Sanctions On Iran Finally Relieved, Opening Doors To Untapped Riches

As reported earlier, MEOG has been predicting almost uniquely amongst global news publications for over a year, the P5+1 group of nations (the US, Russia, China, France, the UK plus Germany) struck a deal this morning with Iran, lifting sanctions on the Islamic republic that had been in place since 1979. Without exaggerating the gravity of the news, it is perhaps the most momentous event in the global oil and gas industry in a generation. This landmark agreement opens up one of the richest oil and gas plays in the world, one which offers international oil companies (IOCs) a vast and largely untapped opportunity to get in on the ground floor of exploration, development, and expansion.

The Prize

The prize for IOCs is access to an estimated 157 billion barrels of proved crude oil reserves (around 10% of the world’s total) and an estimated proved natural gas reserves of 1,193 trillion cubic feet (34 trillion cubic metres), second only to Russia’s, 17% of the global figure, and more than 33% of OPEC’s total. The scope to secure such access is wide, with between US$150-550 billion in new capital required by Iran to bring its oil and gas sector up to standard international development levels, with the amount varying according to timeframes for completing key projects. Equally important is that the Iranians have shown themselves in the run-up to the removal of sanctions as being extremely flexible in the ways in which they are prepared to deal with major IOCs – both from the West and from the East – in terms of the type of contractual arrangements, financial structures, and exploration and development rights available. “Basically, if you are an IOC, Iran is the future now in the same way that Saudi Arabia was in the 1930s and 40s, and missing out on this will put you on the margins of the global hydrocarbons game for the next 20 or 30 years at least, it’s as simple as that,” Christopher Cook, director of global energy consultancy, Wimpole International told NewsBase.

Short-term impact

Whilst the short-term effects of sanctions removal are likely to be marked on the oil price on expectations that major new supply will flood on to the markets at some point in the future, in reality, any significant new supply will take some time in coming. We estimate that Iranian oil output is unlikely to grow by more than 300,000 barrels per day to its current level of around 2.83 million bpd by the end of 2015 as a result of sanctions easing. This is ultimately capped by time, the resolution of legal issues, and current technical capabilities. “In general terms, although the Iranians have said that they can increase production by 1 million bpd immediately [bpd], there have been very little modern investments and upgrades to the Iranian oil fields since 1979, and any oilman worth his salt will tell you that you cannot shut in a well for years and years, then simply turn a wrench, and hey presto there’s your oil,” Anthony Lerner, partner at energy trading firm, Partner at 4 Corners Global Trading told NewsBase.

More specifically, trader talk of the impact of the amount of Iranian oil currently in storage – EA Gibson Shipbrokers recently estimated 34.5 million barrels aboard tankers in the Gulf – suddenly being released onto the international oil markets is overplayed. “With the final deal struck, these barrels will come onto the market quickly certainly, as the Iranians try to raise cash rapidly, and will put some pressure on prices, but 30 million barrels or so is not a huge amount and it is likely the Chinese will buy it en masse at an appropriate discount to market and simply store it themselves, so limiting general physical market impact,” added Lerner.

Obstacles remain

Moreover, this deal does not yet mean that all practical encumbrances to doing business with Iran have been removed. For a start, under legislation passed by the US Congress in May, President Barack Obama will not be able to ease any sanctions on Iran during a 60-day period designated for lawmakers to review the deal, beginning once the finalised deal’s full text has been submitted to Congress. During that time, Congress will have to decide whether to try to pass a resolution through both chambers disapproving or approving the deal, either of which would require at least 60 votes to clear the Senate, with 54 out of its 100 seats held by the broadly anti-Iran Republican Party, although Congress could also opt not to vote on it at all.

Senate majority leader, Republican Mitch McConnell, said on Jul 12 that if such a disapproval resolution was passed, and then vetoed by President Barack Obama, then the President would then need 34 votes, or more than one-third of the Senate, to sustain the veto. It may well be, said Reva Bhalla, Middle East strategist for global strategy firm, Stratfor, US investors will likely remain shackled by the core Iran Sanctions Act until at least the end of 2016, when the legislation is set to expire. In this context, a senior lawyer in Geneva familiar with the Iranian sanctions structures told NewsBase, the US Treasury long ago designated Iran’s financial sector as a “primary money laundering concern”, particularly in connection with the state’s alleged financing of terrorism and pursuit of its nuclear programme. “This does not preclude banks undertaking transactions with Iran, but it does mean that any bank that has any business in US dollars – all of which are ultimately settled on US soil – will be subject to a range of punitive measures, including custodial and monetary penalties,” said the source. “Even if transactions – including insurance for shipping hydrocarbons, for example – were not conducted in US dollars, then the US Treasury could bring penalties against any and all banking and insurance companies both with subsidiaries in the US or which had other dealings in the US currency,” the source added.

