Oil Majors Waiting to Return to Lucrative Iran Market

Oil Majors Waiting to Return to Lucrative Iran MarketOil Majors Waiting to Return to Lucrative Iran Market

Outside the boardroom of BP Plc’s headquarters on London’s swanky St. James’s Square, a display case houses the geological data from Masjid-i-Solaiman, Iran’s first oil well.

The discovery of crude in 1908 laid the foundations for the company that would become British Petroleum and opened one of the richest opportunities that western oil companies have ever enjoyed in the turbulent Middle East. Since then, the industry’s history in Iran is intertwined with CIA-backed coups, colonial exploitation and the anti-western resentment surrounding the 1979 Islamic Revolution, Bloomberg reported.

Now, as Iran and the US enter 11th-hour negotiations to reach a nuclear deal and ease sanctions, the Middle Eastern country is emerging again as a potential prize for western oil companies such as BP, Royal Dutch Shell Plc, Eni SpA and Total SA. The Chinese can also be expected to enter the race, while US companies, more burdened by sanctions and legacy, will be further down the pack.

“You look at the history of the oil companies, and that history is Iran,” said Nader Sultan, an oil consultant who ran state-owned Kuwait Petroleum Corp. from 1993 to 2004.

An appetite to return to Iran is understandable: Iran holds 10 percent of the world’s oil reserves -- putting it No. 4 globally after Venezuela, Saudi Arabia and Canada and ahead of Iraq -- and almost a fifth of gas reserves -- second only to Russia. “Iran is the big prize,” said Oswald Clint, an oil analyst at Sanford C. Bernstein & Co. “The resource size is very attractive.”

Investment Needed

For Iran, the attraction is also straightforward: it needs investment and foreign expertise to raise its hydrocarbon production. The toxic combination of decades with little foreign involvement coupled with the devastating legacy of long Iran-Iraq war in the 1980s has crippled the country’s energy industry.

Iran today pumps 2.8 million barrels a day, down from 4.5 million a decade ago and a peak of 6 million in 1974. Its large fields, including Gachsaran and Marun, have been in production for more than 50 years and are in “sore need” of rehabilitation, according to the International Energy Agency.

Moreover, Iran has failed to develop much of its gas reserves. That’s allowed countries including Algeria, Australia and neighboring Qatar, with which it shares a field, to take market share. Without western technology, it is unlikely Iran would be able to build liquefied natural gas, or LNG, plants that super-cool gas into liquid form for shipping.

Jason Bordoff is a former White House oil official who was involved in designing sanctions against Iran and is now at Columbia University. He says Iran needs anywhere from $50 billion to $100 billion in investment from foreign oil groups to boost output.

“The contract terms are important —- more so than many recognize,” he said, adding that European oil companies “were leaving Iran even before oil sanctions really hit in 2010-2012, and contract terms were key part of the reason.”


The contracts, known in the jargon of the industry as “buy-backs,” paid foreign groups as contractors for short-term assignments. Companies, though, soon complained the contracts -- which lasted five to seven years -- offered them insufficient returns.

Oil Minister Bijan Namdar Zanganeh has now come up with a new set of terms, called the “Iran Petroleum Contract” that he says are more attractive than the buy-back model. On paper, consultants and lawyers who have reviewed the new contract agreed it does offer better terms.

Crucially, some of the conditions are “similar to the tried and tested production-sharing agreements in the UAE and Iraqi Kurdistan,” according to Adrian Creed and Amir Kordvani of law firm Clyde & Co. in London. That makes them familiar to foreign firms, they said.

Leonardo Maugeri, a fellow at Harvard University who was head of strategy at Eni while the Italian company worked in Iran, said: “Zanganeh knows the problem and the new formula he is designing is much more favorable.”