Polishing the shop window

Behind nuclear tumult and shouting Iran wants

more foreign investment in its oil and gas industry

From the Economist Intelligence Unit ViewsWire

The recent drive to attract international oil companies (IOCs) to commit themselves to major new investments in Iran's oil and gas sector has come after a prolonged period of stagnation, owing to political ructions within Iran and to the gathering storm over the country's nuclear programme. Such investments are vital if Iran is to realise its previously stated ambition of increasing oil output, rather than struggling to stem depletion, and of becoming a player in the global gas market. Getting foreign oil companies more deeply involved could also help to strengthen Iran's hand in the dispute over its nuclear programme.

Better buyback

The new upstream package was revealed to a gathering of oil executives in Vienna at the start of February as part of the marketing of 17 new exploration and development blocks for which bids have been invited by June 20. The refinements to the buyback model go some way to meeting the IOCs' reservations about Iranian contract terms — although it is clear that most of them would prefer an alternative to buyback, which does not allow reserves under development to be booked as the company's own.

Buyback entails operation of the field being handed to the National Iranian Oil Corporation (NIOC) once it comes on stream, with the developer recouping costs and receiving an agreed profit margin from a share of the field's output. NIOC has agreed to lengthen the life of the contract to 25-30 years (compared with six-seven years) and to allow the IOC to continue to play a role in overseeing operations after production starts. The developer will also have the chance to benefit from output exceeding the target, as well as being penalised for any shortfall — at present only the penalties apply. Another innovation has been to allow the capital budget to be fixed at a later stage in the project, allowing for a more accurate estimate of costs, and NIOC has agreed to insert a get-out clause as an insurance policy against possible sanctions.

It is thought that the new terms will apply to projects currently being negotiated, as well as to the new blocks. That would be a fillip for projects such as Yadavaran, being discussed with China's Sinopec, and for the development of Mehr field, where NIOC has recently declared an oil discovery by OMV of Austria to be commercially viable.

The new buyback terms would also, presumably, apply to the liquefied natural gas (LNG) export projects that Iran has been trying to get off the ground over the past five years. In the lead-up to the Vienna conference, NIOC announced that it had reached agreement with the Royal Dutch/Shell Group and Repsol YPF of Spain on the upstream elements of the Persian LNG scheme, involving two phases of the giant South Pars gasfield. Shell made clear that proceeding with the gasfield development was contingent on a final go-ahead for the LNG plant, which was unlikely to be forthcoming before 2008. NIOC has also announced that it plans to open talks with the sponsors of Pars LNG, in which the foreign partners are Total of France and Petronas of Malaysia, about reaching a final investment decision. Pars LNG is reckoned to be the most advanced of the various projects under consideration.

Is there enough gas?

Iran currently produces about 100bn cu metres/y a gas, and consumes roughly the same amount. The quantities that it exports via pipeline to Turkey are about the same as the volume of gas imported from Turkmenistan. Much of the new gas coming on stream from South Pars (five are in production and five more phases are nearing completion) will be devoted to reinjection in Iran's oilfields as part of major ongoing efforts to sustain output in the face of chronic depletion. The Economist Intelligence Unit forecasts that Iran's gas consumption will reach 140bn cu metres/y by 2010.

If Iran persists with its intensive programme of gas reinjection, it is questionable how much would be left over for export, once rampant domestic demand for (highly subsidised) gas is satisfied. A recent report on NIOC by PFC Energy, a Washington-based consultancy, suggests that the results from reinjection projects have so far been disappointing. If this is indeed the case, Iran may be obliged to reassess this programme, which could work in favour of the LNG projects.

The IOCs have played down the direct risk of sanctions interfering with their project plans. Existing US sanctions have not impaired operations by companies such as Total and Shell, and fresh sanctions arising from the nuclear dispute are unlikely to proscribe energy investment. However, the LNG projects in particular, which will require considerable upfront capital expenditure, could be vulnerable to knock-on effects from US financial sanctions, which have already prompted a number of European banks to withdraw credit lines for Iran.

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