Leadership and Democracy LabWestern Social Science

Iran Opens Bidding For Energy Development

28/10/2016

Primary Article Contributor: Trevor Zaple

Team Leader: Ashley Audette

Potential foreign investment in Iranian energy development is picking up after the National Iranian Oil Company opened bidding in a pre-qualification phase on October 17th.  Fifty sites are at stake, including the South Azadegan oil field near the border with Iraq, and the sought-after South Pars oil and gas layers in the Persian Gulf.

The Obama Administration imposed sanctions on Iran in 2012, freezing Iranian property in America and threatening penalties against international firms that did business with Iran, especially with regards to the Iranian energy sector.  Following the nuclear deal between Iran and the P5+1 nations, Iranian oil production underwent a spike that drove output to approximately 4 million barrels per day.  The Iranian government is now seeking a massive set of development projects to drive production even further; NIOC Managing Director Ali Kardor has estimated that $134 billion in investment is needed for projects slated to begin in 2021.   

This rise in Iranian energy production comes in spite of an OPEC agreement in September to cut overall production among OPEC nations from 33.24 million barrels per day to a fluctuating 32.5-33 million barrels per day.  This was OPEC's first official response since the drastic drop in global crude oil prices, which went from $110 per barrel in June 2014 to a low of $25 per barrel in January 2016.  Increased energy production in Iran after the lifting of U.S. sanctions as well as reclaimed production capacities following the cessation of violence in key areas of Libya and Nigeria have led OPEC to be concerned about the possibility of adding an estimated 800,000 barrels per day into a supply chain that may already by oversupplied by a million barrels per day.

Balancing the possibility of global oil market oversupply is the increasing oil demand of Asian markets, which have taken in 70% of Iran's energy exports since the lifting of sanctions in January.  India has imported 576,000 barrels per day and China has imported 749,000 barrels per day; both countries have state-owned energy corporations negotiating with NIOC to develop oil and gas fields in Iran.  India's Oil and Natural Gas Corporation has signed a preliminary agreement to develop the Farzad-B gas field in the Persian Gulf. Chinese firms, China National Petroleum Corp. and China Petroleum & Chemical Corp. are close to signing deals to develop two oil fields in western Iran.

NIOC has indicated that since opening pre-qualification applications sixteen international energy firms have entered into negotiations.  In addition to these firms, Iran is also in negotiations with Denmark's Maersk Group and France's Total SA to further develop the South Pars field.  The South Pars field - which holds an estimated 7.5 billion barrels of oil - is a transnational field, stretching across the Iran-Qatar border in the Persian Gulf.  Iran's development goal in South Pars involves drilling approximately 300 new wells in order to close the gap with Qatar, who have already sunk 300 wells in their own territory since 1991.  Total SA in particular is no stranger to Iranian oil development; prior to sanctions they were involved in the development of gas projects in the South Pars field and kept an office in the country even during the period of American sanctions.  They were also penalized $398.2 million stemming from American criminal and civil allegations that the firm paid $60 million in bribes to win Iranian oil contracts between 1995 and 2004.

While energy development in Iran is currently a hot commodity among international energy firms, initial negotiations have not been entirely calm.  Corporate negotiating teams have reported that NIOC has not given enough information on the geology of Iranian energy fields or on the terms of contracts, which will likely be joint ventures where international investors are paid with a share of output pegged to the Euro, rather than the U.S Dollar.  In addition, investors are as yet unclear as to the time span for recouping capital investment or who they will be partnering with in terms of Iranian domestic firms.  Despite this, investors remain cautiously optimistic about development plans, likely because the overall cost of oil production in Iran remains a globally miniscule $9.08 per barrel.  Even with the Brent crude price hovering around $50 per barrel, Iran represents a gigantic source of profit for international energy concerns.