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Iran’s nuclear deal may not mean an oil boom

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The prospect of western sanctions ending in Iran is an exciting prospect for international oil companies hoping to tap the fourth largest oil reserves in the world. According to Russia’s envoy to the U.N. nuclear watchdog, the historic Iran nuclear deal is expected to see sanctions lifted in Tehran in January 2016. The Joint Comprehensive Plan of Action (JCPOA), a deal brokered between Iran and the P5 + 1 nations (France, China, UK, Russia, US and Germany) in July 2015 after 20 months of negotiation, is ground breaking. In exchange for Iran reducing its nuclear program, including swapping non-enriched uranium to scale back its stockpile of low-enriched uranium, Europe and the US will lift international economic sanctions on Iran.

Despite concerns that the US Congress may block the deal, the prospect of oil markets opening up to international oil companies seems more likely come January 2016, with the IAEA (International Atomic Energy Association) expected to close a 12 year investigation into Iran’s nuclear program when the board meets in December 2015.

Hope for oil markets as sanctions lift

If the Iran nuclear agreement holds, western sanctions are due to begin winding back in early January 2016. Consequently, a Reuter’s poll comprising 25 oil analysts and economists predicted that as much as 750,000 barrels per day (bpd) of Iranian crude oil could enter the global market by mid-2016. International oil companies such as France’s Total, Italy’s Eni and Royal-Dutch Shell are understandably enthusiastic about the prospect of gaining traction in Iran’s emerging oil economy. With the promise of 50 new production projects in Iran’s extensive oil and gas reserves and flexible contracts on offer in 2016, the prospect of an oil boom seems tangible.

iran oilProgress on JCPOA nuclear deal

But how robust is this deal in reality? Will Iran deliver on its promise to scale back their nuclear program?

On the one hand there are promising signs that Iran is ratifying the agreement. As recently as November, 2015 the Iranian nuclear chief, Ali Akbar Salehi reported that work had begun to decommission centrifuges. This activity was additionally confirmed by complaints in Tehran from 20 MPs, claiming that dismantling work at Natanz and Fordow facilities was advancing too quickly.

Further progression of the JCPOA was evidenced by Iran granting permission for the head of the International Atomic Energy Agency to visit the sensitive military site Parchin in September, 2015. This was despite earlier parliamentary restrictions which declared the nuclear deal excluded such inspections.

However, in complete contrast to these acts of compliance, in October, 2015 Iran fired a long – range ballistic missile from a hidden military base in a seemingly confrontational act of defiance. Considering sanctions will only be lifted when Iran fulfils conditions within the nuclear agreement, this action sent confusing signals.

Political climate throws doubt on nuclear deal

There is also concern that the nuclear deal has not been ratified into local Iranian law. Rather the Iranian parliament has referred to the JCPOA as a “Plan of Action”, maintaining the agreement’s voluntary nature (according to the Iranian government). This avoids the Iranian parliament having to mandate the agreement as an international treaty or contract, which would require local governmental authorization into law.

Thus the nuclear deal, in reality, is an agreement accepted by the Rouhini agreement on the basis of good faith, but stands on shaky ground when considering the implications for future governments. Until the JCPOA deal is legislated into Iranian law it would arguably be unwise for international oil companies to leap into Iran’s oil and gas market without some serious caution.

Conditions too volatile to ensure oil market stability in Iran

Although some economists have predicted a significant global reduction in oil prices once the JCPOA “day of commencement” arrives, the shifting sands of Iran’s political and military conditions make this eventuality less likely. Even if Iran does comply with nuclear downsizing, discontinues weapons testing and demonstrates political willingness to conform to the agreement, there is still concern about the power of the military over commercial operations.

For instance the US insists sanctions will be maintained over the Iranian Revolutionary Guard Corps. Although this military corps was designed to respond to internal or external threats against Iran, it now has extensive influence in the Iranian oil and gas industry via control over hundreds of companies. Therefore, international oil companies may still find themselves hampered by sanctions if they partner with Iranian companies maintaining ties to the revolutionary guard.

When the long term political and military complexities are considered in Iran, it seems it may be some time before the Iran nuclear deal will make a significant impact on global oil markets.

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Post-Sanctions Iran: A Modern Day “Gold Rush” for Investors

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Iranian flag

By Enu Afolayan (Contributor)

Iran is opening up all major sectors of its economy for foreign investments. The conditions are still under discussion, butforeign businesses are already preparing their market penetration plans. Iran offers exciting opportunities, however the risks are even higher.

On the 29th of June, the Foreign Minister of France met Bijan Namdar Zanganeh, the Oil Minister of Iran, to announce the beginning of a new era in the history of Iran’s oil industry. France’s Total corporation would be the first foreign company to develop Iran’s oilfields after the sanctions have been lifted.

It is expected that the additional oil from Iran will lead to a market supply increase, and consequently to a further decrease in oil prices. It is still a big question whether this scenario will become a reality. While experts and the media try to forecast the amount of barrels arriving on the market from Iran, there may be other aspects of this “Iranian thaw” that could be even more important than short-term fluctuations of BRENT and WTI oil prices.

Iran is opening up all major sectors of its economy for foreign investments. The conditions are still under discussion, but foreign businesses are already preparing their market penetration plans. Iran offers exciting opportunities, however the risks are even higher.

Economics of the Iranian Thaw

The result of the negotiations between Iran and the G6 countries (Russia, USA, EU, Great Britain, France, China and Germany) in July was the so-called Joint Comprehensive Plan of Action – the agreement on Iran’s nuclear program. In exchange for relief from some sanctions, Iran agreed to significantly reduce the stockpile of enriched uranium in the country, and to provide access to IAEA experts to all nuclear facilities in Iran for the next 20 years. Iran also agreed to suspend uranium enrichment operations for 15 years. The EU and the US agreed to lift sanctions starting next year as long as Iran complies with agreements made.

