Reportage | Iran

Iran: From the splendor of the past to the contradiction of the present

Energy overview by Valerio Giardinelli -

Upstream: a giant returns

With the Iran nuclear deal, a founding member of OPEC returns to the fold of major oil and gas exporters. The country’s energy sector has been growing accordingly, driven by a program to attract foreign investors and new upstream development plans

 

The nuclear deal signed with Iran at a July 2015 summit in Vienna, and the resulting lift of the embargo on Iranian exports, is considered one of the contributing factors of the crude oil price stabilization during the volatile period – heralding the return of an important actor. How important? According to the Oil and Gas Review 2016, Iran’s confirmed oil reserves amount to 158,400 million barrels. That means the Middle Eastern nation is sitting on 9.5% of global crude supplies. But Iran’s gargantuan output capacity has long been common knowledge. According to a report by Clyde & Co, approximately 80% of Iranian oil deposits were discovered before 1965. Facts Global Energy estimates that 70% of the nation’s crude reserves are onshore, while most of the remainder is located in the Persian Gulf. The numbers on estimated reserves are also staggering: 500 million barrels, mostly offshore, found primarily in the Caspian Sea. However, the exploration and exploitation of these deposits has been held up by territorial disputes, especially with Azerbaijan and Turkmenistan.

The end of sanctions and return to the market

The real question that analysts (and markets) are pondering in the aftermath of the nuclear deal is how much time Tehran will need to resume its leadership role in the upstream sector. Back in 2015, the answer of the International Energy Agency was “not much,” considering that 40 million barrels (from inventory stocks) were already on tankers headed toward buyer markets. The Iranians themselves expressed optimism following the signing of the deal. And indeed, today the country’s output has resumed growth, while Iran’s government has announced plans to create new generation infrastructure in response to growing energy demand. The country is working to modernize and maintain existing rigs, and Tehran has drafted a plan for the development of alternative sources, announcing investments even in renewable energies, a sector in which the country is pursuing a target of 5000 MW per year by 2018, anticipating foreign help in the form of funding and transfer of technologies and knowhow. In the coming months, Iran expects investments in the oil and petrochemical industries. All these factors are heartening, especially in light of the fact that the country has resumed exporting at pre-sanction levels.

Natural gas: another promising resource

Iran is not only a major oil exporter, but also the world’s third largest natural gas producer. Iranian petroleum output in 2015 amounted to 3,589 thousand bpd, while that of natural gas totaled 185.54 billion cubic meters (source: World Oil and Gas Review 2016). The effect of the embargo imposed on the country by the USA and Europe in late 2011 was felt in the Iranian upstream sector beginning in summer 2012, with a sharp decline in oil output and a significant slowdown in the growth of natural gas production, in spite of abundant mineral resources. The sanctions impacted foreign direct investments in particular, dragging down the entire Iranian energy industry, leading to the suspension or delay of many research and exploration projects. According to IMF, during the fiscal year 2011-2012 (the last before the embargo), the country’s total revenue from oil & gas exports was some $118 billion. That figure dropped by 47% during 2012-2013, and then a further 10% the year after that. This drop was largely attributed to the drastic reduction in oil exports. Now Iranian oil & gas exports are once again at record levels. According to recent statements by Ali Kardor, managing director of the National Iranian Oil Company (NIOC), the country’s exports of petroleum and natural gas condensate reached a record of 3.047 million bpd during February-March. As for oil exports, Tehran is gaining ground primarily in Asia, becoming South Korea’s second largest oil supplier during the first quarter of this year, after Saudi Arabia.

Opening up to foreign investors

Following the lift of international sanctions following the 2015 nuclear deal, Iran’s oil ministry published on its website a list of 29 foreign firms authorized to participate in bidding on oil & gas exploration and production projects. The list includes various multinationals, including Eni, Total, Shell, Gazprom and Schlumberger. For the first time since the signing of the 2015 agreement, Iran has invited foreign oil companies to present pitches for 50 exploration and production projects. In the meantime, Iran has updated the terms of its oil contracts to allow for complete cost recovery for nearly two decades. In October, the government signed the first of these new contracts with a local firm. The return of Italy’s Eni to the country was announced by CEO Claudio Descalzi in 2015. The company had been seeking to collect on commercial credits worth €800 million relating to investments made before the embargo in the Darquin oil field. That claim has since been resolved, as the Eni exec announced following a meeting in Tehran with Iranian oil minister Bijan Zanganeh, stressing the company’s intentions to invest in a country whose prospects are looking more and more promising.