While Iran has been engaging in nuclear diplomacy with Western powers, it has also been attempting to engage in parallel oil diplomacy designed to woo investment from Western oil and gas companies now barred by international sanctions.
Iran has invited major petroleum companies to talk about returning to Iran and appointed officials who are known to Western companies for their pragmatism. These officials have signaled a new willingness to make contract terms more attractive than they have been in recent years.
For now, sanctions are curbing Iran’s oil exports, blocking payments for past sales and crippling new investment. And while Western investment in new projects probably would not be possible until sanctions are completely lifted, a temporary easing of sanctions on transactions with Iran’s central bank might clear the way for Chinese and other buyers of Iranian crude oil to immediately pay tens of billions of dollars owed for past shipments.
Even amid sanctions, Iranian oil exports account for 80 percent of the country’s foreign exchange earnings and about half of government revenue, according to the Energy Information Administration.
Iran’s willingness to engage with the United States and other Western powers worried about Iran’s nuclear program has already changed price expectations in the oil markets, where anxiety about conflict that could disrupt oil supplies has given way to anticipation of an easing in sanctions that could bring higher Iranian output.
Where traders and analysts once said that the mere possibility of an attack on Iran’s nuclear facilities by the United States or Israel added as much as $5 to $15 a barrel when tensions ran high, now they are focused on how much a reopening with Iran might trim the price of crude oil.
“I would say right now there isn’t an Iran premium,” said Robert McNally, president of the Rapidan Group, a consulting firm. “Now there’s an Iran discount. All of a sudden, everyone is abuzz talking about how soon Iran’s exports could resume once sanctions are ended.”
Iran is currently exporting roughly 1 million barrels a day, down by more than half, and production has slumped to its lowest level since 1992.
“In a grand bargain scenario . . . the Iranian risk premium could erode and exert downward pressure on prices,” said Barclays analyst Helima Croft in a September note, though she cautioned against “irrational exuberance” and warned that “the physical void of Iranian barrels is likely to remain a fixture of the oil market because of sanctions and technical difficulties.”
She said in an interview Saturday that Congress, where the Senate is weighing a House measure that would tighten restrictions on Iran, was unlikely to lift sanctions anytime soon. She also noted that several state legislatures had also passed their own sanctions measures that could remain obstacles to new investments. “The only thing Congress seems united on is antipathy toward Iran,” Croft said.
But Iran under President Hassan Rouhani is already reaching out to Western oil companies, inviting them to meet at the time of the U.N. General Assembly sessions, according to one major U.S. petroleum giant that was invited but did not attend. Oil company executives did, along with other major American business leaders, attend a luncheon with Iran’s foreign minister.
Iran has also named Mehdi Hosseini, an adviser to the oil minister, to come up with a plan that would attract $100 billion in new investment over the next three years. He told the Financial Times in an interview that the current “buyback” contracts for paying foreign oil companies would be altered to a format that would allow foreign companies to book oil reserves from operations there.
The oil minister named in August, Bijan Namdar Zanganeh, who served in the job from 1997 until being ousted by President Mahmoud Ahmadinejad in 2005, is well known to Western oil companies. His “reputation in the oil industry is very positive,” said Paolo Scaroni, chief executive of the Italian oil giant ENI, which is still producing oil in Iran under a sanctions waiver that allows the company to recover money invested there long ago. “He is a very pragmatic and reasonable person with a lot of experience.”
Iran needs to bring capital and technology to its long-neglected oil fields. Iran’s oil and gas reserves are among the biggest in the world, but its oil fields have suffered from a lack of investment and technology.
Barclays analysts say that the production capacity of Iran’s existing oil fields is falling and that the country needs technology for enhanced recovery. Iran is injecting increasing amounts of natural gas in oil reservoirs to maintain output, and Barclays said Iranian authorities have said that the country uses about 20 percent of its annual gas production for enhanced oil recovery.
Despite Iran’s overtures, Western firms are being cautious. “Will the situation in Iran evolve positively, and will Iran be part of the international community?” asked Scaroni. “I hope yes, but it is very early days to say that.”
In the short term, Iran needs cash. And the most immediate impact of a nuclear deal that eases financial sanctions could be the unfreezing of money already owed to Iran by buyers of its crude. Jin Canrong, associate dean of the School of International Studies at Renmin University in Beijing, said that Chinese oil importers owe Iran $22 billion that cannot be paid because of the sanctions prohibiting transactions with Iran’s central bank.
In the absence of such foreign-exchange payments, Iran has resorted to barter and other financial arrangements. Croft of Barclays said that Indian buyers of Iranian crude oil have made payments into rupee accounts in India and that Iran taps those accounts when it imports goods from India.
Yet Iran is still struggling to keep its Indian customers in the face of tight sanctions. An article Saturday in the Tehran Times said that Iran was offering free delivery of crude oil to buyers in India, which would save about $1 a barrel. The paper also said that Iran was offering discounts to customers who increased purchases.
Even with an easing of tensions over Iran, crude oil prices remain high, bolstered by supply disruptions in other oil-producing countries. In Libya, militias have seized some of the country’s oil terminals, sharply reducing exports. ENI, the biggest international oil company in Libya, is producing just 135,000 barrels a day, well below its 300,000 barrel-a-day capacity. In Nigeria, continuing insurgent attacks in the oil-rich Niger Delta have reduced output, too.
Moreover, many analysts and traders anticipate strong demand if the economic recovery picks up in the United States and Europe and if China’s economy doesn’t slow down as much as anticipated. OPEC is forecasting about a 1.1 percent increase in world oil demand in 2014 to 90.8 million barrels a day.
With disruptions in Libya and sanctions on Iran, Saudi Arabia, the world’s largest oil exporting nation and the swing producer in OPEC, has ramped up its output to prevent prices from rising further. If Iran persuades the United States and its European allies to ease sanctions, oil prices might remain high if Saudi Arabia cuts back after Iran’s exports increase.
But for now, Congress is talking about tightening sanctions, not easing them. Currently, the Obama administration has been giving waivers to some buyers of Iranian crude as long as those countries can show that their purchases are declining significantly. The bill under debate now could cut back on the use of such waivers.
The major oil companies, though interested in Iran’s rich resources, realize that limits on their activities might be among the last to be lifted.
“The Iran issue is not solved,” Scaroni said. “It’s not getting worse, but it is not solved.”