Iran: Opportunities and Problems Await after Sanctions

The lifting of sanctions offers opportunities for a revival of global trade and investment in Iran, particularly in energy. But key issues still need to be clarified, especially regarding the new international petroleum contract (IPC), whose terms are yet to be fully disclosed.

Whether they will be sufficient to generate investment is far from clear – and so is the amount of investment needed to revive Iran’s oil and gas sector.

At a conference held in the Turkish resort of Antalya January 23-24, Dr Mehran Amirmoeini, of Tehran’s Institute for International Energy Studies (IIES), said that Iran’s total requirement for oil and gas investment was about $15bn/yr, with gas alone requiring $11bn/yr if Iran was to succeed in completing almost all of the 28 phases of the giant South Pars development in the next two years.  

Mahmoud Khagani, a former Iranian deputy minister of oil, told the conference that the new IPC, which is expected to be published in full towards the end of February, appeared to ensure that foreign companies would not be able to book hydrocarbon reserves, potentially leading to a doubling of investment costs.

Referring to Amirmoeini’s estimates that Iran needs some $15bn in new upstream investment, Khagani said: “The $15bn may be twice as much – $30bn –  because of the inability to book reserves and thus to raise capital against reserves.” He added: “Instead, the return on capital only occurs when the oil or gas is actually developed.”

Khagani argued forcefully for what he called “energy for energy” exchanges, citing the ongoing negotiations on Iranian gas supplies for Oman’s LNG export facility at Sur and plans for joint Turkish-Iranian projects to develop power plants in Iran that would deliver electricity to Turkey.

On 21 January, Iranian Oil Minister Bijan Zanganeh visited Oman for further talks on the supply of 10 bcm/y (28 mcm/d) of gas, with Alireza Kameli, the managing director of the National Iranian Gas Export Company (NIGEC), stating subsequently that around 30% of these deliveries would be used to produce LNG at Sur.

And in recent days, Turkish officials have been discussing cooperation in the power sector with their Iranian colleagues. To Ahmet Fayez, the CEO of Enpro, a major Turkish power plant and engineering construction company, considerable scope exists for cooperation between the two countries in the power sector, notably in construction of combined-cycle gas turbine (CCGT) plants.

“Iran is the only country in the Middle East producing high-tech gas turbine, steam turbine, heat recovery steam generation,” Fayez noted, adding that Turkish contractors now stand second only to China in the number of projects undertaken abroad.

Iran makes roughly half of all its power sector equipment itself, Fayez said, but because of sanctions so far, Iran has only been able to market and sell its equipment to a few countries around the world. He added that once sanctions have been lifted, Iran will be able to present its competitively-priced capability to the world's power markets.

Turkish contractors had considerable international engineering, procurement and construction (EPC) experience while “Iranian technologies are competitive compared to western technologies, resulting in an overall competitive EPC price,” he said.

Mirmoeini highlighted Iran’s prospects for increasing gas production, arguing that it would come closer to achieving its target of more than doubling production from 172.8bn m³ in 2014 to as much as 391bn m³܆ in 2020 than its detractors might consider realistic.

The Iranian analyst acknowledged there were “some constraints and some upside risk to gas production,” citing such issues as construction of necessary infrastructure to accompany field development. However, he cautioned against reliance on assessments that anticipated Iran’s gas expansion would proceed much more slowly, such as the forecast by the UK’s Business Monitor International that Iranian production would increase to just 221bn m³ in 2020.

“BMI is a little pessimistic,” said Amirmoeini. “It also assumes no return to the gas sector from the end of sanctions. And don’t forget South Pars will be completed in the near future and will increase gas production capacity rapidly.”

The production expansion is already underway. Amirmoeini said that in 2015, gas output reached 540mn m³/d (197bn m³/yr), with South Pars accounting for 315mn m³/d. These figures are in line with previous official expectations. In contrast, BMI had forecast output of 185bn m³.

In 2016, the official expectation is that output will soar to 265bn m³, as a result of phases 15 and 16 coming fully on stream in late 2015 and phases 17 and 18 due to come on stream in the next six months, whereas BMI considers it will reach just 198bn m³.

Iranian gas consumption is rising fast, Amirmoeini acknowledged, with domestic demand reaching at about 157bn m³/y) and gas used for oilfield injection running at up to 29bn m³/yr.

However, whilst arguing that “gas production is remaining below its production potential due to sanctions,” Amirmoeini also acknowledged that much of the increased gas production was likely to be used to boost oilfield production in the post-sanctions era.

“More than 200mn m³/d are needed for reinjection,” Amirmoeni told NGE in the wake of his presentation. However, this would still leave some gas over for export, with Amirmoeini stressing to NGE that “gas will go to Oman.”

John Roberts, Chief Analyst, Natural Gas Europe