Iran prepares to open up to foreign oil companies

Anjli Raval, from Finacial Times

It is customary in Iran to refuse an offer several times before agreeing to take it, whether it be an invitation to tea or a business deal. Foreign energy companies are gearing up to play the same game of manners during negotiations over the terms of their return to the country in a post-sanctions era.

This month, Iran is expected to outline the terms of new oil contracts that will allow foreign companies to take stakes in one of the last cheap and accessible oil and gas provinces in the world.

Mehdi Hosseini, the chief architect of Iran’s new oil contracts, says the Islamic Republic will welcome feedback from international oil companies on these contracts, after which further adjustments could be made. “Nothing is perfect,” he says.

One European oil executive counsels patience: “It seems that the announcement is not going to be as definitive as we had hoped. More discussions will be had and more changes will come to these contracts.”

Executives of foreign oil companies, ranging from Italy’s Eni and France’s Total to Japan’s Mitsubishi and Russia’s Lukoil, were in Tehran in mid-October to rub shoulders with Iranian officials at the first large oil and gas conference since July’s deal with world powers, aimed at limiting Iran’s nuclear development and removing sanctions against the country.

Leaders of some of the world’s biggest oil companies believe the prize of winning business in Iran is worth the effort, even as $50 a barrel oil forces them to curb investment elsewhere.

European and Asian players stole a march on their American rivals at the conference by delivering pitches about their companies’ prowess. Although international sanctions remain in place, European oil majors have been able to speak to their Iranian counterparts and give feedback on draft contracts while the US has stricter laws preventing them from doing so.

Bijan Namdar Zanganeh, Iran’s oil minister, has a vision of his country returning to export and production levels that existed before the imposition of sanctions by overhauling a sector starved of investment. Foreign oil companies are being invited to become partners across a range of exploration, appraisal, development and production activities. Mr Zanganeh says Iran could increase production by 500,000 barrels a day immediately after the lifting of sanctions and within seven months reach its pre-sanctions level of at least 3.4m b/d. Oil analysts, though, say these targets are hugely ambitious.

Iran aims eventually to increase oil production to more than 5m b/d and gas to 1.4bn cubic meters a day.

Rainer Seele, chairman and chief executive of OMV, which is looking to invest in oil and gas infrastructure, said “it will be a delicate undertaking” for the country. He adds that Iran will need vast sums of foreign funding and technological expertise to consistently produce at these levels.

Rokneddin Javadi, head of the National Iranian Oil Company and deputy oil minister, says the Islamic Republic needs $100bn over the next five years to develop the upstream oil sector alone. The investment, he says, would be well worth the reward for international oil majors. Iran’s cost of production is low, at between $5-10 a barrel for offshore production and “even lower” for onshore, he adds.

Mahdi Kazemzadeh at Afraz Advisers, an energy consultancy, argues that Iran’s political stability compared with neighbouring countries could prove attractive to big energy companies.

Iran’s hydrocarbon reserves are owned by four state companies and their subsidiaries, which are controlled by the oil ministry. President Hassan Rouhani’s government has sought to privatise some segments of the industry through asset sales and the transfer of shares.

Companies such as Eni and Total are keen to tout their ability to provide financing to Iran, as well as offer access to markets, technical know-how and competence at managing costs efficiently, particularly in a low oil price environment. Iran has identified nearly 50 projects available for licensing.

It is not just foreign oil companies that are on tenterhooks over the proposed terms of trade. Domestic players say they are waiting anxiously for the terms that might dictate their future.

Hossein Abbasi, a domestic services contractor, says: “Big European companies have already spoken with us saying they have talked to their banks and they are ready to work with us. Not only are they ready, we are ready too.”