Iran’s new approach to building energy allies is being revealed as the former powerhouse staggers back onto the global stage. The lifting of Western-imposed sanctions earlier this year has given the country a new lease of life.
Tehran’s ability to adapt will prove vital, as today’s market is more competitive than the one it reluctantly stepped back from more than a decade ago.
Iran, however, remains confident that it can further boost its current 3.7 million barrels a day of oil production, enabling it to be able to export 2.2 million barrels a day by the end of the summer. The country’s strategy to regain superiority has started well, but some of this spike in volume may be a case of Iran emptying its full storage capacity.
Iran’s cabinet approved the latest draft of the country’s oil and gas contracts in early August, which are widely known as Iran’s Petroleum Contracts (IPCs) and abandon the generally unpopular buyback contracts that were first introduced in the 1990s as an attempt to bridge the gap between the country’s need to attract foreign oil and gas companies, and an attempt to place a ban on private foreign ownership of natural resources under the country’s constitution.
Some international energy stakeholders still need to be convinced. The new IPCs are essentially risk service contracts, where the contractor is paid back by being allocated a portion of the hydrocarbons produced. There is lingering concern among international oil companies (IOCs) that the agreement does not yet appear to offer a platform to discuss disputes.
However, these are relatively early days as the sanctions were lifted just seven months ago, which is just the blink of an eye in economic terms.
Tehran has adopted a fresh approach to blending in an effort to shrug off its lone-ranger profile and seek collaborative partnerships with energy allies. Crude oil blending can raise the sale price of a lower grade of crude by blending it with a more valuable grade. This means producers can have a particular variety at the lowest possible cost, which has proved to be a useful trade-off.
In April, Iran joined fellow OPEC members Nigeria, Angola and Algeria with plans to blend its light oil with Venezuela’s heavy crude to get a better crude price. Iran’s Research Institute of Petroleum Industry signed an agreement with South Africa’s state-run PetroSA to jointly pursue research and development in crude blending technologies. Iran also signed a long-term cooperation agreement with South Korea at the start of May. This covers a number of areas including gas and telecommunications and serves as a springboard for raising Iranian crude supplies to the North Asian country.
Sanctions did not completely derail Iran’s energy infrastructure, with Tehran funneling cash into the country’s major oil and gas sites – refineries, pipelines, drilling sites, roads and so on – to prepare for the lifting of sanctions. The first phase of the Persian Gulf Star refinery, which has the capacity to produce 360,000 barrels a day, will be completed by next March, with the remaining two units scheduled to go online in 2017. While the Persian Gulf Star refinery, when finished, will add 16 million liters a day of gasoline production, the ongoing upgrade at the Bandar Abbas refinery will add four million liters a day.
Officials say gasoline imports of approximately 50,000 barrels a day will not be necessary once the plant is completed. Furthermore, officials have recently said that Iran could even be exporting as much as ten million liters a day of gasoline after the full start-up of the Persian Gulf Star refinery.
Iran is also heavily focused on leveraging its position as home to the world’s second-largest gas reserves. Also, Iran and Oman are pushing ahead with the construction of a 400km gas pipeline that will export of 28 million cubic meters of gas from Iran’s South Pars – one of the world’s largest independent gas reservoirs – to Oman from as early as 2019. The 25-year agreement was last valued at $60 billion in 2013, with the construction costs to be equally financed by Oman and Iran. Companies have been invited to submit their bids for the engineering, procurement and construction (EPC) contracts by December.
To the east, Iran’s hopes to rejuvenate plans to build a 2,700km gas pipeline from the country’s South Pars to Pakistan and India will likely be curtailed by politics after already facing more than a decade of delays.
Iran’s ability to reduce inflation from 45 percent in 2013 to below ten percent in late 2015 and introduce subsidy cuts illustrate Tehran’s financial acumen, which will bolster the country’s ability to cope with today’s lower oil prices. The International Monetary Fund (IMF) expects Iran to deliver four percent growth at a time when others in the Middle East grapple with credit rating cuts and urgently slash energy subsidies in a bid to cushion their strained coffers.
Iran is far from free of economic and logistical hurdles. Iran’s President Hassan Rouhani’s pledges in 2013, which included better job creation, have not been successful enough to offset the national tide of dissatisfaction.
This could spell bearish news for Iran’s economy at next year’s elections, as IOCs are comfortable with Rouhani’s collaborative approach and a significant political shift could weaken their appetite to invest locally.
Tehran is also grappling with a limited number of ships, which is curbing Iran’s oil exports. In mid-April, the International Group of P&I raised the reinsurance level to a maximum of $830 million per tanker for shipping Iranian crude, from $580 million previously. Although this does not fully make up for the missing US reinsurance cover as a result of the US’ ongoing sanctions against Iran, it could be seen as sufficient for Asian buyers such as India and South Korea, or some European importers, for their shipping of Iranian oil, according to industry sources. However, the increased reinsurance is still below a full P&I insurance cover of $7.8 billion.
The movement of Iranian oil to potential consumers is not helped by the remaining US sanctions that prevent business with Tehran in dollars, or with US companies. Yet, oil and tanker trade is priced in dollars. The freight shortage is likely to ease later this year as ships being used for storage are emptied and Iran repairs unused ships to enlarge its fleet, but the delay will inevitably hamper the speed of the country’s relaunch into European and Asian markets.
Another lingering issue is that energy executives are still unsure about the legal landscape of doing deals with Iran following the lifting of the majority – but not all – of the sanctions. This confusion is hindering foreign countries’ confidence when they consider pursuing business in, or associated with, Iran. The cumulative impact does little good for Iran’s economic prosperity. Tehran’s seemingly more flexible approach is helping accelerate the country’s return to the global energy market and the international appetite to deal in Iranian business will deepen every time the country reaches its goals, such as the targeted four million barrels a day of oil production. While there is no way to set an exact date, one development is clear: the new Iran has a high chance of regaining its glory of yesteryear.
Daniel Colover is strategic oil market development director, S&P Global Platts.