Time Running Out for Iran Oil Bonanza

When sanctions were lifted on Iran after the 2015 nuclear deal, the oil industry geared up for the greatest upstream bonanza since Iraq's opening in 2007-08. But it never materialized. Would it be any different now if the US and Iran restore the so-called Joint Comprehensive Plan of Action (JCPOA) and sanctions are eased again? The investment challenge appears even greater this time given the energy transition and geopolitical complexities. Iran hopes it can attract some international oil companies (IOCs) if sanctions are lifted because their financial and technical capabilities are needed to rehabilitate a hydrocarbons sector that has suffered from decades of underinvestment due to international sanctions. “We think some of them [IOCs] will be back, but only if a better [nuclear] agreement will be reached," an executive at a major private Iranian contractor told Energy Intelligence. Under the original JCPOA, TotalEnergies was the only Western major to sign an upstream deal with Iran. But the French firm abandoned the deal in 2018 after the US reinstituted harsh sanctions on Tehran under former President Donald Trump (PIW Aug.29'16). The attractiveness of Iran's reserves, which are among the world's cheapest to develop, aren't in doubt. But US companies would again have to steer clear even if the JCPOA is reinstated due to lingering non-nuclear sanctions. European firms, meanwhile, would have much to consider. Iran's complex politics, the prospect of a hard-line government, and the generally challenging business environment could make them think twice, as could the chance that the US bails on the JCPOA again under a different administration in the future. As the energy transition accelerates, IOCs are also under heavy pressure to decarbonize their operations, and only exceptional upstream projects are getting the green light these days (related). Uncertainty about future demand has prompted fierce debate over how much new investment and supply will be needed over the coming decades (PIW May28'21). “We do not expect the Western companies to commit to long-term upstream investments upon sanctions removal. But trades and short-term service contracts with Western companies might resume if sanctions are removed,” says Sara Vakhshouri, president of US-based consultancy SVB Energy International (PIW May7'21). Questions over the commercial attractiveness of the Iran Petroleum Contract (IPC) will inevitably resurface too, especially if Iran's government is dominated by hard-liners who are traditionally opposed to foreign involvement in the country's upstream. The IPC, the successor of the much-disliked buyback model, failed to excite when it was launched in 2016. Iran managed to strike just one upstream deal with an IOC under the new model -- with Total for the $4.8 billion development of Phase 11 of the giant South Pars gas field. Despite initial interest from Eni, Royal Dutch Shell and Wintershall, no other Western players followed suit as domestic Iranian politics delayed the IPC’s launch and questions remained over the contract's competitiveness (PIW Dec.3'18). There is no doubt that Western expertise and funds are needed. Iran’s oil production capacity has stalled at around 4 million barrels per day, of which it should be able to reach 3.8 million b/d swiftly should talks between Tehran and Washington succeed (PIW Apr.23'21). In 2016, Iranian Oil Minister Bijan Zanganeh declared a production capacity target of 4.7 million b/d by March 2021, which the Opec member has missed. Zanganeh recently declared that the next government, to be determined in Jun. 18 elections, should target a capacity hike to 6.5 million b/d. Meeting such targets would be difficult to achieve without Western players. Iran's upstream fate could hinge on investors from China and Russia, as well as smaller independents. “This time, Chinese and Russians will be pioneers,” says the Iranian executive. But the track record of Chinese companies in Iran has been limited at best, while Russian companies and independents have even less to show for. None of this bodes well for Iran's upstream ambitions. And as the energy transition accelerates further and other producing nations position themselves to take advantage of their low-cost, low-carbon production, catching up will become even harder for Iran, which previously sought $70 billion in upstream foreign investment (PIW Oct.10'16). Iran also wants to expand its gas sector to become a major exporter. Unlike Qatar, which has developed its side of the giant South Pars gas field swiftly over the past two decades to become the world’s top LNG exporter, sanctions have prevented Iran from securing liquefaction technology.