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Iran: an oil opportunity or slippery investment?

17 Jan 2015 or ‘Implementation day’ has marked lifting of sanctions on Iran.

It is not certain that how long Iran would continue to comply with its obligations curbing its nuclear ambitions. ‘Joint Comprehensive Plan of Action’ states that Iran would reduce level of enrichment to no more than 3.67% (from current 20%), reduce size of stockpile of enriched uranium to 300 Kgs (from current 10,000 Kgs), phase out IR-1 within 10 years and help in unrestrained international inspections. So far so good.

With IAEA, UN’s nuclear agency, confirming Iran’s compliance of the agreed milestone for Jan 2016, some of the decade old restrictions have been lifted, allowing Iran to export its Oil & connecting it to international financial network. Also, as an immediate effect, Iran can access its $100 billion frozen money in various international financial institutions.

It is an opportunity for 80 million people of Iran to rejuvenate its’ economy struggling with around 15-20% unemployment and 15-20% inflation. On the other hand, this is also an opportunity for global companies that have been barred (or blacklisted) from doing business to exploit a hungry market for anything from automobiles to airplane parts. Moreover, global companies can eye Iran’s middle class having a size as big as population of Canada or Malaysia and a per capita income more than that of majority of Asian counterparts.

This is also an opportunity for global Oil & Gas companies, moreover NOCs of energy deficient large consumers like India, to regain access to world’s 4th largest & 10th largest 3P reserves of Oil & Gas respectively.

Despite the opportunities, Iran’s business environment remains challenging. Systematic challenges are reflected in Transparency International’s report, which ranks Iran 136 out of 175 and in World Bank’s Ease of doing business report, which ranks the country 118 out of 189. Also, unprecedented low oil prices and expected bearish trend will lead to subdued monetization of its O&G assets, leading to slower growth in disposable income of its 25 million strong middle class.

Socio-political management and financial transactions with local business partner may be another challenge as several of Iranian companies are influenced by rightist Iranian Revolutionary Guards Corps. on which Western financial sanctions still continue.

Opportunities & associated risks in O&G for sector players

E&P opportunity for Operators & Technical service providers: As Iran intends development of additional 3.5 mmb/d of crude & 7 bcf/d of natural gas production capacity, it needs the investment of around $120 billion.

E&P projects in Iran are technologically low risk because of subsurface geology. They provide a competitive opportunities for IOCs to overcome the current problem of low cash flow conditions in the low oil price environment. However, most IOCs are have cut down capex over the next 1-2 years.

NOCs looking to export oil face the challenge of erstwhile contracts not allowing ownership of oil or gas and contract’s rigidity compared to international norms. Therefore, these companies need to closely watch the outcome of expected announcement on new standard contracts, slated to be announced in February at London.

Midstream & downstream opportunities for operators & Engineering service providers: These projects, together with mid-stream and downstream projects including LNG plants, export facilities, petrochemical plants, etc. may need over $150 billion dollars over a period of 5 years or even less.

Petrochemical demand currently is subdued due to slower global economic growth. At the same time, LNG prices, both spot and long term, have suffered due to drop in associated crude prices and term contracts being revised for lower prices to maintain market share. RasGas & Petronet deal renegotiation is a strong indicator of this.

Project specific risks need to be factored in dynamically as their magnitude may have significant commercial implications. For instance, India’s plan to construct a subsea pipeline may have to be completely dropped in the wake of the United Nations Convention on the Law of the Sea (UNCLOS) decision of March 2015 to extend Pakistan’s seabed territory by an additional 150 km.


Rouhani came to power with a clear mandated for economic reforms and Iran’s corporation with International community will definitely enhance chances of its economic revival. However, pace of final investment decision in O&G sector which contribute 60% to the exchequer may be dampened by local business laws, oil price trend and global economic condition.

Policy decisions such as the new E&P contract can prove to be win-win for both Iran & international O&G companies. It may be prudent at this time to track Iran closely for policy announcements and opportunities and at-least forge a local relationship for future opportunities.

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