Oil Investment in Iran After Crude Oil Purchases?

The finalization of Shell's return to the Iranian crude oil market, following Total of France, raises the key question of whether the presence of major European oil companies in Iran will be limited to crude oil purchases or will expand to include participation and investment in Iran's oil and gas exploration and production projects. Shell, in addition to purchasing large quantities of crude oil from Iran, has previously been responsible for executing development projects in Iranian oil fields, including the restart of the 'Soroush' and 'Norouz' fields, and unlike small and large Russian companies, has a significant track record of work in Iran post-revolution. According to information released by shipping sources, Shell has signed a contract to use the tanker 'Delta-Hellas' to load 130,000 barrels of crude oil from the Kharg oil terminal on July 8. Prior to the announcement of sanctions in 2012, Shell was considered one of the largest buyers of Iranian crude oil, purchasing up to 200,000 barrels daily, and after the sanctions were lifted, it paid off its $2.3 billion debt to Iran for oil purchases. Despite a relative willingness among major European oil companies to resume buying Iranian oil, they still evade long-term commitments or direct investments in Iran's oil and gas development projects. Consequently, even after the Iranian oil contracts known as 'buy-back contracts' were reformed by Rouhani's government and a readiness was announced to welcome large oil companies, even American companies have limited their activities to purchasing Iranian oil since the lifting of sanctions in January this year. To reach crude oil production capacity prior to the imposition of sanctions and increase exports, Iran requires an investment of $50 to $100 billion and the utilization of advanced technologies in exploration and extraction. Without the active participation of reliable and large foreign companies, achieving the announced goals and regaining lost oil markets in the coming years will not be possible. Having a larger share in oil markets, in addition to securing more foreign currency income and increasing purchasing power, is politically and security significant due to the increased influence of the exporting country in the global community. The latest example is Saudi Arabia, which is considered the largest crude oil exporter in the world and has over $900 billion in foreign reserves. Recently, the Riyadh government successfully used its influence in global forums to convince the United Nations to remove its name from the list of those accused of violence against children (Yemen). Doubts about participation and investment Iran faces competition in the region and in oil export markets from Iraq and Saudi Arabia, and in gas production from Qatar. The oil and gas contracts of these countries (Iraq and Qatar) offer more advantages to oil companies compared to Iran's buy-back contracts, which still resemble contractor agreements. During periods of low oil prices, the lengthy repayment times for development project costs to foreign contractors (oil companies) further diminishes their interest. Since Bijan Namdar Zangeneh took office in Rouhani's government, reforms have been made in favor of oil companies in the 'fourth generation of buy-back contracts' to enhance competitiveness with Iraq in attracting foreign investments, but the new contract model, which was recently unveiled in Tehran and sharply criticized by conservatives, has not yet generated sufficient interest among major oil companies for participation in development projects. Due to the relative stabilization of crude oil prices in the market in recent months and the forecast of continued increases in line with rising demand, it is expected that oil companies' enthusiasm for investment in oil-rich countries will increase—but this has not yet occurred for Iran for various reasons. The uncertain future of nuclear sanctions and ongoing banking and insurance issues for oil shipments, along with the internal political situation in the U.S. in the coming months, have added to the doubts about investment in Iran. Although it is not expected that Donald Trump, the Republican candidate, will suddenly cancel the JCPOA and abandon the commitments of the Obama administration towards Iran if he reaches the White House, he will not stand against potential congressional efforts to impose new sanctions on Iran using his veto power. Predictable reactions from the Islamic Republic to future congressional actions and the possibility of Rouhani not being re-elected next year will place the JCPOA and Iran's economic and political situation in a completely different position than today, and this is a factor that large oil, mining, industrial, or service companies will consider before making a final decision on long-term presence or investment in Iran. The earliest possible time for significant foreign investments in Iran's upstream industries will likely be postponed until after the determination of the next occupant of the White House and the presidential elections in Iran. Outlook for oil and gas cooperation The Islamic Republic of Iran, which during the sanctions believed it could overcome the crisis using the capacities of Chinese and Russian companies, and even announced agreements for the daily delivery of 500,000 barrels of crude oil to Russia and the implementation of joint exploration and production contracts, has, after experiencing unfulfilled promises and delays from the Russians, relied solely on attracting the attention of major Western companies in the post-JCPOA era. Iran aims to reach a production capacity of 4 to 4.5 million barrels per day and export 2 to 2.5 million barrels of oil daily. Only cooperation with large European companies (in the foreseeable absence of American companies for the next few years) will make achieving this goal possible. Iraq, which is Iran's competitor in crude oil production and export, has set its oil production target at 12 million barrels per day and is in a much better position than Iran in terms of production volume, exports, and especially attracting direct foreign investments and contracts with oil companies, despite its specific security situation and ongoing civil war. In the gas production sector, Iran also aims to export natural gas (under pressure) via pipeline to European markets and is interested in entering the liquefied natural gas (LNG) production industry at an annual volume of 10 million tons. Currently, Iran has neither a liquefied gas production plant nor gas transport terminals or specialized gas transport vessels. Establishing infrastructure and entering the ranks of LNG producers cannot be achieved merely through aspirations in this area. In the past, Shell, in addition to deciding to complete Phase 11 of the South Pars gas field, intended to produce LNG in Iran by obtaining technical production permits, which are generally owned by American companies. With the lifting of some sanctions and the implementation of the JCPOA, Rouhani's government is determined to convince major oil companies such as Shell, Norway's Statoil, France's Total, and Italy's Eni to resume past collaborations with Iran. The Rouhani government is also interested in having Total take on a role in developing Phase 2 of the South Azadegan oil field after accepting an investment commitment of up to $5 billion and to accept a share in LNG production in Iran, but Total (in a policy similar to Shell) has so far refrained from signing contracts in these areas and has limited its cooperation to oil purchases. The cautious return of major oil companies to the Iranian market is a positive step towards regaining lost oil markets for Iran. The strategic policy of the government and the state at this stage should aim to restore the position of oil and gas in Iran's development outlook.