Wood Mackenzie, the energy intelligence group, has outlined five things one needs to know when it comes to the effect of the lifting of sanctions on Iran’s upstream industry, and the projects offered under the new fiscal terms of the Iran Petroleum Contract (IPC).
1. This is the beginning of a new era
The lifting of sanctions marked by Implementation Day paves the way for Iran to target a return to pre-sanctions levels of production and exports at 3.8 mb/d and 2.2 mb/d respectively. Strong support for moderate candidates in the recent legislative elections highlights the backing of President Rouhani’s economic and diplomatic reforms. This will help the country’s new fiscal regime, the IPC, to be fully implemented.
The outlook is positive and the IPC should create a more attractive environment for foreign investors. Non-US firms are now allowed to invest in Iran’s oil, gas, and petrochemical sectors; they can more easily buy and sell Iranian crude oil and petroleum products. Plus the EU has lifted its oil embargo and started importing again.
So the potential for growth is there although it will not be an immediate process. There are delicate geo-political challenges that need be overcome, but some giant steps have already been taken, perhaps most importantly Iranians are voting for progress.
However, although most sanctions have been lifted on the nuclear deal’s Implementation Day, sanctions on US companies are still in place in place and the possibility of snapback remains a risk. The US ‘Iran Sanctions Act’ (1996) stays in place until end-2016 at least, meaning US oil and gas companies will stay away for the time-being.
2. There are 49 projects available
In late 2015, the National Iranian Oil Company (NIOC) unveiled 49 upstream oil and gas projects to be offered to local and foreign investment, via joint-ventures. There are significant opportunities available. The 49 projects could help recover 28 billion boe of oil and gas. The assets on offer hold enormous resources, some 216 billion bbls of STOIIP and 229 tcf of GIIP. Of the 49 projects, 29 will target oil and 20 will target gas.
The NIOC will prioritise the development of fields that Iran shares with neighbouring countries. In that sense, the likes of the partly developed Azadegan South and South Pars oil layer, or the totally undeveloped Changuleh could be offered earlier than other fields.
3. The biggest projects on offer are gas
Although less numerous, gas fields are the biggest projects on offer. Out of the potential for 28 billion boe, gas represents 17 billion boe. But they are almost all greenfield developments. In fact, 19 of the 20 gas assets are greenfield compared to 19 of the 29 crude oil projects.
The scale of the opportunity could be huge and major IOCs and NOCs are likely to be interested. The seven biggest projects could attract more than US$100 billion in capital investment.
4. The projects on offer are technically complex
In addition to the heavy weighting toward greenfield, many of the leading assets have challenging resource themes that demand investment in infrastructure and technology. IOR/EOR, heavy oil and deepwater will require higher capex than more conventional modes of extraction.
Along with technology, the NIOC aims to attract foreign capital in the upstream by making deals with some of the majors and biggest Asian NOCs.
This is why foreign investment and expertise is absolutely essential. The infrastructure and technical developments required means the fiscal terms have to be more attractive than the pre-sanctions deals the NIOC offered.
5. The IPC is more attractive than its predecessor
The Iran Petroleum Contract includes payments in kind and a floating remuneration fee linked to oil prices, making this service contract more like a PSC. There has been more interactivity and flexibility created with 20 to 25-year contracts, joint ventures with Iranian companies, and shared risk.
Above all, the IPC addresses weaknesses of the previous buy-back contracts. The new terms are more competitive with no ceiling for cost recovery and a floating remuneration fee per boe based on oil price, exposing investors to upside oil price risk. The model will allow priority or riskier projects to be rewarded with higher returns. Exploration terms have also been made more attractive.
All this points to Iran returning as a major producer. Wood Mackenzie expects a return close to pre-sanctions levels of production at 3.7 mb/d in H2 2017, Wood Mackenzie said in its recent report on Iran.
Source: Wood Mackenzie