Thursday,19 July, 2018
Current issue | Issue 1274, (10 - 16 December 2015)
Thursday,19 July, 2018
Issue 1274, (10 - 16 December 2015)

Ahram Weekly

Back in the game

Iran is positioning itself to reclaim its share of the global oil market, writes Camelia Entekhabifard

Al-Ahram Weekly

One week ahead of this week’s 168th meeting of OPEC oil ministers in Vienna, Iran unveiled its formula for new petroleum contracts at an energy conference in Tehran.

Iran hopes to attract $30 billion in foreign investments in the oil and gas sectors, and is offering 15- to 20-year contracts that can be extended by five years to allay investor concerns.

The nuclear deal signed mid-July between Iran and the P5+1 group on implementation will lift long-standing sanctions, especially in the energy industry. Iran is now positioning itself for a strong comeback on the global market.

Conservatives are hesitant about the formula proposed by Iranian Oil Minister Bijan Namdar Zangeneh because of dealings with foreign investors, especially US companies. The presence of American companies is important to reassure other investors, however, and for stronger competition among potential partners.

“There is no objection or any problem with the participation of American companies [in the oil sector],” Zangeneh told the conference in Tehran.

Hardliners criticised the proposal as violating Iran’s constitution, which prohibits foreign ownership of Iranian infrastructure projects. To override the constitutional stipulation, the new formula states that any contractor must have an Iranian partner with a majority stake of at least 51 per cent.

Upon arriving in Vienna on 3 December, Zanganeh told reporters that Iran would increase oil production once sanctions are lifted. “We will immediately increase output by 500,000 barrels per day, and in a short time reach one million barrels per day,” he announced.

Zanganeh said that Tehran is determined to recapture its global share, even if the price drops to $20 per barrel (or around half the current price). Iran produces about 2.8 million barrels per day (bpd), about half of 2011’s output of four million bpd. If it can attract investors, its goal is to reach 5.7 million bpd by 2021.

At the OPEC meeting in Vienna, the world is coming to see what Iran has in mind after sanctions are lifted, estimated to happen in early January 2016. One Japanese journalist told Al-Ahram Weekly that Tokyo is glad to see Iran back in the oil market, but it is uncertain if Zanganeh’s terms will be reasonable to Japanese investors.

“A 20-year contract is a very long time, and post-revolution Iran was never stable enough to convince investors about long term commitments,” said the journalist.

The oil embargo, imposed in 2012 by the US and Europe to punish Iran for its controversial nuclear programme, damaged the nation’s energy industry and sales revenues. Iran has the world’s fourth and second largest oil and gas reserves in the world respectively, but due to sanctions and post-revolution developments, investing there has always been seen as high risk.

The low price of oil and sanctions seriously damaged Iran’s foreign currency reserves, and led to rising inflation and devaluation of the local currency. This weakened the economy and pushed citizens into poverty.

Domestic instability, Iran’s involvement in regional crises and internal rivalries within the regime are all causes for concern. Former president Mohammad Khatami was engaged with the EU to resolve the dispute over Iran’s nuclear programme, and his government voluntarily suspended uranium enrichment until a final agreement was reached with the West.

But when his successor, President Mahmoud Ahmadinejad, was elected he reopened the facilities that were sealed by the International Atomic Energy Agency (IAEA) and also stepped up Iran’s nuclear programme.

In response, the IAEA’s file on Iran was referred to the UN Security Council and several resolutions were adopted relating to Iran’s nuclear programme. During Ahmadinejad’s eight-year presidency, most energy investors left Iran, and the British and Canadian embassies closed their doors in Tehran because of disputes with the government in power at the time.

But that was then and this is now. Today, Iran is slowly returning to the international fold, despite great resistance by hardliners inside Iran and some foreign groups whose interests are served by continuing to isolate Iran.

After two years of negotiations with the West and six months preparing to implement the nuclear deal, Iran is finally ready for foreign investors. Several obstacles remain, however.

First, investors want to see whether incumbent President Hassan Rouhani, a moderate, is able to win another term in office.

Second, regional competition with rival Saudi Arabia in the oil industry is fierce. When the oil embargo was imposed on Iran, Saudi Arabia stepped in to fill the gap and even oversupplied the market to reduce the price in comparison to US shale oil.

Today, Iran is ready to return to the international market and could also oversupply to cut oil prices even further. While Saudi Arabia may be able to weather even lower oil prices, other OPEC members may not support Saudi Arabia’s desire to use low prices as a political weapon much longer.

The OPEC ceiling was set at 30 million bpd in 2011, however some reports have hinted that 31.5 million bpd are now being produced. With no quota for cartel members, they can pump as much as they want without consequence. Because of this, Zanganeh openly announced that Iran will soon be producing one million bpd, to warn others not to oversupply the market.

Iran and Saudi Arabia may soon have a new battlefront beyond the borders of Syria and Yemen — namely, the oil sector. No decision was taken in Vienna to reduce production, and oil ministers will meet again within six months to review post-sanctions Iran and assess political developments in the region.

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