Lukoil #345 (May-June 2019)

The future of Iran’s oil industry may depend as much on US domestic politics as on its own government’s policies. IRAN’S OIL: DOWN, BUT NOT OUT I n Politics and oil production have always been deeply intertwined throughout Iranian history, with state actors playing adecisive role. This trendcontinuedon April 21 of this year, when the Trump WhiteHouse announced it would not be extending waivers on secondary sanctions for international buyers of Iran’s oil beyond May 2 with a stated mission of bringing the country’s exports down to zero. Any violators would be cut off from US financial institutions. The countries granted the waiver included China, India, Turkey, Greece, Italy, Japan, South Korea and Taiwan. Expectations of a breakthrough in negotiations between the United States and Iran have come to naught, as both Turkey and India have begrudgingly agreed to halt imports of Iran’s oil. Iran’s ambassador to the UN, Majid Takht Ravanchi, recently wrote in an OpEd to the Washington Post: “Throughout history, Iranians have always resisted the imposition of others’ will and have survived for millennia...The languageof threats and intimidation is anathema to Iranians, who have always demonstrated that respect begets respect.” The sanctions, he noted, would not bring about any change in policy.. HISTORY OF IRANIAN OIL INDUSTRY 1901 1914 1951 1954 1960 1957 1908 1933 The history of Iran's oil industry began in 1901, when British entrepreneur William D'Arcy received a concession to explore and develop southern Persian oil resources. The discovery of oil in 1908 led to the formation in 1909 of the London-based Anglo- Persian Oil Company (APOC). In 1951, the government of Prime Minister Mohammad Mossadeq formed the National Iranian Oil Company (NIOC). A 1953 coup d’état led by British and U.S. intelligence agencies let foreign companies return to Iran, but under new, less attractive terms. Following the 1979 Islamic Revolution, the NIOC took control of Iran's petroleum industry and canceled Iran's international oil agreements. Foreign investors got a new opportunity to work in Iraq only in 1997 after the new president Mohammad Khatami came to power. In 1997-2004 more than $40 billion was invested in Iran’s hydrocarbon industry (including internal and external funds). 2006-2015 UN sanctions halted activities of most IOCs in Iran, and their removal in 2015 spurred a boost in both oil production and international interest in investment. Most of these benefits had eroded by 2019 with the re-imposition of US secondary sanctions on Iran’s oil industry. D’Arcy Exploration Company got the first Persian Oil Concession British Treasure purchased 51% of APOC (renamed AIOC in 2035 and British Petroleum in 1954) Majlis voted to nationalize AIOC assets. Britain imposed an embargo on Iranian oil 25:75 agreement between ENI and Iran Iran became one of the founders of OPEC Oil discovered in Persia Anglo-Persian Oil Company (APOC) was formed in 1909 Concession was re-negotiated in favor of Persia Iran Oil Participants (IOP) consortium signed 50:50 agreement with National Iranian Oil Company (NIOC) to manage Iranian oil assets and sell Iranian oil Production is falling To be clear, Iran is an energy juggernaut with the world’s second largest gas reserves (after Russia) and third largest conventional oil reserves. It is currently, despite the sanctions, the third largest oil producer in theMiddle East and third largest gas producer in the world. Trump’s policies caused the price of Brent crude to go above $80 a barrel for the first time since 2014 last year. March export figures for Iran were 1.1 million barrels a day, while in April export dropped to less than 1 million barrels. The last hope for Tehran – Beijing – halted import of Iranian oil in May, following other consumers. The situation in the Iranian oil sector became critical. Isolated from the global oil market, Iran will not be able to stop production decline. Since mid-1970s, oil production in the country dropped from 6 to 2.7 million barrels a day and continue falling. To reverse this trend, Iran has to improve the recovery factor at the large, In 2016, after the partial lifting of sanctions, an upstream fiscal framework called the Iran Petroleum Contract (IPC) was announced. The stated goal was to attract $130 billion of foreign and local investment into the upstream sector via 50 development projects estimated to hold 28 billion barrels of oil equivalent (boe). However, concern over further US sanctions and the IPC’s own commercial flaws led only three deals to be signed. The most significant was the $5 billion South Pars Phase 11 project by Total, China’s CNPC and Iran’s National Oil Company. Total left the project after the US refused a sanctions waiver, while CNPC has not made significant progress. Windowof opportunities Three quarters of Iran’s territory remains largely unexplored, meaning there is great potential for finding even more hydrocarbons. Since 2007, the National Iranian Oil Company (NIOC) has discovered over 200 trillion cubic feet of gas resources with a success rate of 60%. Amajor deciding factor inwhether (andwhen) this potential is developedwith the help of IOCsmay be America’s domestic politics.With little chance of a softer policy from the TrumpWhite House, Iran’s best bet may be to hope for a less hostile administration in the future (either in 2020 or 2024) that would be willing to return to the 2015 Iran nuclear deal framework in some format. That deal had added 1 million barrels a day to the nation’s oil and condensate productionwithin two years. If done correctly, a partial lifting of sanctions could spur a new golden era for Iranian oil sector. ageing fields, which is now around 25%. Without foreign investment and technology, it’s almost impossible. Investors disappointed Situation in the Iranian oil and gas sector has worsened over several decades. “Investors have…been discouraged by the severity and inflexibility of buy-back contracts, historically the sole vehicle for international upstream investment in Iran. In the absence of significant external contributions, internal investment has fallen short of the minimum needed to deliver sustainable growth. This situation has been exacerbated by endemic organizational inefficiencies and an increasing call onoil revenues to propup other sectors of the state economy” WoodMackenzie On May 19, 2019 the 14th meeting of Joint Ministerial Monitoring Committee (JMMC) took place in Jeddah, Saudi Arabia. Most nations at a meeting supported extending production cuts to the end of 2019. “We need to stay the course, and do that for the weeks and OPEC+ tends to keep production cuts months to come,” Saudi Energy Minister Khalid Al-Falih told reporters after the meeting in Jeddah. OPEC conference and OPEC+ Ministerial Meeting that will make a decision regarding future production volumes is scheduled on the end of June – beginning of July. Politics 6