NIOC to complete a $2.5 billion deal with local companies to ramp up oil output
Iran has won significant concessions and secured the right to pump more oil even as rival Saudi Arabia and its Gulf Arab allies have agreed to curb output at the informal meeting of the Organization of the Petroleum Exporting Countries (OPEC) members, on the sidelines of the International Energy Forum (IEF) in Algeria from September 26-28th, 2016. As a first step in this direction, Iran is taking steps to revive its sanctions-ravaged oil industry, with the state-run National Iranian Oil Co. (NIOC) signing a new-model oil investment contract, as reported by Bloomberg on October 4th, 2016. As part of the contract, NIOC will complete a $2.5 billion deal with a group of local companies.
The new type of contract, termed the Iran Petroleum Contract (IPC), is aimed at offering better returns on investments in Iran’s oil and natural gas production, a crucial aspect to increasing the country’s long-term export potential. The IPC is hence seen as core to the country’s plan to raise crude production to the pre-sanctions level of 4 million barrels per day (bpd).
The launch of the IPC has been postponed several times earlier as rivals of President Hassan Rouhani opposed any type of deals that could end the so-called buy-back system, under which foreign firms were banned from owning stakes in Iranian companies. The signing of the first IPC would intensify competition among international oil majors for long-awaited contracts in the new format. Oil majors such as France’s Total S.A. and Italy’s Eni S.p.A. have said they would invest in Iran only if there are major changes to the buy-back contracts of the 1990s, which are deemed to be financially unfeasible.
As a first step, NIOC will sign a contract with local company Setad Ejraye Farman Emam under the IPC to develop the second phase of Yaran field, and EOR (enhanced oil recovery) and IOR (improved oil recovery) contracts for Koupal oil field in southwestern Iran.
Iran to benefit from recent OPEC deal
At the recent IEF gathering, OPEC members agreed to reduce oil output to 32.5 million bpd from the current levels of around 33.24 million bpd. However, OPEC will decide on the production levels of each country at its next formal meeting in Vienna on November 30th, 2016. Iran had argued that it should be exempted from such limits as its production has just started recovering after the lifting of E.U. sanctions earlier in 2016. Iran’s production has been steady at 3.6 million bpd in the past three months, close to pre-sanctions levels, although the country says that it wants to ramp up output to more than 4 million bpd when foreign investments kick in.
Given the sharp uptick in crude oil prices, which are hovering above $50 per barrel after the OPEC deal to curb output, Iran’s economy stands to gain from the ramping up of oil output and the crucial foreign investments to revive its ageing fields.
Iran’s economy to benefit from crucial deal
The prospect of higher oil prices, coupled with increased investment in Iran’s battered oil industry, will also boost chances of President Rouhani, who faces a re-election in 2017, winning the elections since voters would be convinced of economic gains from the IPC. Together with rising oil exports, the IPC would be evidence of the progress shown by the Iranian government with regard to new investor contracts.
The local Iranian companies that are parties to the IPC will also develop the South Yaran field in southwest Iran, near the Iraqi border. The oil contract assumes significance in light of the International Monetary Fund’s statement on Monday, October 3rd, 2016, that economic conditions in Iran are improving substantially and forecast growth of at least 4.5% in 2016-17. Currently, Iran is pumping 820,000 bpd more than in December 2015.
Iran aims to increase exports to 2.35 million bpd in coming months from about 2.20 million bpd, according to the NIOC. However, Iran may already be nearing its maximum output in the absence of new investment. Hence, Iran needs crucial foreign funds and technology to counter the natural decline of its aging fields and push production capacity beyond 3.8 million bpd to the pre-sanctions level of 4 million bpd, according to market watchers. The pressure is now on the NIOC to show that it can ramp up production to pre-sanction levels over the next few months.