Forbes: Iran’s Oil And Gas – Who Dares Will Win

For banks throughout much of the world, doing business with Iran is a daunting prospect.

“A situation happened where our CEO was quoted in the press, and it seemed like he said the bank was looking at opportunities in Iran,” says one banker based in the United Arab Emirates. “Personnel from the US Embassy came in and interrogated us. This scared us. The sanctions are so harsh they have warded people off. It’s worked.”

Most business brokered with Iran right now does not touch the banking system – they are shadowy cash transactions. Unless it is a state-to-state deal with one of Iran’s few allies, such as with China, he adds. Sanctions have consequently assaulted the Iranian economy, causing its GDP to contract by 5.8 percent from 2012 to 2013 alone.

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 Yet Iran’s commercial prospects could change fast. With the 24 November deadline for negotiations over the country’s nuclear program approaching, many corporations are gearing up for a likely easing of the sanctions imposed by the US and EU in recent years.

“The relaxation will probably be a step-by-step process over a period of years. Sanctions will be lifted gradually, possibly by limiting production and exports,” John Whittaker, a partner at Clyde & Co., an international legal firm. “What we’ve seen are a number of people going to Iran, looking at the market, they are looking to really position themselves so that they’re ready to capitalize.”

 Mahdi Kazemzadeh, managing director of Afraz Advisers, an oil and gas M&A advisory firm, agrees: “Businesses need to be prepared. If you wait until Iran is open, it’s too late.”

The sector to spark the most interest is energy. Iran produced 3.2 million barrels per day of oil in 2013. It holds 17 percent of the world’s proven gas reserves, and 10 percent of global oil reserves, according to the US Energy Information Administration (EIA).

Sanctions in 2012 significantly slowed Iranian oil exports by restricting Western insurance and reinsurance firms from doing business in the country. European insurers underwrite the majority of insurance policies for oil tankers throughout the world.

Iranian crude exports fell to less than 1 million barrels per day in July 2012, when the insurance sanctions were introduced. This was a drop of more than 1.3 million barrels per day compared with 2011 levels.

Therefore, insurance restrictions would be one of the key issues that would need to be worked around for Iran’s petroleum industry to be revived.

New Integrated Petroleum Contracts

In the meantime, the National Iranian Oil Company (NIOC) is overhauling the design of production contracts it offers to international oil and gas companies.

No foreign company is allowed to hold an equity stake in Iranian petroleum assets. The petroleum’s marketing, transfer and sale is the responsibility of the NIOC, positioning the foreign firms as service contractors. The inability to book reserves has always been an off-putting factor to international players.

 While this ethos is expected to remain, the NIOC is planning to introduce new production contracts that are a departure from the previous “buy-back” model, which required foreign investors to fund a full project and recoup those costs and profits from seven years of production earnings.

The new contracts, which are called Integrated Petroleum Contracts (IPC), promise a better deal for the foreign investor, says Kazemzadeh who is participating in various consultations over the new contracts.

 “The focus is on sustaining or increasing production in the fields,” he said.

Iran plans to offer longer contracts — between 20 and 25 years. Foreign companies again have seven years to recover capex, but, unlike buy-back contracts, the recovery period can be extended if all the costs are not recovered in the initial seven years. An extra margin will be offered to those companies that meet certain operational production targets, adds Kazemzadeh.

While the terms on offer are still restrictive, it is likely that all of the major oil and gas players will compete for a piece of the action. Executives from European majors Total SA, Royal Dutch Shell and Italy’s ENI SpA have met with Iran’s Oil Ministry to discuss their potential return if sanctions are lifted, according to the ministry and companies. US energy firms, however, appear to be more reticent on entering the country. They were effectively banned from Iranian investments by the U.S. government after the Iranian revolution in 1979.

“What does a Western company need to be seen as attractive to business with in Iran? Money and technology,” said a private equity investor who has had frequent dealings in Iran. “Iranian petroleum is desperately in need of both.”

By Katie McQue

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