Iran Opening Oil Sector; Is Saudi Arabia Next?

Iran Opening Oil Sector; Is Saudi Arabia Next?Iran Opening Oil Sector; Is Saudi Arabia Next?

Iran has taken a big step toward bringing foreign investors back into its oil and gas sector. The experience of neighboring Iraq shows it still has a long road to walk, but if successful, there may well be a lesson here for Saudi Arabia on opening up to outside help.

Iran has restored most of the production it lost because of sanctions imposed in 2012, confounding analysts with its speed of recovery. Crude exports are back at 2 million barrels a day and the country is slowly reestablishing itself in European markets, Bloomberg reported.

The Middle East producer has restored most of its sanctions-hit production and now looks ahead to growth.

But the next step—taking output back to levels last seen before the 1979 revolution—needs the assistance of foreign oil companies.

Last week, Iran's Cabinet approved the general terms of a contract model that will govern foreign oil and gas investments, and it looks promising enough. It reaffirms that oil and gas reserves will remain under sovereign ownership, so no surprise there.

But it opens the way for foreign involvement in three types of project: 1. Exploration, development of already discovered, but undeveloped, reserves and using enhanced oil recovery techniques to raise output from mature fields.

Contracts will be valid for up to 20 years from the start of development, with an extra exploration period if appropriate. Enhanced oil recovery projects may be extended for another five years beyond that.

Investors are also being offered protection from any future OPEC output reductions, remote as that possibility may seem today.

  The Iraq Example

Iraq's experience shows that even with an agreed model, things may move slowly. Baghdad approved its oil law in March 2007. Yet the first contract was not awarded for another two and a half years, after an initial bidding round in which no would-be investor proposed an acceptable fee.

For Iran, too, the payment requested by foreign bidders will be the big factor in determining winners. 

Iraq's contracts helped it boost production by 2 million barrels a day, or 80%, within about six years. Plus, investors in Iran will not face the same sort of security and stability problems as in Iraq, meaning they may be willing to pay more from the start.

If Iran is successful, it will leave Saudi Arabia and Kuwait as the only oil producers determined to go it alone, as former champions of oil nationalism have, one by one, embraced foreign investment.

Will a partial privatization of Saudi Aramco increase pressure for the kingdom to follow suit? It ought to.