Iran has long been wary of outside influence, especially when it comes to exploiting its natural resources. But now, the government is offering international oil companies their biggest role since 1979, when the newly-founded Islamic Republic nationalized the country’s reserves. In theory, it’s an attractive proposition for both sides. Iran needs oil revenue to revive its economy, the third-largest in the Middle East, which was set back by years of sanctions. Foreign companies are tempted by the potential profits that could be made even without a rebound in the price of oil, and President Hassan Rouhani’s re-election in May ensures another four years of government support for foreign investment. But there are plenty of risks to investing in Iran. Among them: that the U.S. will impose significant new sanctions on the country under President Donald Trump, who opposes the 2015 deal that allowed Iran to reintegrate into the world economy.
Iran’s oil output has settled just below its pre-sanction level, following the lifting of most measures in January 2016 after Iran reined in its nuclear program under its agreement with world powers. In a November deal among members of the Organization of Petroleum Exporting Countries to cut output, Iran was granted an exemption allowing it to raise production further. Expanding development of its oil fields will require outside technology, management expertise and capital, so the government has called on foreign companies to invest $100 billion in the oil industry. One obstacle has been the relatively poor contract terms Iran provided in the past. Iran’s cabinet approved a new model contract in August but only after Iranian conservatives, who oppose Rouhani’s efforts to bring foreign investment into Iran, forced the government to make amendments. Details, such as how investors will be regulated and how disputes will be resolved, were not made public. In November, France’s Total reached a non-binding agreement to develop a natural gas field in Iran, and the next month Royal Dutch Shell signed a deal to assess three of the country’s largest oil and gas fields.
From the first concession given to a British speculator in 1901 until the 1979 Islamic Revolution, Iran had almost no control over its most precious natural resource. For several decades the British government, through its majority stake in the Anglo-Persian Oil Company, effectively owned Iran’s oil and received the lion’s share of the profits. After years of mounting discontent, Iran’s parliament nationalized the country’s oil fields in 1951. The politician who spearheaded the takeover, Prime Minister Mohammad Mossadegh, was deposed in a coup backed by British and U.S. intelligence services two years later, and the power of the Western-backed Shah was restored. When Islamic revolutionaries overthrew the Shah in 1979, one of their first acts was to renationalize Iran’s oil. For two decades, no foreign oil companies operated in Iran. When they came back in the late 1990s they operated under short-term contracts that paid them a fixed fee to explore for oil and develop fields, with all the risks that entailed, but they got no share of production profits. Most of those companies stopped operating in Iran by 2010, as political risks started to outweigh the benefits.
Can Iran attract the top technology, hefty investments and long-term commitments it seeks? Big oil companies won’t pass up Iran’s fields lightly. The country’s crude is cheap to extract: Costs are less than half those in Mexico, for instance. And Iran holds about 10 percent of the world’s proven reserves. But the list of risks is long. Business regulations in Iran are complex. Investors will have to enter a joint venture with a local partner, making it harder to comply with international anti-corruption legislation and the remaining U.S. sanctions. The government hasn’t clarified whether it will agree to settle disputes through tribunals such as the International Court of Arbitration. Longer-term contracts will offer more opportunity to exploit difficult fields but will also lock investors into an unpredictable environment. Trump has argued that the nuclear deal is unacceptably favorable to Iran. The U.S. said in May that for the time being it would continue waiving sanctions – including restrictions on oil sales – eased under the agreement. But it imposed new sanctions related to Iran’s ballistic missile program, which is not covered by the nuclear deal.
The Reference Shelf
- A Chatham House study gives an outlook for Iran’s oil industry and investment contracts.
- A Brandeis University professor examines the internal politics of Iran’s oil industry.
- The Financial Times reviews a book on Mossadegh and the 1953 coup.
- Another Bloomberg QuickTake looks more broadly at Iran’s economy and investment climate.
First published Aug. 3, 2016
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