Iran reaches historic nuclear deal
Iran and the US, Russia, China, France, UK and Germany (P5+1) announced a final accord in mid-July, curbing Iran’s nuclear programme in exchange for the lifting of most international sanctions. Implementation of the deal is subject to approval from the US Congress and the Iranian Parliament (‘Majles’), as well as the implementation by Iran of nuclear related measures described under the deal.
As Wood Mackenzie notes, Iran’s oil and gas industry has been hit hard by waves of international sanctions set in 2010 and 2012, which President Obama called ‘the toughest in history’. Foreign companies, with the exception of CNPC and Sinopec, have all left, crude oil exports have halved to 1.1mn b/d, production has been curtailed by 1mn b/d, while Tehran has also been unable to repatriate its crude oil export revenues because of banking sanctions.
‘Even if all parties approve the deal – which is by no means certain – the legal process to remove sanctions could take several months,’ comments the market analyst. ‘As a result, we do not expect Iranian crude to flood the market in the near-term. Moreover, although Iran has around 20mn barrels of oil in storage, some of it is needed for operational reasons domestically and is therefore, not destined for export.’
Wood Mackenzie believes it could take Iran until the end of 2017 to increase production by as much as 600,000 b/d. ‘There is a great deal of uncertainty over whether there has been any degradation of the reservoirs or facilities while production has been shut in. While well shut-ins may have increased reservoir pressure, it will be hard to quickly reverse the production decline rates experienced over recent years without additional gas re-injection or more enhanced oil recovery schemes. Since the increase in Iran’s output will occur steadily rather than one sizeable step change up, we do not see a large-scale downward effect on oil prices.’
‘Potential for investment in Iran is huge, three quarters of its combined oil and gas reserves – the third largest in the world – are yet to be produced. The country is expected to unveil new upstream fiscal terms in late 2015. However, it will take years for international oil companies to gain access to projects and start having an impact on production capacity – even if fiscal terms are set at internationally competitive levels.’
Meanwhile, Darren Roiser, Managing Associate in the litigation department at international law firm King & Wood Mallesons, concurs: ‘The deal with Iran provides businesses within the oil sector with huge encouragement, particularly with Iran indicating a willingness to renegotiate its oil contracts to include much needed greater flexibility. However, the reality is that sanctions remain in force for the time being, any unwinding will be on a phased basis, there is the threat of so called “snap back” measures in the event of a violation by Iran and it remains possible that the EU and the US may adopt differing timetables for the unwinding of sanctions – in short, businesses should still proceed with caution.’
‘In addition, banks – many of which have been subject to large fines by the US authorities for sanctions breaches – are likely to remain extremely conservative when it comes to assessing Iranian risk and their appetite for dealing with Iranian business.’
‘Businesses in the oil industry are in a difficult position – if they leave it too late to engage with Iranian companies they could miss out on the enormous opportunities offered by what is seen as a largely untapped market. Yet it is still necessary to ensure appropriate legal protections are built into contracts to prevent, at best, legal uncertainty and, at worst, significant losses further down the line. In addition to mandatory sanctions screening, companies should seek express sanctions representations, warranties and termination rights in the event sanctions are re-imposed. Put simply, oil businesses must remain alert to deal with the ongoing risks even at a time when many will be eager to explore the new opportunities that the lifting of sanctions could present.’
Following the landmark nuclear deal, Mohsen Qamsari, Director of International Affairs at the National Iranian Oil Company stated that he wants to ‘maximise crude oil capacity to Europe and restore the 42–43% share in the European market before the sanctions were imposed,’ according to a Reuters report. Several refineries have expressed willingness to buy Iran’s petroleum supplies, he said. Oil Minister Bijan Zangeh said previously that Iran was aiming to add 500,000 b/d to production within two months of Western sanctions easing.