Ties that bind

Having said this, added the Geneva-based source: “There are plenty of firms who will be willing to engage with the Iranians on both the insurance and banking fronts, despite these caveats, from Scandinavia through China to India, with the latter two being the most likely.” Indeed, given the lack of concern that both China and India have perennially shown over US sanctions on importing oil directly from Iran itself, as NewsBase has repeatedly highlighted, it is difficult to believe that banks in either country will be also worried about the US Treasury’s banking sanctions, partly because they have less business in the US, partly because they do not believe their own countries would re-impose sanctions on Iran in any event, and partly because, at least in China’s case, the US has repeatedly shown (most notably in dealings over China’s actions in Tibet and the Senkaku Islands) that it is loathe to antagonise China, a nod perhaps to the country’s massive holdings of US Treasury bonds.

The close relationship between China, Russia, and Iran has not only been evidenced by the ongoing on-the-ground participation of Chinese and Russian companies in Iran’s oil and gas sector, but recently as well by the news revealed by NewsBase of the groundbreaking bond arrangements currently being made by China for Iran’s return to the international foreign currency bond markets, utilising the renminbi, and underwritten by the Chinese directly, and indirectly by Russian interests.

Underlining such close connections will remain going forward was a statement earlier this week from Russian presidential adviser Anton Kobyakov, in Moscow, that Iran will join the Eurasian economic, political and military bloc, the Shanghai Co-operation Organisation, after sanctions are lifted on the country, as a full member (currently it has ‘observer’ status only), joining Kazakhstan, Kyrgyzstan, Tajikistan, and Uzbekistan, in the China/Russia-led Eurasian equivalent of the European Union (EU) and NATO rolled into one.

In the shorter-term, Richard Mallinson, senior geopolitical analyst for global energy consultancy, Energy Aspects, told NewsBase, it could be that any immediate sanctions relief may come only from the EU, which could lift its ban on crude imports – totalling 700,000 bpd before 2012 – and ease shipping restrictions.

Indeed, before Ukraine crisis-related political pressures came to bear, the EU had already lifted sanctions on Iran’s biggest tanker firm, National Iranian Tanker Co. (NIOC, see MEOG Week 07). In any event, added Mallinson, from now it will take at least a month or two from July for the real effects of sanctions lifting to be felt (thus, the third quarter of this year). “Given the lack of investment and expertise, although obviously [the volume of oil it can produce] is likely to change dramatically down the line,” he said.

Contract issue

One potential caveat raised about the likely degree of foreign companies’ involvement in Iran’s hydrocarbons industry has been the IOC-unappealing buyback contracts that had previously been on offer by Iran. However, as NewsBase has been highlighting for months, these contract types for oil and gas are currently in the process of being re-drawn to rival the appeal of any of the most IOC-friendly agreements available anywhere in the Middle East (a fully detailed breakdown of the proposed new style of contracts is available exclusively in NewsBase’s Iran Investment Special Report). Even for the petrochemicals sector, as NewsBase revealed recently, the National Petrochemical Co. (NPC) has re-designed the contracts for foreign participation in Iran’s petrochemicals sector, which are now lodged with the Petroleum Ministry and related bodies for final approval.

Whatever the short-term implications of the sanctions now being lifted, the longer-term ramifications for the global oil and gas industry will be enormous, and too big to ignore by any of the major IOCs. “With targets of increasing crude oil production to at least 3 million bpd by the end of this Iranian calendar year [ending in March 2016], and then to 5.7 million bpd by 2018, natural gas production up to 1 billion cubic metres per day by 2018, and annual petrochemical production to 180 million tonnes per year [tpy] by the end of 2022, Iran is the number one nascent global hydrocarbons superpower immediately now sanctions have been lifted,” he said.

“Russia and China have been positioning themselves for this moment for a long time and are extremely well-placed to win some more big deals in Iran, but the Europeans have been doing the same over the past few months in particular and are well-regarded by Tehran, and US firms will not allow themselves to be left behind, not a chance,” he added. “It is extremely unlikely that the Republican Party – the party of ‘Big Oil’ – just a year out from the next presidential elections, will fly in the face of the desire of the IOCs – their major funders after all – to get back into the scramble for their share of Iran’s vast hydrocarbons riches,” he concluded.

But it is equally unlikely that the ‘Big Finance’ firms that bankroll the Democratic Party are going to allow themselves to miss out on all of those potential petrodollars; money runs the US after all, and Iran is where the money will be.