January 17 could mark a pivotal moment in Iran’s economic history; the day Tehran shrugged off the shackles of Western-imposed sanctions and stepped back onto the global energy stage as a serious competitor. Or it may not.
A group of
world powers comprising of the five permanent UN Security Council members
Britain, France, Russia, China and the US plus Germany (P5+1) lifted sanctions
on Iran in January following a comprehensive deal that was negotiated at a
typically bureaucratic pace.
Iran’s new
economic freedom could reverse the fortunes of its struggling economy and open
the biggest bonanza for international energy companies since the ouster of
Iraqi President Saddam Hussein in 2003, especially as the Islamic republic is
arguably a safer political and economic bet than Iraq.
International
energy firms’ appetite has already been well illustrated by foreign delegations
flocking to Tehran; a city crossed off many companies’ travel list during the
sanctions era. While all are treading gingerly, there can be little doubt that
interest amongst international firms in developing Iran’s hydrocarbon resources
is enormous.
Tricky Territory
Iran is
re-emerging into a volatile market – oil prices have collapsed by around 75%
since June 2014 and dipped below $30 a barrel (bl) in January, marking a
12-year low. Energy companies’ accountants have curbed millions of dollars
worth of oil and gas expenditure and tens of thousands of job cuts have
dramatically shortened payrolls over the last six months. Total, Shell, BP and
Lukoil are a small selection of some of the world’s major energy companies
eyeing new investment opportunities in Iran; the country is home to the world’s
second largest natural gas reserves and the fourth largest oil reserves. Change
is on the way for Iran’s domestic sector, which is dominated by state-run NIOC
and its multiple subsidiaries, among the most important of which are National
Iranian Drilling Company (NIDC), Iranian Offshore Oil Company (IOOC) and Pars
Oil & Gas Company (POGC).
A tentative
agreement was made between OPEC linchpin Saudi Arabia, Russia, Qatar and
Venezuela in Doha on February 16 to ‘freeze’ production at January levels in a
bid to address the global oil glut and boost the price to $50-$60/bl. The deal
– noteworthy for the rare cooperation between OPEC and non-OPEC producers –
gained unexpected traction, with Ecuador and other South American producers holding
similar meetings shortly after. Iran’s Oil Minister Bijan Namdar Zanganeh said
that Iran will consider joining the negotiations once it recovers from
sanctions and hits 4 million barrels a day (b/d) of oil production – roughly a
35% increase on today’s 2.93m b/d.
Lofty
ambitions?
Zanganeh
maintains that the country can bring 1mn b/d of new oil supply per day to the
market now that sanctions have been lifted – a confidence that triggered a 6.7%
drop in WTI Brent prices on January 20. But it seems unlikely that Iran’s
energy infrastructure and current pot of cash is able to support the minister’s
plans – just yet.
Political eyes
are focused on how the Sino-Iran ties – two major powers along the New Silk
Road – will evolve. Following the first visit to Iran by a Chinese leader in
fourteen years, the two countries agreed in January to expand trade to $600bn
over the next decade – the historic Sino-Iran relationship is back on. A small
collection of Chinese oil companies in particular were unwilling to pull out
from Iran during the sanctions to retain a prime position for when the
country’s energy economy was revived.
Japan’s Prime
Minister plans to step on Iranian soil for the first time this year in nearly
four decades, while Tehran and Indonesia are negotiating a short-term 120,000
b/d supply deal of Iranian crude, alongside a memorandum of understanding (MOU)
to expand cooperation in the oil, gas and petrochemical sectors. Iran is also
pursuing gas supply MOUs with Turkey, Oman and Europe, amongst others. While
MOUs are often tools of political posturing, any public ties to Tehran are
noteworthy following the country’s exile from the global economic scene.
Within Central
Asia, a sanctions-free Iran means that the 2,700km Iran-Pakistan-India gas
pipeline – first touted in 2002 – could finally gain traction. Indian and
Pakistani energy officials say the obvious economic and societal benefits of
the gas pipeline through their lands could override their fractious
relationship. However, given Pakistan’s proximity to Iran, it is likely that
Pakistan will be the immediate beneficiary of Iran’s gas long before India.
Such energy infrastructure plans are complex and demand significant investments
– all of which will take time.
Political and
economic clarity surrounding Iran’s gas MOUs and pipeline projects is likely in
2016 and the country will not be a contender for Qatar’s crown as the world’s
largest LNG exporter for a long while yet. Looking westwards, 1mn b/d of crude
landed in Europe on the Monte Toledo oil tanker on March 6 – the first delivery
of Iranian crude since mid-2012.
Closer to
home, the escalating discord between the Middle East’s vying hegemons, Saudi
Arabia and Iran, will add another element of geopolitics into what is already a
convoluted picture. The ongoing wars and security unrest in Syria, Libya, Iraq
and Yemen have had a manageable impact on global oil supply. However, the
significance of the long-running power struggle between Riyadh and Tehran
gained momentum in January, following Saudi Arabia’s execution of prominent
Shia cleric Sheikh Nimr al-Nimr and the lifting of the P5+1 sanctions on Iran.
Have accusations of proxy wars and economic angst set a potentially treacherous
tone for 2016?
Reviving
strained economics
Iran’s economy
was hit hard by the United Nations (UN) and international bilateral sanctions
imposed in 2006 and 2010. But it was the particularly stringent measures
enacted by the US and the European Union (EU) in late 2011 and 2012 that had
the most devastating impact on the local economy.
Fiscal
challenges persist on the back of collapsing oil prices, multifarious
geopolitics and non-performing bank assets. Economic performance has stalled in
recent months with key sectors – notably manufacturing and construction –
contracting and GDP growth expected to decelerate from 3% in 2014/2015 to
around 0.5% in 2015/16, the International Monetary Fund (IMF) said.
Tehran may see
GDP growth jump to 4-5.5% in 2016/17, as domestic energy production increases
and the country’s foreign assets flow back into the country. Still, to join
other top emerging market economies – China and India, for example – Iran must
continue to diversify its hydrocarbon economy and address unemployment amongst
youth and women. Repeating the economic health check carried out in 2015 and
strengthening communication linkages between government and suppliers and
curbing public debt to banks would be good steps going forward.
The outlook is
not as woeful as the figures suggest, as Iran has a wealth of cost-cutting
acumen developed during the sanctions. Iran reduced its inflation rate from 45%
in mid- 2013 to less than 10% in 2015 – a move that helps reinvigorate
investors’ appetite and is in stark contrast to the overspending in other parts
of the Middle East.
Iran will have
to spend billions on upgrading and expanding its oil and gas sector if it is to
meet domestic requirements on the one hand and to meet its goal of becoming a
growing oil and LNG exporter on the other. Latest estimates put Iran’s cash
needs at $185 billion (bn) through to 2020; $85bn for upstream oil and gas,
$80bn for petrochemicals and $10bn each for downstream oil and gas. Navigating
around nervy investors – especially those with U.S. links – could prove tricky.
Despite the
challenges, global energy investors should not be fooled; Iran’s reemergence
will translate into a wake-up call for the Gulf, especially. Competitive edges
will need fine tuning, as Iran’s tenacious appetite to push to the front of the
global jostle for Asian and European clients remains unabated.
This article is from the Energy Outlook, First Quarter 2016,
originally published by
The Gulf Intelligence. Reprinted with permission.
