Iranian opportunities beckon

An agreement to discuss lifting sanctions against Iran offers a glimpse of hope that its oil and gas sector could be reopened to international business. Elaine Maslin reports.

Talk of fully or partially lifting sanctions against Iran has raised hopes within the region. In turn, this has offered optimism that Iran's oil and gas sector, currently largely off bounds to foreign investment, and or co-operation, could be opened for business.

However, sanction easing, if agreed, would only be a part of the changes needed to draw operators back into the region, according to some.

The prize is large. According to the US Energy Information Administration (EIA), Iran holds the world's fourth-largest proven oil reserves and the world's second-largest natural gas reserves.

BP’s 2013 Annual Statistical Review says that, at year-end 2012, Iran’s oil reserves were 157,000MM bbl, greater than Iraq's 150,000MM bbl. Its gas reserves were 33.6Trillion cu m, 18% of the world's total.

That prize is mostly off bounds, however.

EU sanctions against Iran started in 2012, and mostly restrict companies and individuals from engaging in business with or providing services for Iranian companies, with specific emphasis on shipping, oil, legal and financial services. Companies can do business in sectors not specified in the sanctions.

US sanctions date back to the storming of the US embassy in 1979, and have continued to be added to and strengthened.

The US sanctions are similar to those of the EU, restricting US and foreign nationals from doing business with, or providing support services to, Iranian individuals or companies. The penalties, though, are heavier, with the threat to freeze the assets of companies doing significant business with Iranian companies or individuals, and also banning them from using or borrowing US currency.

"Effectively, companies have to make a choice to deal with either Iran or the US," says Patrick Murphy, legal director, at Clyde and Co, in Dubai.

BP's North Sea Rhum field has been a direct victim of Iranian sanctions. Because the Iranian Oil Company holds a share in the field, BP had to close the field in 2010.

Image of the Rhum field courtesy BP.

However, government lobbying and concern that leaving the high pressure high temperature field shut in (while still requiring maintenance), would result in its early abandonment, due to its supporting infrastructure. The Bruce facility is not economically capable of running without production from Rhum, which could result in premature decommissioning.

There are now signs this could change. At the end of October, the UK Government announced that it was making arrangements to allow BP to restart production at Rhum by placing the IOC’s share of revenues in a frozen account.

More significantly, in late November, Iran reached an interim deal with six western powers to limit its nuclear program, under which sanctions on oil investment and trade with Iran may be eased next year.

Following the agreement, Iranian Oil Minister Bijan Zanganeh named seven companies Iran would like to see working on its fields again: Total, Royal Dutch Shell, ENI, Statoil, BP, Exxon Mobil and ConocoPhillips.

More will need to happen before they can return to the region, however. "The agreement would see little change in the sanctions,” says Murphy. The real change is the mood and the momentum, which has definitely changed. We are going to have to watch to see what happens in the next six months.

"Eventually, it is hoped, if all goes well, the agreement will result in some sanctions being lifted. But, we need to stress: There is no deal before anything is agreed, and, even then, this will be limited, and also reversible.

"Exploration and production activities in Iran would be one of the biggest areas to benefit from this. This has caused Iran the most hurt, but I can't see that being relieved until the whole area around Iranian uranium enrichment is resolved."

According to the EIA, international sanctions “are redefining the Iranian energy sector,” affected profoundly by the lack of foreign investment and technology.

“Iran's crude oil production fell dramatically in 2012, and, although it remained the second-largest OPEC producer on average during the year, it exceeded Iraq's production only narrowly. In August 2012, its crude oil production fell below Iraq's for the first time since 1989,” says the EIA.

Companies hoping to fill the void are watching the mood change and potential sanction-lifting closely.

UAE-based rig builder Lamprell worked with Iran in its formative years. Lamprell CEO Jim Moffat says: "We are watching Iran very closely. Iran was a very good customer of ours in the early days, but obviously that has all changed.

"They have tried to build their own, but this took them five years. ABS had classified them, but haven't been able to get their analysts in."

Lamprell’s Ian Anderson, marketing manager at the firm’s Hamriyah facility, says that eight of the 10 largest oil and gas fields in the region are in Iran.

Like Lamprell, AMEC, an engineering services provider to the energy, water and environmental industries, also worked with Iran in the past. Tom White, business development director, Middle East, AMEC, based in Abu Dhabi, UAE, said: "Iran is an area we are watching very closely, and not just for the oil and gas market. All four sectors are relevant in the Iranian market."

More than sanctions need to be changed for Iran to really be of interest, suggests Statoil's VP Middle East, Neri Askland, however.

"We are following what's going on and there is a lot of hope and optimism,” said Askland, also based in Abu Dhabi. “It is going to be an interesting but tough six months. The challenge for Iran will be that there are new opportunities, but that the framework, a buyback system, is not good.

"You get your investment back immediately and then you are out. It is a facility investment focus, and oil and gas is not like this. It needs long term planning around maximizing resources. If you have a buyback contract it will be focusing on short term investment and not the long term. The model needs to be up for discussion."

Investors also need patience. Derek Novak, VP operations, pacific division, ABS, based in Singapore, points to Myanmar. “A year after sanctions were lifted in Myanmar, we are only just starting to see things happening. It takes a while to establish government functions. I imagine the same process will be needed for Iran.”

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