By Daniel Patrick Shaffer
Follow Daniel on Twitter @DanielShaffer3
A major player is coming back to OPEC. Iranian oil and gas are coming back on the market for the first time since the nuclear deal.[1] Sanctions have been lifted and the Iranian oil ministry is inviting foreign investors to start bidding on oil and gas projects once again. Iranian oil and gas production is now nearing pre-sanction levels of about 4 million barrels per day.[2]
Iran was a large producer of oil in 2011, outputting 3.7 million barrels of oil per day.[3] After sanctions were imposed the country’s oil production dropped significantly due to lack of buyers.[4] Now that the nuclear deal has been implemented and the sanctions have been lifted, the Iranian oil and gas industry is beginning to restart its operations.
While the resumption of Iranian oil production will have a large impact on business, particularly since the country had the 4th largest proved reserves and was the 6th largest producer in 2014, natural gas production is what to watch.[5] Iran has more proved reserves of natural gas than any country in the world.[6]
New legislation has made its way through the Iranian government and the country has reformatted its oil and gas contracts. Pre-sanction contracts were buyback contracts, which prohibited private ownership of any natural resources in the country. Instead, Iran attracted foreign investors by paying them with a portion of the hydrocarbons produced. However, these buyback contracts were short and afforded small returns for investors, making them unpopular among international oil companies.[7]
The new Iranian Petroleum Contract (IPC) will allow for a joint venture between the National Iranian Oil Company (NOIC) and international oil companies. The partnerships can last anywhere from 20 to 25 years and will exist throughout all the stages of the process, from exploration to production. These contracts also allow for secondary and tertiary oil recovery techniques, which would create better returns and sophisticate oil and gas technology in Iran. Companies looking to invest in even riskier ventures, such as offshore drilling, would possibly see an even higher return on investment.[8]
Iran is hoping that the better terms and contracting freedom will attract foreign investors. Although the country has opened its door to bidders, there is one crucial element that investors must consider. The Iranian Petroleum Contracts are completely under the jurisdiction of Iranian courts, which follow Shia Islamic law.[9] International oil investors may be unwilling to subject themselves to the sole jurisdiction of the unfamiliar body of law of the Iranian courts.
What does this mean for the United States? It is unlikely that we will see very many, if any, American investments in Iranian oil and gas. Thus far, the only interest comes from large European and Asian companies like Total SA and Eni SpA.[10] Iranian oil and gas will probably be exported to India and China, the 4th and 2nd largest regional consumers of oil[11] respectively, and the 15th and 3rd largest consumers of natural gas. [12] Look to Pakistan for a pipeline from Iran to India.
Currently, oil is high on the supply side so the price is low. Historically, OPEC heavily affected oil prices in the United States through controlling the supply side of the huge OPEC market share of oil production.[13] OPEC does not affect the United States like it used to due to the recent sharp increase in U.S. domestic oil production,[14] so the United States will not feel significant effects of Iranian oil and gas coming back on the market. However, the introduction of Iranian oil will contribute[15] to the globally low prices. Foreign companies have until November 19th, 2016 to submit bids, and winners will be announced on December 7th,2016.[16]
[1] Javier Blas, Iranian Oil Goes Back on the Market, Bloomberg (Nov. 5, 2015), https://www.bloomberg.com/news/articles/2015-11-05/iranian-oil-goes-back-on-the-market.
[2] Zanganeh: Secondary Sources Put Iran Crude Output at 4mbd, Shana (Oct. 17, 2016), https://www.shana.ir/en/newsagency/271098/Zanganeh-Secondary-Sources-Put-Iran-Crude-Output-at-4mbd.
[3] Michael McDonald, Iran’s Oil Production Is Slowing Fast, OilPrice.com (Jun. 27, 2016), https://oilprice.com/Energy/Energy-General/Irans-Oil-Production-Is-Slowing-Fast.html.
[4] Id.
[5] The World Factbook: Iran, U.S. Cent. Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/geos/ir.html (last updated Oct. 19, 2016).
[6] Id.
[7] Buyback Vs. New Iran Petroleum Contract, A Winning Model?, The Gulf Intelligence (Jan. 17, 2016), https://www.thegulfintelligence.com/Docs.Viewer/bb9597f1-191e-4d75-8060-5319427d2fb9/default.aspx.
[8] Id.
[9] Omar Sial & Ershadul Karim, UPDATE: A Guide to the Legal System of the Islamic Republic of Iran, GlobaLex (Feb. 2011), https://www.nyulawglobal.org/Globalex.
[10] Sam Wilkin & Hashem Kalantari, Iran to Seek Investor Bids in October With New Oil Contracts, Bloomberg (Aug. 30, 2016), https://www.bloomberg.com/news/articles/2016-08-30/iran-to-seek-investment-bids-in-october-under-new-oil-contracts.
[11] Crude Oil Consumption by Country, IndexMundi, https://www.indexmundi.com/energy/?product=oil&graph=consumption&display=rank (last visited Oct. 22, 2016).
[12] The World Factbook: Country Comparison: Natural Gas – Consumption, U.S. Cent. Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/rankorder/2250rank.html#ag (last visited Oct. 22, 2016).
[13] Supply: OPEC, U.S. Energy Info. Admin. https://www.eia.gov/finance/markets/supply-opec.cfm (last visited Oct. 29, 2016).
[14] Jude Clemente, U.S. Oil Production Forecasts Continue to Increase, Forbes (May 7, 2015), https://www.forbes.com/sites/judeclemente/2015/05/07/u-s-oil-production-forecasts-continue-to-increase/#5a81571c4f32.
[15] How the Iran Deal Will Affect Oil Markets in the Short Term, Stratfor (Jul. 16, 2015), https://www.stratfor.com/sample/analysis/how-iran-deal-will-affect-oil-markets-short-term.
[16] Iran to invite foreign companies to bidding on oil and gas, Fox News (Oct. 16, 2016), https://www.foxnews.com/world/2016/10/16/iran-to-invite-foreign-companies-to-bidding-on-oil-and-gas.html.
