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There Are Huge Opportunities for Development in Iran’s Oil Industry

Thursday, February 25, 2016

Iran Review’s Exclusive Interview with Sara Vakhshouri
By: Kourosh Ziabari

The introduction of the new contract model for Iran’s upstream oil and gas projects, dubbed IPC (Iran Petroleum Contract), has generated a great deal of enthusiasm among the energy experts and analysts who’ve been monitoring Iran’s market fluctuations following the imposition of sanctions on the country’s energy sector in 2011 and 2012 and the termination of those sanctions on the day of the implementation of the Joint Comprehensive Plan of Action earlier in January.

Iran has unveiled a new package of incentives for the International Oil Companies (IOCs) to bring their capital and technology into its money-spinning energy projects, and revised the terms of the old buyback contract model set forth in 1990s as the nation was emerging from the ashes of 8 years of devastating war with Iraq that ruined its economy and specifically wrecked its oil industry.

Experts maintain the IPC terms are markedly different from the provisions of the traditional buyback contracts, especially in that the new format foresees the establishment of joint ventures between the National Iranian Oil Company and foreign partners for field exploration, assessment, development and production. It’s said that for the first time since the 1979 revolution in Iran, the IOCs would be allowed to get involved in the actual production of oil from the Iranian fields. Moreover, the length of the contracts is raised and the IOCs will be provided with greater compensation for increased production.

A Washington-based energy expert and consultant tells Iran Review that there are huge opportunities for development in Iran’s oil industry.

“[T]here has been in fact a lot of exploration around the world; so, the companies had already explored a lot of resources globally. Now, they are looking into development. Therefore, development is the biggest kind of activity I think the oil companies are eyeing, and Iran has a huge opportunity for development in its oil industry,” said Dr. Sara Vakhshouri.

Sara Vakhshouri has advised international corporations, think tanks, investment banks and law firms on global energy market, geopolitics of energy and investment patterns. She has been interviewed by Bloomberg, BBC World Service, The Financial Times, Reuters, Al-Jazeera, Energy Intelligence and other outlets on different energy matters.

In the following interview with Iran Review, Dr. Sara Vakhshouri discusses Iran’s comeback to the global oil and gas markets, the terms of the IPC and the future trends in crude prices.

Q: In your Iran Energy Policy report for the Atlantic Council, you noted that the introduction of sanctions against Iran’s energy sector by the European Union in 2012 prompted the country to pursue a doctrine of “Economy of Resistance.” How can Iran actualize the benefits of this doctrine, anchored in constituents such as expanding non-oil exports and developing barter trade, and reduce its dependency on oil revenues?

A: Well, in energy sector it is already happening, or I could say Iran has already started implementing such doctrine, and if you look into Iran’s downstream policy, it currently refines about 2 million barrels per day of its crude and is planning to refine almost all of its condensate capacity of 1 million barrels per day by around 2020. Therefore, almost all of Iran’s condensate would be refined domestically; and on the crude side, as mentioned earlier, Iran is having about 2 million barrels of crude refinery capacity, so in total, there’s 3 million barrels of crude and other liquids refinery capacity. Iran has also many ambitious plans for consuming its natural gas domestically and converting it into other products to add more value added to its natural gas. First of all, some of it will be re-injected in its mature oil fields in order to maintain their production; converting natural gas into electricity and exporting the electricity to the neighboring countries and using natural gas in its petrochemical factories are also some of Iran’s plans for its natural gas. So, Iran could use some of the huge natural gas resources it has as a feedstock of its petrochemical industry and of course export petrochemical products, which have higher export value.

However, something that is very important about Iran’s energy policy is that there is not an energy regulatory body. This is something very important and I would like to emphasize that there is not an energy regulatory body in Iran to regulate its energy policy and strategy. As a result, you see that during the tenure of different ministers and different administrations, Iran has had different energy policies based on that day or that time specifically. And often the policies are contradicting each other. For instance, during the first term of Mr. Khatami’s presidency, Iran planned to expand its petrochemical capacity and was planning to bring subsidized natural gas into the petrochemical sector. However what happens today is that the Petroleum Ministry has announced they would not have enough natural gas to offer subsidized natural gas to the petrochemical factories. Well, many investors in the petrochemical factories 10 years ago or more were planning to use subsidized natural gas. So, it’s really important to have an organization that sets and implements the energy policy of the country. This is something that many countries, not only developed countries with developed economies have; countries around Iran such as Turkey, Saudi Arabia or other countries like Mexico, all have an independent energy regulatory body. This regulatory body is above the Petroleum Ministry or Parliament. It’s just an independent body that is formed by the government, of course, of a country and includes the experts, specialists and the technical people in the field and has connection with different agencies in that country. They take into account the parliament’s idea; they could even take into account the proposals of the ministry of economy; so all the levels and all different agencies could put together their insight and output and then use the scholars or experts to regulate the country’s energy policy.

