The gradual lifting of sanctions on Iran following the landmark nuclear weapons deal Tuesday isn’t a clear winner for international oil companies.
Once the agreement is finalized and sanctions are removed, the industry’s biggest players will be free to return to some of the world’s largest oil and gas reservoirs. At the head of the pack are expected to be European companies that already had strong footholds in Iran before sanctions pushed them out in 2012 — including Eni in Italy, Total in France, BP in the U.K., and Anglo-Dutch Shell.
But Iran’s opening comes at a particularly bearish period for the industry and the addition of Iranian oil exports threatens to exacerbate the tough times. Oil prices are now around half of what they were a year ago, and their fall has also dragged down gas prices. Meanwhile, OPEC countries have so far refused to curb their oil output, pumping higher and higher volumes into an already oversupplied market.
Even the hint that Iran and the six world powers were poised to reach an agreement caused prices to falter on Monday. The influential Brent crude benchmark to slipped by 1.9 percent to a low of $56.73 per barrel, Reuters reported Tuesday morning.
Low commodity prices will make it harder for international oil majors to commit big investments to upgrading and expanding Iran’s energy infrastructure, especially if it leads to more supply on the market.
Low commodity prices will make it harder for international oil majors to commit big investments.
“The Iranian government will have to decide how much it wants to invest itself and what kind of infrastructure it wants, and it will have to see what kind of money oil and gas companies want to invest,” a diplomatic source in Rome said after the deal was announced.
“Funnily enough, oil companies may not be happy, because this will bring an increased supply to the market at a time when oil prices are already low,” the source added, noting that the industry’s response to price falls is usually to roll back projects and tighten supply until prices bounce back.
Oil will likely be Iran’s first significant export once sanctions are lifted, probably by the end of this year. Iran can immediately sell oil it has in storage, or parked offshore in tankers. It will take a bit longer for it to ramp up production from shuttered oil fields.
Sanctions have almost halved Iranian oil exports to just over 1 million barrels per day. With the nuclear deal, it is expected to raise exports by up to 60 percent within a year, a Reuters survey of analysts said.
There are also broader issues to be resolved before international companies can go back to doing business in Iran, ranging from an outdated legal system to restrictive labor laws, Firas Abi Ali, head of Middle East analysis at IHS Country Risk, said in a note Tuesday.
“Iran has not had significant experience with international investors for years, and the bureaucracy is likely to lack sufficient numbers of skilled personnel to be able to process investor requests rapidly enough,” Abi Ali said.
For international energy companies, it also remains to be seen what kind of contract terms Tehran unveils later this year, likely in London in September. The country’s existing buyback contracts are unpopular because they bar foreign companies from taking equity stakes oil and gas assets.
“International companies will be waiting to see what Iran can offer,” the industry source said. “But there will most likely be a change for the better. It’s something companies have been working on with the Iranian government for a couple of years already.”
Even with the uncertainty, however, there is no doubt that energy companies from Europe and the U.S., as well as China and Russia, will be rushing in to establish their offices in Tehran.
“They’re already out there trotting the field, there’s no question about that,” the diplomatic source said. “I think it will just take a bit of time to get things going, to re-enhance relations with the National Iranian Oil Co.”