The decrease in oil prices shocked the Iranian economy that had already been struggling. Sanctions have been a heavy burden for the country, weakened by excess bureaucracy, corruption and mismanagement.

The sanctions imposed on Iran led to 60% decrease in oil exports – from 2.5 million barrels per day to 1.4 million barrels per day, with dire consequences for the country’s economy. In 2013, while oil prices were at their peak, Iran’s oil revenues fell from 100 billion USD to 35 billion USD, and GDP was down 5%.

The decrease in oil prices pushed the Iranian government into a corner and it had to recognise the urgent need of reforms. By agreeing with Western countries, Iran aimed to solve multiple problems: the lifting of sanctions, increasing the effectiveness of the economy by attracting foreign investments, and offsetting the oil revenue decrease through increased production output.


Oil Investments as a Key Goal of the New Governmental Policy

Throughout the history of Iran, oil played a significant role, not only for the economy, but also for the country’s national identity. The first nationalisation of the oil industry under Mohammed Reza Pahlevi happened under the idea of “liberation” of the country from English corporations that exploited the country’s oil resources. Mohammad Mossadegh, the prime minister of Iran in 1950’s, was the first politician to “give back the oil to the people of Iran”. In 1951, the property of Anglo-Persian Oil company (later known as BP) became national property of the country.

In 1953, as a result of a military coup, Mossadegh was ousted and nationalisation was cancelled. British and American corporations agreed on the privatisation of the National Iranian Oil Company. Even though only 10% of the company’s shares belonged to foreign corporations, Ruhollah Chomeini had gained many Iranian hearts by making the “battle for the oil” key to the main leitmotif of his political campaign in exile.

After the 1979 revolution, foreign companies were forced from Iran. The oil industry went into a long period of decline, which lasted until the end of 1990’s, when liberal president Mohammed Hatami attempted to revive the oil industry by cooperating with foreign partners. Unfortunately, his efforts were curbed by the nuclear program of Iran that deteriorated the country‘s relations with the West.

Today, the Iranian government is desperately trying to attract foreign investments into the oil sector in order to increase production output and to fill in the hole in oil revenue. Recently, the Oil Minister of Iran said that without sanctions the country would be able to increase output to 4 million barrel per day. However, Iran would need investments of 50 billion to 100 billion USD to achieve this ambitious goal. To attract this amount of money from foreign investors, the government of Iran has to ensure smooth transformation of all necessary institutions, and to restore the trust of the international community. After two decades of state oil monopoly and two nationalisations, it may take years.

The positive aspect is that after relief from the sanctions, Iran can bring about 30-40 million barrels of crude and condensates that it held in floating storage. Based on estimates of the International Energy Agency, it would ensure the supply of an additional 180,000 barrels per day for 6 months to the global market. Knowing that global consumption of oil is currently at about 90 million barrels per day, this additional oil supply is unlikely to influence oil prices.


Iranian Foreign Minister Mohammad Javad Zarif shakes hands on January 14, 2015 with US State Secretary John Kerry in Geneva. AFP PHOTO / POOL / RICK WILKING

Non-oil Investments as a Side Effect

It isn’t only the oil and gas industry players that are enthusiastically welcoming the opening up of the Iranian market. The World Bank predicted a “massive economic windfall”, advising Iran to attract investments into non-oil industry, including infrastructure and communications. However, the success of the new investment policy depends on proper planning on the part of Iran. At the moment, the outlook is not as shiny as it might have appeared: widespread corruption and the need of transformation of many national institutions will probably hamper the government’s efforts and discourage investors.

Despite many organisational challenges, Iran attracts investors with tremendous opportunities. A modern day “Gold Rush” is expected to set off in Iran. Coca Cola, Mercedes, Arabian hospitality corporations, American grain importers, European power corporations and many others are already looking forward to the battle for their share of the Iranian market.

The internal privatisation began in Iran few years ago. For a decade, Iranian investors have been acquiring undervalued assets: insurance companies, hospitals, and other public utilities were put up for sale. Recently, the state telecommunications company was put up for sale. However, due to the deep crisis in Iran’s economy, it is getting harder and harder to find internal buyers for these assets. Foreign investments could be an easy solution for Iran’s desperate need for money.

At the same time, Iran’s government is still not clear on conditions of cooperation with foreign investors. President Rohani stated recently that foreign investors would be welcome only if they worked with a local partner, hired local workforce and transferred their technology to Iran.

While the new foreign investment law is still a work in progress, the Iranian president continues his meetings with investors, encouraging them to take the opportunities offered by the new post-sanctions Iran.

Failure of Industrial Nationalism

Media attention is now focused on the relief from sanctions in Iran. However, the key problem in Iran’s economy is not the sanctions that were imposed just a few years ago. The problems with Iran’s economy began much earlier, and they were linked to the nationalisation of all sectors and economic isolation after the revolution.

Iran has the largest hydrocarbon reserves in the world, but its production capacity is lower than that of Russia, USA, Saudi Arabia and Canada. This proves that Iran failed to use the potential of its oil industry to give an impulse to economic development. It had good chances to become a country with one of the highest GDPs per capita and to develop a smart investment policy to boost other sectors of economy. But unfortunately, the success of economic development depends not only on the amount of oil reserves, but also on institutional capacity, anti-corruption measures and proper management systems. Unfortunately, in all these areas, Iran has been at the bottom of global rankings. With or without sanctions, the government of Iran should find a solution to the country‘s internal structural problems.

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