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Can Iran Attract Foreign Investments By Oil Majors Such As BP And Shell plc?

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By: MICHEAL KAUFMANPublished: Apr 1, 2015 at 8:34 am EST

Recently, Iran has been exposed to numerous sanctions by the West over concerns that the country was developing a nuclear project. However, talks between the US and Iran have started over a new nuclear deal. If the deal is successful, then sanctions are expected to ease off and Western energy companies are expected to return to the country.

According to Bloomberg, the discovery of oil in 1908 in the country laid the foundations for the development of the British oil major, BP plc (ADR) (NYSE:BP). An oil consultant in Iran, Nader Sultan said: “You look at the history of the oil companies, and that history is Iran.”

With the ease off in these sanctions, BP, Royal Dutch Shell plc (ADR) (NYSE:RDS.A), Total SA (ADR) (NYSE:TOT), and Eni SpA (ADR) (NYSE:E) would be looking forward to return to the country. Iran currently holds 10% of the world’s reserves and is ranked fourth after Saudi Arabia, Venezuela, and Canada. This shows that energy companies see Iran with a lot of upside potential.

The sanctions for Iran along with its war with Iraq have been detrimental for the energy industry. Ten years ago, the country had a daily production of 4.5 million barrels, but it has gone down to 2.8 million barrels per day. Therefore, the foreign investments by the major energy companies are bound to benefit the country in terms of production.

However, the return of foreign companies to the country would not be straightforward. As reported by Bloomberg, an analyst at Manaar Energy Consulting, Robin Mills, said: “The international oil companies want to come back to Iran, but only if the conditions are right.”

With little to no foreign investment, Iran has failed to develop its gas reserves. This is primarily due to the country not possessing the sophisticated techniques and technology required to maintain these reserves. The country also requires technology to develop liquefied natural gas (LNG) plants. Thus, the return of foreign investment to Iran remains its top priority.

As per Bloomberg, a former official of the White House, Jason Bordoff, has indicated that Iran has a tough job ahead of boosting its output. According to his estimates, the country requires investments of around $50-100 billion to increase production. He also indicated that the contract terms were important in attracting and maintaining foreign investments. He pointed out the fact that many European oil majors started leaving the company even before the sanctions, mainly due to the contract terms.

The companies complained that the contract terms offered lower returns. However, Iran’s oil minister, Bijan Namdar Zangeneh, has indicated and assured companies that the new terms called the “Iran Petroleum Contract” would be better than the previous terms.

According to Bloomberg, many consultants and lawyers indicated the terms to be far better than the previous terms. Former head of Eni SpA Leonardo Maugeri said: “Zanganeh knows the problem and the new formula he is designing is much more favorable.”

However, some other oil consultants were hopeful and felt the global environment has changed rapidly and that Iran would have to consider a lot of other factors. Moreover, crude oil prices since June 2014 have fallen over 50% due to which profit margins have declined substantially for energy companies, which is why they are looking to invest in countries that offer better returns.

Meanwhile, investments are now open to Mexico for the first time since 1938 and Iran would also have to compete with countries such as Iraq for foreign investments. As a result, the country would have to carefully assess and offer terms suitable to attract foreign investments.

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