November 15, 2016    4 minute read

Is Total Signalling The Rebirth Of Iran?

Back On Track    November 15, 2016    4 minute read

Is Total Signalling The Rebirth Of Iran?

After over six years of absence from Iran, Total announced a €4.8bn contract to develop South Pars gas field to supply the Iranian domestic market. This project is a joint venture between Total SA, which will control 50.1% of the operation, China National Petroleum and Petropars, a subsidiary of National Iran Oil Company.

Iran’s Energy Resources

Iran is a member of the Organization of Petroleum Exporting Countries (OPEC) and meets most of its internal energy demand through its wealth of domestic resources. Natural gas is the mainstay of Iran’s energy system. The country has the largest proven natural gas reserves in the world, ahead of countries such as Russia and Qatar. Straddling between Iran and Qatar, the South Pars 11 (SP11) is the largest natural gas field in the world and covers 9700 square kilometres of which 3700 square kilometres are situated on Iranian soil.

The South Pars 11 production is estimated at 1.8 billion cubic feet per day, or 370,000 barrels of oil per day. Upon the lifting of sanctions in mid-January 2016 and after the inspection of nuclear sites by the International Atomic Energy Agency (IAEA), Iran is seeing favourable conditions for the revival of its economy, mainly through the exploitation of its natural resources.

With an oil market full of uncertainties, the country makes the production of natural gas its priority to resume hydrocarbon exports.

The Transition To Nuclear Electricity

One of Iran’s main objectives is also to reduce its dependence on polluting fossil fuels, of which it is one of the world’s leading producers. Following the signing of the international agreement with the 5 + 1 group (comprised of members of the UN Security Council and Germany), Russia and Iran have decided to strengthen their cooperation in the field of nuclear energy.

To date, Iran has only one nuclear reactor for power generation, but Russia has already pledged to help in the construction of nine new nuclear reactors.

The Iranian government is aiming to develop a total of 20 nuclear reactors over the next few decades. Foreign investments, through partnerships with the Iranian state, are likely to happen in the future and will strengthen Iran’s production objective of 20,000 MW in the long-term for nuclear electricity.

The Uncertainty Of Oil Production Forecasts

At the same time, forecasts for the oil market are still highly uncertain, and analysts fear a relapse of prices after the increase to 50 dollars per barrel. A recent announcement from the International Energy Agency (IEA) says non-OPEC countries will increase their production in 2017.

The output of these countries is expected to surge at a historic high level of 57.2 million barrels per day. This increase comes mainly from Russia, which is fully opening the taps and should continue to increase its production by 119,000 barrels per day.

The Crucial Vienna Meeting

The OPEC has pumped a record level of 33.83 million barrels per day in October, and the future balance of the market will depend in particular on its decision to effectively cut production, which must be taken at its meeting on November 30th in Vienna.

There are two possible outcomes of this meeting. The first one is that countries freeze production, which will result in placing the market in deficit for 2017 but with a stock too important to expect a significant rise in the price per barrel.

The second outcome would maintain the current production volume in a market which is already heavily oversupplied. This would result in an increased risk of a new collapse in prices.

Conclusion

Iran seems to be on the right track and the recent contract signed by Total will surely open the door to other foreign investments on its territory. However, a recent concern has emerged for future investors with the election of Donald Trump to the White House.

The President-Elect has indeed widely criticised the nuclear agreement signed with Iran’s and could jeopardise it once in office.

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