Sanctions Aren’t Only Block for Western Oil Companies Eyeing Iran

Oil prices fell Thursday on the prospect that agreement on a nuclear deal with Iran would result in restrictions on Iranian exports being lifted, adding to a glut on world markets.

But those sanctions aren’t the only impediment for Western oil companies seeking to do business in Iran. Another looming question is whether Tehran will make deals with enough profit potential for outsiders to make it worth their while, especially at a time of weak prices.

If the framework nuclear deal reached Thursday leads to an eventual easing of restrictions on doing business in Iran, the country’s oil sector would be very alluring. The Islamic Republic holds nearly 10% of the world’s crude oil reserves, putting it fourth behind Venezuela, Saudi Arabia and Canada.

The industry, however, has been plagued by mismanagement and starved of investment for at least a decade. Iran’s oil fields are old and increasingly technologically challenging. And Iran doesn’t have the money to develop untapped fields, some among the world’s largest.

“Frankly, it’s one of those big opportunities; it’s like Russia, it’s like Argentina,” said Oswald Clint, senior analyst at research and brokerage firm Sanford C. Bernstein.

Many U.S. and European companies specialize in squeezing production from aging wells and have the cash to pay for new projects, making these companies ideal to work in Iran, the country’s oil officials have said.

Companies have talked with Iranian officials in the past year to explore how they might enter the country or, in some cases, return to projects they left behind when U.S. and European sanctions forced them to stop doing business with Iran in 2010.

Royal Dutch Shell PLC, Total SA of France and Eni SpA of Italy have held meetings with Iran’s oil minister in recent months, Iranian officials said. Repsol SpA of Spain and Statoil SA of Norway also worked in Iran before sanctions, and Iranian officials said they have invited BP PLC, Chevron Corp. and ConocoPhillips to begin production there. All of the companies declined to comment.

For American oil companies the road to Tehran might be particularly fraught. “Whether U.S. [oil] companies, which have been barred from Iran since the mid-1990s, would be allowed back in” is unclear, said Peter Harrell, until recently the deputy assistant secretary in charge of sanctions at the U.S. State Department, said it was unclear

Mr. Harrell, who is now a principal at consultancy Prospect Global Strategies LLC, said that, even if U.S. oil companies were permitted to return, “I am sure they will continue to be concerned about staying on the right side of the terrorism and human rights-related sanctions.”

Just how quickly Iran could ramp up production from its current levels of about 2.7 million barrels a day is unclear. Oil Minister Bijan Namdar Zanganeh has predicted it could add 1 million barrels a day several months after sanctions are lifted. Some analysts put the figure around 800,000 barrels.

At its height in 2005, Iran produced 4.2 million barrels a day, according to the U.S. Energy Information Administration.

A new flood of oil could send another jolt into world oil markets. Brent crude, the global benchmark, is trading around $55 barrel, less than half its price last summer. After the framework nuclear deal was announced Thursday, the U.S. benchmark slid almost 2% to $49.14 a barrel on the New York Mercantile Exchange.

Iran’s oil industry was neglected during the two terms of former President Mahmoud Ahmadinejad, who oversaw a revolving lineup of oil ministers and packed the ministry and national oil company with tens of thousands of make-work jobs for political allies. Contracts were doled out to companies linked to Iran’s politically powerful Revolutionary Guards and to Chinese companies. Both struggled to make progress on critical projects.

That changed with the election of President Hasan Rouhani in 2013, who tapped an experienced hand to become oil minister: Mr. Zanganeh.

He has spurred an overhaul within the ministry, focusing scarce resources on a handful of projects and reinstating experienced technocrats into key positions. He has also been frank about the need to enlist the technology and financial clout of Western companies to revive the country’s oil patch.

Rocky Ansari, managing partner of consultancy Cyrus Omron International PJSC in Iran, estimates that the country’s oil sector needs $500 billion worth of investment overall.

Iran’s oil ministry is preparing new contracts to lure Western companies by allowing more flexibility in controlling cost overruns and earning larger profits. Both were major sticking points with companies before.

The new deals—which have yet to be completed—would ensure stronger company involvement in the projects, including a larger managerial role and longer contracts. Iran may allow changes in a project’s budget, making it easier for companies to recoup their costs. Iran will present the deals to foreign companies in September, said Mehdi Hosseini, an Iranian oil adviser.

“The day it becomes possible, we will start talking to Iran immediately,” said a Total official familiar with the company’s strategy.

But signing up will depend on what contracts are offered, particularly in a context of lower oil prices. Iran’s new draft contracts assume a fee per barrel paid to foreign companies, and Iran may be tempted to offer very low prices in the current context, a Western oil company official said.

http://www.wsj.com/articles/sanctions-arent-only-block-for-western-oil-companies-eyeing-iran-1428005658