Opportunities & Risks in Iran

Is Iran back in the international oil business? It certainly looks like it, but what are the opportunities and risks for the IOCs and various services supporting the industry? Our guest contributor, Steve Macvicar, editor of Eurasian Business Briefing, takes a brief look at what’s going on in and around the Persian Gulf.

Ever since it became clear late last year that the world powers were ready to relieve Iran of its economic sanctions, a steady stream of high-ranking multinational executives has quietly been trickling into Tehran, intent on re-establishing old ties and forging new ones.

High ranking representatives from the oil industry have been at the front of the queue, including delegations from BP, Shell, Eni, Lukoil and Total, as well as from major contractors to the sector such as Saipem and Mitsui. Iran is back in business, and it seems everyone wants a piece of the action.

This eagerness to bring a new source of hydrocarbons onto a market reeling under the effects of the ultra-low prices highlights the paradox that lies at the heart of the relationship between the oil industry and today’s globalised economy. With the price of a barrel of crude at its lowest for over a decade, Iran’s rehabilitation into the world’s energy markets is, to put it mildly, a mixed blessing. While net importers such as India, Pakistan and several East African countries have been enjoying their strongest ever GDP growth, those countries whose GDPs rely on oil exports have been having a miserable time. Brazil is going through its worse recession for 30 years; Nigeria and Azerbaijan have both been obliged to go cap in hand to the IMF; and Russia has been flirting with a fire sale of some of its state-run enterprises, including Rosneft. On the corporate front, both BP and Shell have reported dramatic losses in earnings for 2015 of 51% and 44% respectively.

But – in the whacky world of hydrocarbons, at least – what goes down must eventually come up again, and the history of oil prices has been littered with wild fluctuations ever since the original crisis of 1973. One of these, pertinently, occurred after Iran’s 1979 revolution when Ayatollah Khomeini decided to expel the majority of foreign oil technicians, bringing production to a virtual standstill.

The Iran-Iraq war followed shortly afterwards and, although several oil majors returned to the country in the mid 1980s, Iran’s oil industry has never really fully recovered. Which is why those Western men in suits have been welcomed with open arms when they turned up in Tehran, because the Iranian government is in desperate need of Western expertise to boost production in its existing portfolio of ageing fields and to upgrade its creaking infrastructure. Without help from outside, it will struggle in its efforts to restore its position as the world’s fourth biggest oil producer after Saudi Arabia, the US and Russia. This doesn’t just mean bringing in Western managers on expensive expat packages – rather the opposite: what’s more important is a transfer of knowledge – helping to develop local expertise, not just in technical areas but also in general management in a way that will enable Iranian firms to compete on the world stage.

Having set itself a target of increasing output by 50% over the next five years, there could be as many as 50 projects put up for grabs, ranging from the exploration and development of new fields and the country’s petrochemical sector, to the provision of new technology. Tehran is said to be particularly keen to bring in a foreign oil company to construct an LNG plant for the South Pars field and is also widely known to need help to develop this and North Pars as well as other major fields at Ahvaz Gachsaran, Marun and Aghajari.

Decisions have already been taken and deals struck. Since the turn of the year, Lukoil, Russia’s largest private-sector oil company, has been awarded the licence to explore two potential oilfields in Khouzestan; the state-run Petroleum Engineering and Development Company (PEDEC) has announced that the Kish Island gas field will become operational by the middle of next year and that, while PEDEC will do the drilling itself, the construction of its refinery will be put out to tender and will probably be financed by foreign investment; and Germany’s Linde Group has announced that it is joining forces with Japan’s Mitsui to invest $4bn in Iran’s downstream sector including development of Damavand Petrochemical complex, which is located in the Pars Special Economic Energy Zone.

While China has been quietly importing up to 536,500 bpd of oil from Iran for several years now, Iranian oil officials last year met with traders at PetroChina and CNOOC, which runs a petrochemical complex with Royal Dutch Shell. Further cooperation in the energy sector will undoubtedly also have been part of the $600bn package that Presidents Xi and Rohani signed up to in Tehran last month.

All of which should lead to a new mini oil boom around the Persian Gulf – and a spike in demand for oil and gas professionals. And, as Iran’s rehabilitation into the global community gathers pace, there should be plenty more where that came from, wherever the price of oil goes in the short term.

Steve Macvicar is an international business journalist and publisher. He set up the Eurasian Business Briefing after a long career with blue chip publishers including The Economist. He has spent much of the last year travelling around the Arabian Gulf researching, writing and producing a series of documentaries sponsored by the Gulf Cooperation Council. As well as his film work, he regularly writes international investment guides for Fortune and National Geographic.

 

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