While the deal reached between Iran and the P5+1 world powers in Geneva in late November was a historic breakthrough, the decline in the Islamic Republic’s oil output will not be reversed until further negotiations take place.

At the start of 2012, Iran was the world’s third-largest oil exporter, with about 2.5 million barrels a day (b/d) shipped to mainly Asian customers. The International Energy Agency (IEA) estimates that exports had fallen as a result of toughened sanctions to about 850,000 b/d by November 2013, making it one of Opec’s smallest exporters.

Perhaps what is most notable is how much of the sanctions’ architecture will remain in place

Douglas Maag, Clyde & Co

When the US introduced sanctions against the purchase of Iranian crude in early 2012, it issued six-month waivers to several major importers, including China, Indian, Japan and South Korea. The waivers, which have been extended three times, were issued in exchange for the countries reducing their imports of Iranian crude to agreed levels.

Negligible impact

Energy analysts have largely agreed that there will be a negligible impact on Iran’s energy sector following the Geneva deal, and there is little chance of energy sanctions being lifted before April 2014, when negotiations are scheduled to resume.

“Perhaps what is most notable is how much of the sanctions’ architecture will remain in place,” says Douglas Maag, senior counsel at London-based law firm Clyde & Co. “Iran will still be subject to the extensive financial sanctions that cut it off from the Western capital and insurance markets and isolate its banking system.

“The crude oil export restrictions will remain in place, as will restrictions on the import by Iran of refined petroleum and dealings with the Iranian shipping industries,” he says. “Up to $100bn of Iran’s foreign exchange reserves will remain frozen and a large number of state-owned enterprises will remain sanctioned.”

The continued limitations on the Islamic Republic’s oil exports will keep crude revenues at about 60 per cent lower than two years ago, before the most significant US and EU measures targeting the hydrocarbons sector came into place.

Helima Croft, analyst at the UK’s Barclays Capital, says there remain significant barriers to overcome before any sanctions impacting Iranian oil exports are likely to be removed.

“Despite the progress made, we still believe that the road to a final settlement, one that leads to the full removal of the sweeping economic sanctions, remains quite challenging, as key groups remain suspicious of the reset in relations and contend that the Iranians got the much better end of the Geneva deal,” says Croft.

“The US Congress, for example, could erect additional roadblocks if Iran fails to agree to make much deeper cuts in its nuclear capabilities in the first half of 2014,” she says, adding that regional rivals could pursue policies to complicate efforts to reach a settlement.

Even assuming the most positive outcome of future negotiations for Iran – a sweeping reduction of international sanctions – many international oil companies (IOC) might still be hesitant to re-enter the country under the current contract terms offered by the Oil Ministry.

Building relations

Relations between the ministry and IOCs have, however, begun to improve after the recent reinstatement of Bijan Namdar Zangeneh as oil minister. In September, Zangeneh set up a special committee to modify buyback oil contracts to make them more attractive to foreign oil companies.

According to reports, Oil Ministry officials will meet European oil industry executives in London in early 2014 to discuss terms for potential new agreements.

The talks could provide opportunities for companies such as Italy’s Eni, UK/Dutch Shell Group and France’s Total, which were involved in Iran before the sanctions were introduced against the energy sector.

In the past, many IOCs have been put off by the buyback contracts offered by the Oil Ministry. The deals involve an IOC investing money up front – potentially billions of dollars – in return for a share of the oil and gas revenues when production starts.

This type of contract is seen as unattractive compared with those offered by many other oil producers in the region as it does not allow companies to book reserves and creates significant risk, especially given the slow progress of recent upstream oil and gas developments in Iran.

Western oil majors have so far been tight-lipped about plans for entering the Islamic Republic if the market opens up.

“Having Iran back in the international community would be good news,” Total’s chief executive officer said at a recent conference in Abu Dhabi when asked about the country’s potential in Iran.

But the Washington-based Frontier Strategy Group, which specialises in informing companies operating in emerging markets, believes most potential investors in Iran have already formed entry strategies.

“Companies already have a plan to go in,” says Matthew Spivack, the firm’s practice leader for the Middle East and North Africa. “It’s not really a question of do we wait three months and see how it’s going, then explore. Major oil companies already have some sort of contingency plan.

“They have already thought about this because Iran is such a huge market and there has to be something they can take off the shelf and get in there, or else they will risk falling behind all the other companies who are lined up,” he says.

Huge potential

Iran has the second-largest oil reserves in the region after Saudi Arabia, estimated at 157 billion barrels. It also has the largest gas reserves in the Middle East, ahead of even Qatar, estimated at 1,187 trillion cubic feet. The two share the world’s largest gas reservoir, the development of which is called the North Field in Qatar and, in Iran, is the South Pars field.

But even with strategies in place, Spivack says there is a long way to go before Western companies can actively pursue business in Iran.

“It’s about management of expectations,” he says. “If you are not there already and there is a restriction on being there, [the Geneva deal] is a positive development, but there is a lot that needs to take place in order to get back into the market.”

Although many commodities analysts are now factoring in the potential for Iran to regain its mantel as the world’s third-biggest oil exporter and its impact on oil prices, the sector’s future is far from certain.

Even if sanctions were removed, Iran’s oil and gas industry would require significant investment, along with the introduction of new technology, to enable the country to reach its potential as a world energy leader.

Iran’s LNG plans fall behind at South Pars

Iran and Qatar share the world’s largest-known natural gas condensate field, known as South Pars in Iran and the North Field in Qatar.

Located in the Gulf, the offshore field holds an estimated 1,800 trillion cubic feet of natural gas and 50 billion barrels of condensates. Iran holds an estimated 28 per cent of the in-place gas reserves.

Qatar started developing its section of the field in 1989 and began exporting liquefied natural gas (LNG) in 1997. It is now the largest LNG exporter in the world and Doha has used the revenues to transform the country into one of the richest in the world on a per
capita basis.

Iran’s development of the South Pars field has not run as smoothly, with several phases stalling in the construction stage. The situation has been exacerbated by the US sanctions imposed against Iran’s central bank and energy industry in early 2012.

Pars Oil & Gas Company (POGC), a subsidiary of National Iranian Oil Company (NIOC), is responsible for the development of the field and has split the megaproject into 28 phases.

The early phases of the project were carried out largely by international oil companies (IOC), with France’s Total executing phases 2 and 3 and Italy’s Eni tackling phases 4 and 5. Eni and South Korea-based LG headed up consortiums developing phases 6 through 10. As of August 2013, the phases already developed were producing an average of about 10.6 billion cubic feet a day (cf/d), according to NIOC.

Several of the other phases have been significantly delayed, with the main sticking point being Iran falling behind in its plans to produce LNG, which would be the most profitable part of the development.

Phase 11 represents the main LNG section of the project. China National Petroleum Corporation reportedly backed out of phase 11 in 2012, after Tehran blamed it for delays in buying equipment and starting preparatory works. Total and Malaysia’s Petronas had previously also pulled out of the scheme.

In the third quarter of 2013, NIOC signed a $5bn deal with the local Petropars to complete phase 11 of the South Pars gas field development. The phase is designed to produce 2 billion cf/d of sour gas, largely for a planned onshore LNG export facility, and 80,000 tonnes a year (t/y) of gas condensate.

Oil commentators have questioned whether Iran has the ability to develop LNG facilities without technology from international oil companies. Without a lifting of sanctions, their involvement will be impossible.

Key fact

Tighter sanctions caused Iran’s oil exports to fall to about 850,000 b/d by November 2013

b/d=Barrels a day. Source: International Energy Agency