Corporate Debt Review

Next Steps for the Iranian Market

Sanctions Still Sting

I am just back from four days of meetings in Frankfurt. The occasion involved discussions with leading Iranian energy bureaucrats and national company heads in what was the first “summit” on Iranian natural gas and LNG (liquefied natural gas) since the Iranian nuclear accord was agreed to.

That accord is more properly labeled the Joint Comprehensive Plan of Action (JCPoA) and was signed between the five permanent members of the United Nations Security Council (the U.S., UK, France, Russia, and China) plus Germany on the one hand, and the Islamic Republic of Iran on the other. JCPoA was agreed to on July 14, 2015, adopted on October 18, and implemented on January 16, 2016.

European parties have begun to implement ways to lessen existing sanctions against Teheran, which were technically beginning a phase out last year. The current status, even without the renewed political bluster from Washington, still requires a demonstration of compliance from Iran before main sanctions are loosened.

The sanctions most of interest to Iran pertain to prohibitions against hydrocarbon trade, including extension of penalties to shippers and insurers, access to Western banking, and the ability to import badly needed technology and expertise to reverse declines upstream while attending to serious (and intensifying) problems in the midstream transit of oil and natural gas.

Iran has arguably the largest reserves of conventional natural gas in the world, but remains dependent on imports from Turkmenistan to meet energy needs in the northern portions of the country, has ongoing difficulties in meeting quality standards for exports to Turkey (Iran’s only operational natural gas pipeline export contract), and has experienced repeated delays in moving forward on a pipeline project across Pakistan to the prized and rapidly expanding end market of India. These dynamics are all testimony to the impact of sanctions.

Sanctions also cut deeply into crude oil export volume, bringing overall volumes to multi-decade lows. My estimates put the nadir at 1.7 million barrels a day, or barely 40% of pre-sanction levels.

Accessing Money, Expertise

A greater and aggravating problem, however, has been on the financial side. Given the lack of access to Western banking, each export deal designed to evade sanctions cost more to put together and resulted in a reduction in revenues on the other end. The inability to draw on U.S. dollars (the currency in which virtually all oil and gas is traded) further exacerbated the situation.

Overlapping all of this was the dearth of needed technology obtainable. The sanctions made most Western sources unapproachable, and what Russian and Chinese options remained were hardly on the same level.

Therefore, Iran relied upon domestic sources of finance and expertise. The former drew from already insufficiently available revenue, further warping an increasingly distorted local economy, and straining the state banking system. The latter has led to delays in all manner of operations, increasing field inefficiency, and the resumption of some discredited practices aimed at arresting further production decline at the expense of reservoir structural integrity.

All these problems were supposed to move toward resolution following JCPoA. Teheran-based contacts have been upbeat about prospects and the early indications were that they may have been justified.

Long-stalled projects gave the promise of rebirth, and international majors like French Total announced initial planning on multi-billion investments in natural gas and LNG. Others including Shell were believed to be close behind.

With South Pars, the world’s largest offshore natural gas basin, and considerable onshore gas reserves, projects to develop gas for both pipeline export and tankers via LNG are regarded as a short-term recipe for improving foreign revenues.

Trump Train Derailing Recovery Hopes

But not so fast. There are two major concerns moving forward, either one of which will probably delay the process further.

The first is the new U.S. administration’s hard line posture on scrapping JCPoA and reintroducing heavy sanctions. On the campaign trail, President Trump consistently promised to tear up the agreement and hold Iran responsible for terrorism worldwide.

To be sure, any move with respect to Iran must be carefully considered and carefully orchestrated. The “Trust but Verify” mantra from the Reagan years remains as valid as ever.

Yet it is disconcerting to any seeking the removal of the U.S. from the accord when all sides acknowledge that Teheran has adhered to all its responsibilities under JCPoA to date. The “stick” approach is less useful in such matters than the “carrot.”

Iranian leaders I met with believe they will now be moving ahead with or without U.S. involvement. Nonetheless, American intransigence has consequences. Secondary sanctions applied against European assets in the U.S. – such as the hefty fine applied to French bank BNP Paribas – will prompt continental companies and banks to exercise caution.

Total last week indicated it would not move on a $4 billion project in Iranian LNG until the Washington matter was clarified. My conversations with Total execs in Frankfurt took place just as the company was making the delay acknowledgement from Paris. Our discussions surrounded my now all too familiar position as the go-to risk analyst.

When it comes to the Iranians, the overall position can best be summarized by His Excellency Amir H. Zamaninia, the Deputy Minister for Trade and International Affairs at the Ministry of Petroleum. Make no mistake. The gentleman below will be the deal maker in natural gas, LNG, and even crude oil moving forward.

H.-E.-Amir-H.-Zamaninia

H. E. Amir H. Zamaninia, Deputy Minister for Trade and International Affairs. Iranian Ministry of Petroleu

He and I spent much time together last week and will be meeting again soon. His Excellency acknowledges that the Iranian natural gas and LNG sectors require some $100 billion in investment. We also agreed that money coming into the sectors, provided there are adequate and transparent guarantees, will be at the deepest discounts experienced in recent memory.

The key to all of this will be detailed risk assessment on a range of matters both project specific and geopolitical. His Excellency graciously mentioned only me by name in his concluding comments to the summit, smiling at me when he alluded to the analysis and negotiations necessary to bring investment about.

Apparently, some of that risk analysis will continue to be my responsibility.

 

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.