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Iran and Pastures New

With EU and US sanctions lifting, Iran is back in business. Possessing the fourth largest oil reserves in the world, the state is ready to step up their game and increase their exports to the West – with a multitude of foreign companies rushing to make appointments. However, with Iran’s outdated infrastructure and the current price of oil, does this potential new market represent excessive risk or a golden opportunity?

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At the end of September Tehran opened the door of the very first European trade office to be established since the announcement Iranian sanctions were going to be lifted. At the same time a 130 strong delegation from Medef, the French business lobby group, arrived with the hope of tapping into the demand of the country which has been isolated for so many years.

And that’s only one of the many delegations booking flights into Tehran as the Iranian oil rush gets underway. ABC News reports that officials are struggling to schedule all the meetings requested by visiting companies.

Despite the low price of oil, struggling to lift itself beyond $50pb, and the knock on effect it has had on projects, Iran is being marketed as a country able to attract that investment which has dried up elsewhere. “The oil market is moving in a very unpredictable direction right now but there are big opportunities,” said a former National Iranian Oil Company official. “Investors are interested because of the potentials and the cost will be cheaper than elsewhere.”

Iran is estimated to have the fourth largest oil reserves in the world and 18% of the world’s gas reserves but years of sanctions impacting on investment and technology means Western buy-in will be crucial. Improvements to the country’s infrastructure will also be necessary where there is currently a situation where gas fields in the south are not linked with the more populous north so the demand is met instead by bringing in gas from Azerbaijan and Turkmenistan.

The Iranian Oil Ministry is taking a proactive approach to drawing it in by creating the Iran Petroleum Contract. The NIOC summit which is likely to be postponed now until February (from initial date of 14-16 December) will share more details about the IPC but it will cover a range of projects including green and brownfield development, exploration and EOR/IOR located both offshore and onshore in the upcoming bid round.

Iran predicts it will be able to increase its oil exports by 500,000 barrels a day by the end of next month, and 1 million within a year. The Chief of Investment for the NIOC Ali Kardor told the Wall Street Journal, “We are ready.”

But is the market? Iran currently produces just over 3 million barrels of oil a day, and of that around 1 million are exported. For it to break even a recent Deutsche Bank survey reported it required prices of $130pb, with Saudi Arabia and Russia not too far behind that at $105pb. The prospect of increasing supply into an already saturated market is alarming some. “With Iran coming back, Saudi Arabia not cutting any production and all the macroeconomic concerns around, there is a high risk we could have nasty downward move by the end of the year,” according to Doug King, chief investment officer at RCMA Asset Management. He told The Journal that is a possibility that oil could fall into the low $30s. “Prices will then stabilize but remain lower for a longer period.”

To reach export levels of 3 million industry experts estimate it would require $100b in investment which creates quite the predicament, and could be one reason why the IPC gives back high reward for high risk. Without that new money and expertise coming in, there’s no dramatic increase in oil production – but the global price is not so directly threatened. Take the chance, buy into a 30 year contract to produce oil and without a decision to row back from OPEC, send it into the market which causes prices to sink further – but how long could that last for before it picks up again?

The next months will be a test for the players in the market but as the veteran Las Vegas gambler VP Pappy once said, “If you ain’t a little scared when you enter a casino, you are either very rich or you haven’t studied the games enough.”