Attracting $600 Billion in Foreign Investment to Iran: Opportunities and Challenges

In recent weeks, Iran has announced a need for $185 billion in investment in oil and gas fields, $200 billion in fuel consumption optimization, $70 billion in the petrochemical industry, and tens of billions in other energy-related sectors, inviting foreign companies to invest in the country. However, according to a report by the Financial Times on Sunday, July 25, oil companies have suspended 46 major oil projects worth $200 billion over the past year due to falling oil prices and the need to maintain profits. Global oil prices have halved over the past year, and these companies are waiting for a rebound in prices to resume work on their delayed projects. Despite a relative increase in global oil prices in recent months, the Iran nuclear deal and economic issues in China have caused a 20% drop in prices last month. Sanctions against Iran remain in place, and if they are lifted by the end of the year, an increase in Iranian oil production could lead to a further drop in prices. Within OPEC, where extraction costs are relatively low compared to non-OPEC countries, the investment situation in oil production has significantly worsened. According to OPEC's report, investment in oil production among its 12 members was about $120 billion last year, while this figure is expected to average less than $30 billion annually over the four years leading up to 2018. OPEC states that its members will invest a total of $117 billion in their oil and gas fields from this year until the end of 2018. Meanwhile, Iran's competition to attract foreign companies is much tougher compared to countries like Iraq, which are willing to sign production-sharing contracts. In production-sharing contracts, part of the oil field's resources becomes the property of the contracting company, which increases its profit motivation and includes the oil reserves of that field in the company's assets. According to Iranian law, signing production-sharing contracts is illegal. However, Iran has recently devised a type of contract that will be introduced to foreign companies in the next two to three months, offering significant incentives in these long-term contracts. In the refining sector, OPEC countries' investments are expected to drop from $10 billion this year to about $4 billion and $6 billion in the next two years, before rising to $12 billion in 2012, with the largest projects located in the UAE, Saudi Arabia, Angola, and Ecuador. However, Iran has many advantages over other oil and gas-rich countries that should not be overlooked. Firstly, the cost of producing oil and gas in Iran is very low. For example, the cost of producing gas from the second phase of the Shah Deniz field in Azerbaijan is estimated at $25 billion, while less than $5 billion can produce the same amount of gas from each phase of South Pars. Additionally, Iran enjoys good security compared to other Middle Eastern countries, and most of its oil and gas fields are located near the southern coastal waters. Furthermore, Iran's downstream oil and gas sector (refineries, petrochemicals, etc.) has made relatively good progress and can attract foreign investments, especially in the petrochemical sector. It is worth noting that the value of petrochemical products in global markets is almost equal to that of the global oil market. Iran also has infrastructure projects such as the construction of $14 billion in cross-country pipelines, two of which will have a capacity of 100 million cubic meters per day, leading to Iraq and Turkey, potentially enabling the future transfer of Iranian gas to European countries. Most importantly, according to Nasratollah Sifi, CEO of the Fuel Consumption Optimization Company, Iran needs a $200 billion investment to optimize its staggering fuel consumption. According to the International Energy Agency, the energy intensity (the amount of energy per unit of GDP) is twice the global average, a situation that Mr. Sifi has stated could lead Iran to become an energy importer within eight years if the current trend of energy consumption growth continues. In contrast to the oil and gas production sector, global investments in other sectors have become much more prosperous than before. For instance, according to the assessment by the United Nations Conference on Trade and Development (UNCTAD), foreign direct investments grew by about 9% in 2013, reaching $1.45 trillion. Last year, this figure rose to $1.6 trillion and is expected to reach $1.7 trillion and $1.8 trillion for this year and next year, respectively. The highest growth in investment will occur in developing countries, from which Iran could attract a good share of these investments. It is noteworthy that Iran was only able to attract $2.1 billion in foreign direct investments last year.