Sanctions-Free Iran Beckons Foreign Investors

With the majority of its nuclear-related economic sanctions lifted, companies around the world are making a beeline for Iran, which is music to the ears of global engineering, procurement and construction companies.

This is stated by an article published by Breakbulk Events & Media–a division of London-based organizer of exhibitions and conferences ITE Group. Excerpts follow:

Sanctions were lifted when Iran signed a nuclear deal with western nations, paving the way for the United Nations and the European Union to remove the four-year-old restrictions in July 2015.

This was followed by the International Atomic Energy Agency announcing in January 2016 that Iran had fully complied with the conditions of the agreement and, within a week, Iran and China agreed to boost bilateral trade to $600 billion within a decade.

Iran has since signed contracts worth $55 billion with Italian and French companies.

According to ratings agency Moody’s, at about $417 billion, Iran’s economy is the second-largest in the Middle East after Saudi Arabia, and is more diversified than other regional oil exporters, with oil and gas making up 17% of GDP. Oil revenues accounted for 30% of total government revenue in 2014.

Since sanctions have been lifted, Iran has signed agreements for the sale of crude oil with a number of international companies.

However, many other companies are watching the show from the sidelines, as oil prices continue to hover around $40 per barrel. Iran needs at least $70 per barrel to sustain the project construction momentum.

The bearish US Energy Information Administration upped its forecasts of average crude oil prices in June to $43 a barrel for 2016 and $52 a barrel for 2017 in its monthly Short-Term Energy Outlook report.

However, analysts at financial services company Raymond James famously predicted West Texas Intermediate would average $80 per barrel by the end of 2017 in the same month. The reality will likely be somewhere in between, which is good news for global engineering, procurement and construction firms, or EPCs, looking to gain a foothold in Iran.

  Business Time

Oil majors and automakers are already making moves. French carmaker Peugeot-Citroen has announced that it will enter into a €400 million joint venture with its former partner Tehran-based Iran Khodro to produce 200,000 cars per year.

ONGC Videsh, one of the subsidiaries of the Indian government-owned major oil and gas explorer, Oil and Natural Gas Co. Ltd., is on the verge of bagging the rights of the $5 billion Farzad-B gas field, while Italy’s oil and gas contractor Saipem has been awarded new contracts and variation orders offshore.

Aircraft manufacturers are getting in on the act: If America’s Boeing manages to confirm a $17.5 billion contract to deliver planes to Iran, it will be a watermark in the annals of US-Iran business relations. Rival European consortium Airbus has signed letters of intent to sell 118 jets to Iran.

On the EPC front, Iran plans to invest heavily to modernize and refurbish its mega infrastructure projects, including in the energy sector, which accounts for the largest slice of the country’s economy, and to develop its huge natural gas reserves.

Iran is likely to invest an estimated $200 billion in the coming years to reach its economic goals.

However, US businesses could fall behind in the race to get into Iran. The US government has not lifted its dollar-denominated sanctions. This lingering restriction has placed US companies at a disadvantage, as they are unable to do any business with Iran, whereas EPCs and project cargo movers in the EU have no such restrictions.

Mamdouh G. Salameh, international oil economist and consultant to the World Bank, said US-based global oil firms and other engineering companies face a challenge not of their own making.

“American oil companies will be eying investment in energy products, as Iran has the fourth-biggest proven reserves in the world. But they are in a fix and handicapped by the current policies prevailing in Washington,” he said.

Salameh added that US companies such as ExxonMobil and Chevron will likely exert pressure on the US government to ease sanctions to let them enter the Iran market, especially once oil prices rise.

Andreas Schweitzer, founding and managing partner of Arjan Capital Ltd. with offices in Malta and Tehran, has been investing in Iran since 2009. He said that the continuing US sanctions were undoubtedly a complication for US companies.

However, there is a provision that foreign subsidiaries of US companies can operate in Iran as long as no US person or US currency is involved. This loophole allows US companies to operate in Iran.