If Iran had such organizations or institutions, there wouldn’t be problems like energy policies that are contradicting each other, or the conflict between the parliament and oil ministry over the upstream contact regulation, the IPC. Before the final ratification, the IPC could go through this regulatory body and then the regulatory body would incorporate the idea of all different agencies.

With regards to your question on how Iran can reduce its dependency on crude oil export, I think that has already happened since 2011 because Iran’s export is already dropped to half of what it was and if Iran really pursued the policy that the minister talked about, like including the refinery capacity, including the petrochemical capacity, it would happen. It could also happen by diversifying its economy through developing other industries like steel or automobile industry.

Q: Right. As you also note in your report, Iran possesses the world’s second largest national gas reserves; however, it has not ever been a major exporter and the International Gas Union report indicates that it’s not on the list of the top 25 gas exporting countries. So, what do you think could be the reasons for this inadequacy? 

A: Iran is the one of the top three countries in the world in terms of natural gas reserves and production. But the amount of domestic consumption is really high in Iran. 65% of Iran’s domestic energy consumption is from natural gas. The household and power generations are major gas-consuming fields in Iran. The county also has annual gas injection plans to its mature oil fields to maintain the production of these fields. Petrochemical industry is also another huge industry in Iran that uses natural gas as its feedstock.

It’s clear that Iran’s gas production capacity is going to increase significantly and doubled by the end of this decade in 2020; however, Iran’s natural gas export policy is not very clear at this moment. Converting gas to electricity and exporting electricity to its neighboring countries, exporting natural gas via pipeline to its Arab neighbors including Iraq and Oman, and also exporting natural gas to EU countries are all part of Iran’s gas export policy. Also it’s important to note that Iran’s domestic demand for natural gas, particularly in its petrochemical sector is increasing.

Q: You talked about the regulatory body that might be able to set some rules and guidelines for the country’s universal energy policies. Don’t you feel the responsibilities of such a regulatory body, if it’s going to be established at any point in time in the future ....

A: Well, the important characteristic of such regulatory body is its independency from all of the organizations, ministries and institutions. It is of course well-connected to all of the related organizations like the ministry of energy, economy, foreign ministry or the parliament. Hence there could be representatives from each organization in this regulatory body. For instance in Saudi Arabia, there is a Supreme Petroleum Council or [likewise] in Mexico and Turkey. All of different power centers could have representatives in this regulatory body, but the whole entity functions independently and stands above all of the individual organizations. Therefore the decisions made by this body are based on the long-term interests of the country and match with all of its long-term strategies in terms of economic, energy and foreign policy. This can lead to the creation of long-term policies that are not dependent on one administration or person. For instance you might have noticed that Saudi Arabia’s ‘Low Oil Price’ policy didn’t change when the King and the whole leadership in the Kingdom changed, even though the new leadership supports a more active foreign policy in countries like Yemen, that is highly extravagant and cash-consuming for the country.

Q: Well, what I was trying to ask you was, won’t the responsibilities of such a regulatory body interfere with the responsibilities of the Ministry of Petroleum and the policies that are set down by the administration? You’re saying that it’s going to be an entity above the government and the administration. Is that true?

A: This would be a technical and independent body to support and help the Petroleum Ministry define and implement the energy policy and strategy of the country. The main purpose of this organization would be to supervise and regulate the energy policy of the country by establishing a technical mechanism to design, guide and evaluate the projects that are presented by the Petroleum Ministry. Another good example for this is Comision Nacional de Hidrocarburos of Mexico. CNH had a very effective and positive role in Mexico’s energy reform. The CNH regulators and experts have very close relations with the International Oil Companies and were very successful in introducing an attractive upstream investment model that fits the country’s constitution but also considers the IOCs’ interest. CNH is also responsible for organizing the bidding rounds and data-rooms and makes sure that all of the bidding rounds are processed professionally and transparently. This mechanism prevents any corruption and also puts the energy officials of a country in a safe side from being involved in corruption cases. Therefore it creates a transparent system that not only benefits the county and its hydrocarbon’s industry but also reduces the investment risks for the international investors. Don’t forget that IOCs are always interested in investing in transparent environments. 

Q: Great. So, let’s move on to another topic. The Geneva Interim Accord of 2013 stipulated that the U.S. and European Union sanctions on the export of Iran’s petrochemical products would be lifted. How much has Iran been able to benefit from this provision of the Joint Plan of Action that was agreed at that time? Has it been able to revamp its petrochemical products’ exports?

A: Well, now Iran can increase its crude oil export and the EU export ban on its crude oil is lifted. This means Iran can try to regain its lost market share in EU. Also Iran can once again have access to its oil revenues; you know that since 2012, Iran’s oil revenue was kept in escrow accounts in the countries that were importing Iranian oil. However now is the worst time for Iran to return to the oil market as the prices are very low and there is a glut in the market.

