Agreement on oil&gas industry between Total and Iran

Agreement on oil&gas industry between Total and Iran

Simone Cantarini (Agenzia Nova)
Now that US sanctions imposed have been lifted, the contract signed with the French company represents one of the first real development opportunities for Iran. New inroads are opened for the energy companies wishing to invest in the country

Iran continues along the path towards developing its energy industry in a bid to make the most of its gas and petroleum resources.  The agreement signed on 3 July by the French Total and the Chinese CNPCI with the Iranian Petropars for the expansion of mega gas deposits in South Pars is an important step forward for Tehran.  Indeed, Total is the first important western energy company to re-enter Iran with development projects and the move could open up the road for further investments by other companies in the gas and petroleum sector.

The energy numbers and new agreements

One important fact to help understand the state of the Iranian hydrocarbon industry is that of petroleum production which, to date, is far more advanced than gas production.  On 4 July, the Iranian government spokesperson, Mohammad Baqer Nobakht, declared that output had surpassed the quota of 3.9 million barrels per day in the period between 22 May and 21 June, for the first time since the Joint Comprehensive Plan of Action (Jcpoa), commonly known as the Iranian nuclear deal, came into force on 16 January 2016.  The official also revealed data on the production of condensed gas and natural gas which, during the period examined, respectively achieved 692 thousands equivalent barrels of petroleum per day and 852 million cubic meters per day. Tehran requires funding up to 100 billion dollars to develop more than 50 petrol and natural gas deposits.  Fundamental for attracting foreign funding is the future enforcement of the new petroleum contracts (Iranian Petroleum Contract, Ipc) which should have been have come into force in 2016 but its approval continues to be blocked by the more conservative factions of Iranian politics.  The Ipc model puts an end to the system of buy-back contracts that date back more than 20 years and are particularly costly for petrol companies. In this framework, the agreement with Total is of fundamental importance for offering a significant impulse towards the return of western companies to the country, especially European ones.

Consequences and implications

The exceptional nature of the agreement for the development of the South Pars deposit, worth around 4.8 billion, was highlighted by the Iranian petrol minister, Bijan Zangeneh who, during a press conference on the sidelines of the ceremony for signing the contract, observed that the agreement with Total and Cnpci will provide a new boost to hydrocarbon exports and will act as an incentive for other foreign companies to invest in Iran. The twenty year agreement involves a project with a capacity of 2 billion cubic feet of gas per day, that is, 400 thousand equivalent barrels of petrol including condensed gas. Production for the internal Iranian market should begin by 2021. The contract for development of Stage 11 of the mega-deposit in South Pars includes Total as operator of the deposit with a share of 51.1%, the partners of the Chinese state run company Cnpc with 30%, and the Iranians of Petropars, controlling company of the Iranian State Petrol Company (Nioc), with 19.9%. In November 2016, Total signed a preliminary agreement to develop the South Pars deposit in collaboration with Cnpc and Petropars. In April, Patrick Pouyanné, president of the French giant, in a bid to ward off fears stemming from possible violations of US sanctions, declared that the company was attempting to develop its own mechanism in order to carry out bank transactions in Iran without violating the restrictions imposed by Washington.

Total's move, however, is not completely risk free due to the tense ongoing situation in the region with the block of Gulf states, supported by the United States, which imposed a series of measures to contain the expansion of Tehran in the region. The most important one regards the decision by Saudi Arabia, the United Arab Emirates, Egypt and other Muslim countries to end diplomatic relations with Qatar, a country accused of supporting international terrorism and of having ambiguous relations with Iran, with whom they also share one of the largest gas deposits in the world, that is, South Pars, whose Qatar side is known as North Field.

A Land of opportunities

The involvement of Total in developing South Pars places the French company ahead of all the competitors investing in Iran, reinforcing Tehran's position at a time of considerable tension between Gulf rivals, but exposing them to strong risks arising from unpredictable US policies. Total knows Iran well, where it worked to develop the large gas deposit up until 2009, when it abandoned the Islamic Republic due to international sanctions against the Iranian nuclear program. Total is also experienced in dealing with countries subjected to sanctions, including Russia where it holds a 20% share of a large liquid natural gas production project in the Arctic region. To date, there are a number of companies wishing to return to Iran including Royal Dutch Shell and for Total to be the first western energy company to re-enter the Islamic Republic is a great opportunity to grant new development projects in the hydrocarbon industry.

Total's competitors have also signed agreements with Iran in recent months, but without any commitment to investment. Last December, Royal Dutch Shell signed a preliminary agreement to assess three of the main petrol and gas deposits in Iran, while last June, Eni signed two memorandums of intent with the Iranian state petrol company (Nioc) to develop the petrol site at Darquain and the gas field in Kish. The agreement signed with the State Nioc company outlines conditions for recovering 280 million dollars in credit. The document also includes an upstream component that grants access to information available on the Kish and Darquain stage 3 assets, in Iran. These agreements do not commit Eni in any way to investment.