After years of isolation, Iran is positioning itself for the lifting of international sanctions, a move that would revive the Islamic Republic's ailing energy industry, pave the way for its return as a major oil exporter and provide much-needed stimulus to the domestic economy.
Following the final comprehensive deal agreed in July in Vienna on the country's controversial nuclear program between Tehran and the five permanent United Nations Security Council members Britain, France, Russia, China and the US plus Germany (P5+1), Iran may see relations with the rest of the world start to return to normal as early as 2016. This development would not only reverse the fortunes of its struggling economy; it would also open the biggest bonanza for international energy companies since the 2003 ouster of Saddam Hussein in neighboring Iraq.
Iran, holder of the world's fourth-largest proved oil and the second-largest proved natural gas reserves, has been hard hit by UN and international bilateral sanctions imposed on the country in 2006 and 2010 on top of existing US sanctions. But it was the latest set of even more stringent measures enacted by the United States and the European Union in late 2011 and 2012 that had the most devastating impact on the local economy. According to the International Monetary Fund, between June 2012 and February 2014, Iran recorded negative GDP growth for seven consecutive quarters.
The Islamic republic's energy sector has been among the most severely affected by the international embargoes, preventing it from securing much-needed foreign investment, technology and expertise for its energy sector and stymieing developments in upstream oil and gas and downstream refining.
A large number of projects have either been cancelled or delayed and so the country has not only struggled to expand production capacity, but also to halt declines at its mature fields.
Once OPEC’s second-largest oil producer, Iran now ranks behind Iraq in terms of oil and liquids production, averaging only about 3.2 million b/d in 2013, compared with about 4.2 million b/d in 2011.
According to the IMF, oil and gas export revenues slumped by 47% to $63 billion in the 2012/13 fiscal year from $118 billion a year earlier and it estimates that oil and gas export revenues declined by another 11% to $56 billion in the 2013/14 fiscal year. These revenue figures would have been halved again with the collapse in oil prices over the last year.
The crippling effect of cumulative sanctions, combined with the election of moderate Hassan Rouhani as Iran's president in June 2013, is widely considered to have played an important role in Tehran's decision to agree to the establishment of a Joint Plan of Action (JPA) with the P5+1 in November 2013.
If sanctions are lifted in the coming months and years, the need to rehabilitate the country's oil and gas sector will no doubt present international oil services companies with potentially very lucrative multi-billion dollar contracts.
During the recent history of sanctions, many Western IOCs such as Shell, Total, Statoil and Repsol withdrew from Iran and the country found itself seeking and securing financing from more willing Eastern firms.
However, many of these projects have since suffered delays or outright cancellations. In 2013, Iran's oil ministry cancelled CNPC's contract to develop Phase 11 of South Pars natural gas field due to persistent delays. In the same year, it re-awarded the development of the OVL-led Farsi gas block to a local company after the Indian state-run consortium dragged its feet on operating the project. And last year, it cancelled CNPC's South Azadegan deal, again due to lack of progress.
The oil ministry of Iran will unveil a new investment model - the Iran Petroleum Contract (IPC) – at a conference in London in December that it hopes will attract new foreign investment, replacing the unpopular buyback schemes which were introduced in the 1990's. The IPC proposes the establishment of a joint venture between the National Iranian Oil Company (or one of its subsidiaries) and foreign companies for field exploration, appraisal, development and—for the first time since 1979—production. By comparison, the buybacks were risk service contracts, under which the contractor was paid back by being allocated a portion of the hydrocarbons produced in exchange for its services.
IOCs from both western and eastern consuming nations are expected to show a strong interest in developing Iran’s hydrocarbon resources post sanctions. On its part, in addition to seeking funding and technical expertise, Iran is likely to be keen to take advantage of foreign companies’ marketing expertise to ease its access to an increasingly competitive export market.
A new era is being ushered in which will not come without its risks and challenges, but the potential upside for both Iran and international investors, it is hoped, will prove to be a win-win.