return for the concession, Iran preferred buy-back deals.

Under these, the international oil companies are in effect a contractor to Iran's national oil company, and are paid at agreed rates for their investments into installations. 

"Iran is conscious of that, in particular the Iranian oil ministry, which has been working for some time on a new framework oil agreement, the Iran Petroleum Contract" or IPC, which should be more attractive for foreign investors, said Perrin, because Iran "wants to work with the best".

As the extended absence of US oil companies from Iran risks making their return more complicated, European companies such as France's Total, Italy's Eni or Royal Dutch Shell may have an advantage, Perrin added.

He remarked that Iran "isn't very satisfied" with the Asian companies currently operating in the country. 

While the reopening of Iran offers energy companies opportunities, it won't immediately help them as it could prevent a rebound in oil prices which have fallen by 60 per cent from peaks last year, although that is a benefit for the global economy.

"For the world economy, the re-integration of Iran could help to keep oil prices lower for longer and mitigate the risks that conflicts elsewhere such as in Libya might pose to global oil supply," said economist Holger Schmieding at Berenberg bank.