The Iran Factor

Image from International Business Times
Image from International Business Times

Iranian oil only costs $10 per barrel to produce, so it’s no wonder foreign companies are clambering to participate in oil and gas projects. The cheap oil, along with the eagerness of foreigners to get involved in projects, will allow Iran to quickly regain its market share in the industry, and disrupt other countries along the way.

Talk of Iran’s reemergence into the global oil market started to surface in April, when Tehran, the US, and five other countries, announced a preliminary agreement to limit Iran’s oil program, and in exchange, end sanctions. However, the deal is likely to be delayed into next year, as the US Congress is stuck in gridlock on whether to support or nix President Obama’s initiative.

Sanctions linked to Iran’s controversial nuclear program have barred it from developing or exporting oil or gas in recent years. Iran’s oil exports have dropped from 2.5 million barrels a day in 2011 down to just 1 million barrels in 2014, according to the US Energy Information Administration (EIA). Iran has between 20-30 million barrels of crude in storage that could potentially come to market whenever sanctions are fully lifted.

Iran presented 70 oil and gas projects to 137 foreign companies at the Iran Petroleum Contracts Conference in Tehran on November 28. Companies included BP, Enel, Eni, Repsol, Royal Dutch Shell, Statoil, Total, Gazprom, Lukoil, and Rosneft. Though US giants ExxonMobil and ConocoPhilips weren’t represented at the conference, the oil minister Bijan Namdar Zangane said he welcomes American participation.

Iran is aiming to bring in $25 billion in investment, and that by 2020, oil and gas project financing is expected to reach $185 billion, Zangane said.

Managing Director of National Iranian Oil Company, Roknoddin Javadi, said he hopes that the first oil contracts are signed at the beginning of 2016.

Before, Iran had lost the interest of foreign companies due to a particular negotiating point that the foreign contractors would have only been able to develop and operate the oil fields, not own outright. Now, Iran has amended this buyback model, but on the condition an Iranian company owns 51% of the project.

The new contracts Iran is offering are 15-20 and will give investors the opportunity to recoup their costs, instead of risking big losses. They will also have the option to extend contracts for an extra five years, up to 25 years.

An OPEC member, Iran’s current production is 3.1 million barrels per day and hopes to boost production to 5.7 million barrels a day by 2018, according to Zanganeh.

Many analysts have already gone into much greater detail on this, but the entrance of Iranian oil (whenever that may be) will affect world production and distribution. If Iran ramps up its production like it says it will, this will only add to the current global supply glut of oil, and further drive down oil prices. To Saudi Arabia’s delight, this will put a lot more North American shale companies out of business. Iran could undercut Russia in supplying the European market.