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Iran: Asia has first mover advantage

Written by  Mahdi Kazemzadeh, Afraz Advisers Wednesday, 17 February 2016 08:02
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Iran's ambitious aim to rapidly develop its oil and gas sector will require foreign engagement in areas Asian companies have leading positions. Mahdi Kazemzadeh from Afraz Advisers sets out the details.

The Abouzar production platform, from National Iranian Oil Co.

Although Iran has the largest proven gas and the fourth largest proven crude oil reserves, international sanctions imposed on the country have deprived its oil and gas sector from the much-needed investment and foreign engagement.

As a result, Iran's oil production and exports decreased significantly. Although, not as severely hit as the oil sector, the natural gas sector also experienced delays in project completions and slowed production growth.

However, with the lifting of international sanctions and the introduction of new oil and gas contracts by the Iranian authorities, all this is about to change. The signing of the Joint Comprehensive Plan of Action (JCPOA) between Iran and the P5+1 marked a turning point of a long reconciliation process.

The historic agreement was followed by the actual nuclear related sanctions lifting, implemented on 16th January 2016, after Iran successfully passed the verification by the International Atomic Energy Agency (IAEA).

It should be underlined that restrictions were alleviated only for non-US individuals. Therefore, the reopening of Iran gives a first access advantage to Asian and European companies.

Asian companies, in particular, will benefit from the fact that they were one of the only foreign players that remained present in Iran's oil and gas sector during the sanction era. With already existing relations between Iran and Asian businesses, the sanctions relief will further facilitate Asia’s engagement at almost all levels.

Along with the positive developments on the international arena, on a domestic level, Iran has also shown that it is willing to reopen its oil and gas sector to foreign investors. This was proven by the Iranian authorities' announcement of a new and flexible oil contractual framework.

So far, companies were allowed to engage in exploration and development phases in Iran through buy-back contracts, which was considered risky and inflexible by international oil companies (IOCs).

Iran’s petroleum framework, opportunities for Asia

In November 2015, at a conference in Teheran, Iranian authorities presented a significantly improved contractual framework known as the Iran Petroleum Contract (IPC). Although, the natural resources ownership remains strictly under the authority of the National Iranian Oil Co. (NIOC), almost all of the other shortcomings of the buy-backs are addressed in the IPC.

The IPC is a risk adjusted service contract. One of the biggest changes that it envisages is that the whole cycle of operations such as exploration, development and production can be integrated under one contract.

According to the IPC, IOCs will form joint ventures with local companies, which will facilitate the transfer of technologies and stimulate the development of Iranian companies. Additionally, the IPC is also longer in duration (20-25 years), and this is intended to encourage IOCs' long-term strategy engagement in projects.

The second major difference from the buy-back contract is that it removes the fixed cap on capital expenditures and introduces a more flexible development plan. Remuneration in the IPC will be fee per barrel and also allows IOCs to benefit from the higher oil prices.

Furthermore, the risk involved in the different fields offered to investors is taken into consideration as well. The IOC funds the development of the field, and recovers all the capital expenditure and operational costs net of the revenues within seven years from the date of expenditure.

The IPC characteristics that have been revealed so far show that for the first time in years there been matching interest between the NIOC and IOCs. Iran's oil sector strategy envisages increasing of oil production to pre-sanctions levels and regaining its lost market share.

Similarly, in the gas sector, Iran aims at boosting production and modernizing technologies. For the achievement of these goals, cooperation with foreign companies at almost all levels will be required. In fact, more than 50 oil and gas projects were offered to investors at the Teheran IPC Conference in November.

This included a range of green and brownfield projects. The offering of these fields is consistent with the IPC framework, where an IOC will be the operator of the field for a longer period overseeing the development, as well as the production stage of the field life cycle.

The mature oil fields in Iran have rapid natural decline rates and, thus, require improved and enhanced oil recovery as well. Recovery factors from natural drive mechanisms are relatively low for the fields on offer with the majority in the 10%-20% range. Some of the fields have reported recovery factors as low as 5%.

Having said that, with the application of new technologies and state-of-the art reservoir optimization methodologies brought by foreign companies, these recovery factors could be increased to 30% or more.

Another priority for Iran will be oil fields like South Azadegan, Darkhowin and Changuleh that it shares with its neighbors. These were also offered by the NIOC in November. South Azadegan, for example, is a project of investors’ interest, and Changuleh, on the other hand, was discovered in the late 1990s, but had not been developed.

Asian companies will definitely benefit from the fact that they have already established relations with Iran and have managed to maintain them during the sanctions period. Moreover, Iran's ambitious aim for fast oil and gas recovery and rapid development will require foreign engagement in areas Asian companies have leading positions.

Nevertheless, it should be noted that Iran's market is in its early stage of opening. Due to the long period of international isolation, there is lack of available data on the state of the oil and gas sector and concrete information about the exact needs of the domestic market.

Asian companies will undoubtedly have the advantage of first-market entry, but there are still many uncertainties present on a local level. Therefore, successfully matching NIOC's demand with Asian companies services will require expertise and insightful understanding of the needs of the Iranian market. If, however, strategically planned there is an enormous win-win opportunity for both sides.

Mahdi Kazemzadeh is the founder and managing director of Afraz Advisers, an Iran-focused advisory firm providing technical and commercial insights for large oil companies, corporates and investors looking at the Iranian market. After an early career in exploration and production with BP, Mahdi set up Afraz in 2013 in anticipation of Iran reaching an agreement with the West.

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