The deal between Iran and the West has been described as “historic”. To recap, the OPEC member and the P5+1 nations (US, UK, France, Russia, China and Germany) struck an initial agreement on Tuesday after a 14-year standoff.
Under the deal, sanctions imposed by the United States, European Union and United Nations would be lifted in exchange for curbs on Iran›s nuclear programme.
The Islamic Republic can be required to provide the International Atomic Energy Agency (IAEA) with access to suspected nuclear sites, including military sites, within 24 days, according to one provision of the accord.
The deal has been a long time in the making, with negotiations spanning more than a decade, but meaningful change will still take some time. A so called ‘snapback’ mechanism was also agreed, under which some sanctions could be reinstated in 65 days in the case of violations.
George Booth, executive – Middle East, Pinsent Masons, said companies looking to steal a march on other organisations should hold fire for the time being, at least.
“While this news brings reason to celebrate, developers are well advised to temper enthusiasm until the complex web of sanctions are fully unwound over the coming months. Snap-back provisions which essentially give the P5+1 the power to push the reset button should they regard Iran to be reneging on aspects of the final deal should be considered as they could leave developers exposed to sanctions suddenly leading to costly fines and severe penalties,” he commented after the announcement.
Fitch Ratings said that Iran has “long-term potential” to become one of the world’s top gas producers, pointing out its 34 trillion cubic metres (tcm) of natural gas – around 18% of the world’s total.
But in a note released four days before the news was announced, it said: “It will take at least five years to ramp up production and build the pipelines necessary to become a large gas exporter. The higher cost and complexity of liquefied natural gas (LNG) projects means significant LNG exports would take a decade or longer to materialise.
“From 2005 to 2014 Iranian gas production increased nearly 70% to around 173 billion cubic meters (bcm). The International Energy Agency (IEA) estimates that Iran currently exports only about 9 bcm to Turkey, Armenia and Azerbaijan. Historically, Iran has never been a major exporter of natural gas, with most of its limited exports going to the former USSR in the late 1970s.”
It means that Iran will have to spend colossal sums to develop its own infrastructure before it can dramatically increase its output.
Several significant gas projects in Iran are in different stages of implementation. Iran’s share in estimated proven reserves of the giant South Pars gas field is about 14 tcm, while its current production capacity is only about 107 bcm. The IEA expects 67 bcm of additional capacity to be commissioned at South Pars before the end of this decade. Another major project is the North Pars field with estimated reserves of 1.3 tcm. In 2006, the China National Offshore Oil Corporation signed a $16bn deal to develop North Pars and build a 20mn tons per annum LNG plant.
“We understand that because of the international sanctions these and other export-oriented projects are experiencing substantial delays as most foreign oil companies have stopped dealing with Iran,” said Fitch Ratings.
Wood Mackenzie said: “The country is expected to unveil new upstream fiscal terms in late 2015 and some IOCs and NOCs, including Shell, Total and Eni, are already eyeing opportunities. Tehran is eagerly poised to attract foreign investment and gain access to modern technologies in the whole energy chain. However, it will take years for IOCs to gain access to projects and start having an impact on production capacity – even if fiscal terms are set at internationally competitive levels.”
As well as holding the world’s second largest reserves of gas, the country also boasts the fourth largest capacity of oil, but the sanctions mean that the country has fallen behind in terms of technology. This could hamper the speed at which Iran can capitalise on the lifting of the sanctions, according to energy consultancy, Douglas Westwood.
“In 2014 total Iranian production, heavily driven by gas and condensate production from the giant South Pars field, amounted to 6.7 mboe/d. During the sanction period, however, Iran had limited access to technology from the West and complex LNG export terminal projects stalled. Vast capital inflows will now be required to develop under-invested Iranian fields, however, due to the large reserves base, DW believes appetite to invest in Iran will be strong amongst major operators,” it said.
Iran’s domestic energy use has increased significantly in recent years, up 66% between 2005 and 2014 to 170 bcm. “This rate of growth has been second only to China and has made Iran the world’s fourth biggest gas consumer behind the US, Russia and China. We expect a significant part of the newly commissioned capacity over the next few years to continue serving the domestic market.”
In an article written for ArabianOilandGas.com, Gerry Rogers senior associate at Galadari Advocates & Legal Consultants, said when Iran does manage to increase its production, OPEC will have a decision to make.
“OPEC’s response to a marked increase in Iranian crude would be either to allow an increase in the production target, leave the target at the same level, or set a lower target. Each option will have consequences. The first option may result in a further fall in crude oil prices, the second would require a reduction of certain OPEC members’ quotas and the third an even greater one. The difference now is that increased US production means that reductions in capacity may not necessarily result in an increase in oil price, as had previously been the case.”
He also warned that there have been previous examples where seemingly inevitable increases in production have not materialised.
“The market may well be awash with speculation around increased oil production but recent history teaches us that this does not always come to fruition, as seen in the unfulfilled promises of increased Libyan production (which has actually decreased) and increased Iraqi production which was then revised downwards after internal political turmoil,” he said.
“Given the susceptibility of oil producing nations to sudden, often unanticipated change, the impact of an increase in Iranian oil in the world market will be determined solely by the global circumstances at the time.”
