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European oil majors lay groundwork ahead of nuke deal with Iran

Top-level executives from Eni and Royal Dutch Shell have been in consultations with high-level Iranian officials to discuss investments in the Iranian energy sector. So how will the oil markets react to this news?

The P5+1 negotiations with Iran vis-à-vis a nuclear deal have sparked interest of another kind with European oil majors and the Iranian government. With expectations high that the Iranians will come to a consensus with their negotiating partners, oil companies are attempting to cash in on the deal with agreements of their own.
High-level executives from Eni and Royal Dutch Shell (RDS) held meetings with various officials in Iran to discuss ways of forging agreements about investments in the energy sector. The talks between these European oil majors and Iran were held in May and June 2015, and are the first of their kind. As the differences between Iran and its negotiating partners narrow, interest in investing in Iran’s massive energy sector grows.
The Iranian energy sector is ranked number three in the world, and the country boasts vast resources of natural gas and oil. However, the cash-strapped Iranians are in desperate need of multinational investment to develop these natural energy resources. The dollar figure needed to tap into the vast energy resources in Iran runs into billions. If Iran can secure the financing, it will be better positioned to double its energy production by 2020.

Royal Dutch Shell upbeat on prospects

RDS executives held intensive meetings with their Iranian counterparts in Tehran during May and June. The topic of discussion centred around the payment of the remaining debt due to the NIOC (National Iranian Oil Company) for crude oil that had been extracted. But the more important issue was how the two sides could cooperate should sanctions no longer remain in force.
RDS has made it abundantly clear that it considers any country fair game if it has been opened for business by the international authorities. A caveat is in order though – only if sanctions are removed will RDS, Eni, Total and others consider investing in the country.
RDS is keeping its options open with respect to brokering an agreement with the government of Iran to develop its vast energy sector. Presently, the Iranians are producing an estimated 2.7 million bpd. That could be boosted to 3.3 million bpd within two years according to analysts at Wood Mackenzie. The West has made Tuesday June 30 the final day for a deal to be struck, but there remain key sticking points between the Iranians and the P5+1.
It isn’t only RDS executives intent on cashing in with the Iranians, it’s Eni too. Mr Claudio Descalzi of Eni met with the Iranian Oil Minister, Bijan Zanganeh, during May 2015. The Italian oil major is looking forward to reinvesting in Iran, and developing its oil and gas industry. However, as with RDS, sanctions must be lifted as a precondition to any European investment initiatives. The Italians are confident that Iran is capable of almost doubling its daily oil output to 5 million bpd by 2020.

Iranian oil production set for huge expansion by 2025

The Iranian parliament is averse to a deal allowing western inspectors at nuclear enrichment facilities and hardliners are averse to a deal in any form that curbs Iranian nuclear ambitions. Should Kerry and his negotiating team strike a deal, the nuclear programme will be rolled back and the Iranians will be handsomely rewarded with much-needed sanctions relief.
In order for Iran to benefit even more from the deal, they would need to tap into their energy sector to the tune of $50 billion. That could allow for up to 4.4 million bpd to be produced by 2025.
Foreign groups will likely be treated as joint venture partners when they invest in Iran. This is being considered as an alternative to treating them as contractors. Plus, the Iranians are also considering returns in line with risk and the price of oil.
Since the contracts are likely to run for 30 years, the Iranians are clearly showing strategic focus in their discussions with foreign companies like Eni, RDS, Total, Lukoil and others. The European oil majors want to pen deals better than they got out of Iraqi oil contracts.

Iranian oil production can dislodge key OPEC nations

The most obvious outcome of reinvesting in Iran is a glut of oil availability on the market. The Iranian output during 2014 averaged 1.4 million bpd, but it was 2.6 million bpd back in 2011. The main buyers of Iranian oil include European nations and the Asians.
The real concern for oil producers – especially in the West – is that prices could drop by as much as $15 per barrel by 2016 if Iranian sanctions are lifted. Should that be the case, it would be wise to go short on oil for the medium term. A medium-term price in the region of $45-$50 per barrel could be on the cards if Iran begins exporting at normal levels.
Brett Chatz
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The content of this article is the personal opinion of the author and not The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.

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