There was never any ban on the export of Iran’s petrochemical products. However as a result of the sanctions rollback, Iran can absorb investment and technology in its petrochemical industry and increase its production and export capacity.

Q: Iran is facing several challenges in bringing back its oil exports to the pre-sanctions level in 2012. At a time when Saudi Arabia seems to be reluctant to downgrade its production, and while the crude prices have hit an all-time low of less than $30 per barrel, are there incentives that Iran can offer to attract the European and Asia-Pacific customers? Are the former clients of Iran’s crude in the EU, especially Greece, Italy and Spain, willing to resume purchasing Iran’s oil following the implementation of the JCPOA?

A: Well, I think Iran has already started negotiation with its traditional and potential customers. I’m sure NIOC has already offered discounts and other incentives like oil for goods or services or oil for investment. However as I mentioned earlier, now is the worst time for Iran to reenter to the market because there is a glut and prices are really low. Saudi Arabia on the other hand has offered the same discounts or incentives that Iran offers to its customers, if not more that Iran.

Iran can try to regain some of its lost market share of 600,000 to 700,000 barrels per day in EU. It already signed an agreement with France to export 200,000 barrels per day to this country. Perhaps Europe is the best market for Iran now because Asia and Asia-Pacific are overwhelmed with supplies from Saudi Arabia and Russia. Iran’s traditional customers like Japan, China, India and South Korea might increase their import from Iran but this will not be significant as they have already signed long-term contracts with the Saudis and Russia for imports.

Q: It’s said that it’s the first time since the Islamic Revolution in 1979 that Iran is allowing the International Oil Companies (IOCs) to get involved in the production process. What are the major advantages of the IPC contract model as compared to the old buyback system? Will it motivate companies such as BP, Eni, Royal Dutch Shell, Repsol and Inpex to return to Iran’s energy market after they began their divestment in 2011 and 2012?

A: This new type of contracts is way much more flexible than buyback and the reason many companies left Iran even before the sanctions were tightened was simply because they could no longer work with buyback. There were many companies that made such a decision on this basis, including Total and Eni. One of the major reasons they left Iran was not simply the sanctions but the buyback contract and by the time the Iraqi market opened up after the U.S-Iraq war and as Iraq offered an opportunity for investment, all the international companies embraced Iraqi oil industry, because Iraqi oil industry contracts were much more flexible than buyback. The IPC contract of course has big differences; it offers more flexible costs, rewards and the duration of the contract is much longer from 5 to 7 years in the past to about 20 to 25 years now. But the point is that the International Oil Companies have had very bad experiences in Iraq, and Iran’s IPC is very similar to the central Iraqi government’s contract model, although IPC is offering a more flexible and progressive model in compare to the Iraqi model. At the current low oil prices, the investors are looking into places that have very low production cost and Iran’s fields have a very low production cost. Also something that is important is that there are so many accessible gas reserves in the world but not so much oil reserves, and the companies could have access to Iran oil reserves. And the other thing is that there has been in fact a lot of exploration around the world; so, the companies had already explored a lot of resources globally. Now, they are looking into development. Therefore, development is the biggest kind of activity I think the oil companies are eyeing, and Iran has a huge opportunity for development in its oil industry. So, these are Iran’s lucky chances for international investors, not just the IPC.

Q: Great! To conclude, let’s discuss Iran’s long-term investment strategies. According to the latest 5-year-energy investment plan for the years 2011 to 2015, Iran needed $255 billion worth of investment in its upstream oil and gas industry. How much of this required investment was absorbed? Do you believe the new IPC contract model will allow Iran to make up for the revenues it lost during the sanctions time and actually reinstate foreign investment at a reasonable pace?

A: Iran couldn’t achieve most of its targeted investment because of the sanctions against its energy industry that were tightened in 2010 and particularly in 2012. The sanctions removal and modified investment regulations both will lead to higher investment rate in Iran. It’s hard to predict how much investment exactly Iran can absorb, but don’t forget that the general investment in the energy industry has been reduced significantly in 2015 due to low oil price and this trend is expected to continue until the end of 2016.

Key WordsIran, Oil Industry, Development, Global Oil Markets, Iran Petroleum Contract, International Oil Companies, National Iranian Oil Company, Non-Oil Exports, Energy Policy, Regulatory Body, Gas Reserves, Saudi Arabia, Oil Export, EU, Investment, Sanctions, Vakhshouri

More by Sara Vakhshouri:

*For Saudi Arabia, Supply and Demand Trump Geopolitics: http://www.iranreview.org/content/Documents/For-Saudi-Arabia-Supply-and-Demand-Trump-Geopolitics.htm

*Is Iran in Oil Price War with Saudi Arabia?: http://www.iranreview.org/content/Documents/Is-Iran-in-Oil-Price-War-with-Saudi-Arabia-.htm

*Iraqi Turmoil And the Global Oil Market: http://www.iranreview.org/content/Documents/Iraqi-Turmoil-And-the-Global-Oil-Market.htm

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