It’s been just over two years since the toughest oil sanctions were lifted on Iran. Unrestrained, it didn’t take long for production to climb from 2.8 million barrels a day (b/d) to 3.8 million b/d, where it stands today. A recovery of 1 million b/d in a matter of months is admirable after years of sanctions. But for the Iranians it was anti-climactic.
Production quickly stalled along with prospects for foreign investment. By late 2016, the writing was on the wall. Iran was not open for business just yet, despite oil sanctions being waived. Worse yet the election of Donald Trump in November 2016 raised fears that the nuclear deal might soon be scrapped. New sanctions became a real possibility. With nothing to lose and no credible way to raise production, with or without foreign companies, Iran joined OPEC and non-OPEC producers in Vienna in late 2016. There the Iranians agreed to keep production at 3.8 million b/d in a joint effort to raise prices by limiting production.
Going into 2016, after three full years of sanctions, Iran’s oil ministry said it wanted to attract $150 billion over the next five years.
Going into 2016, after three full years of sanctions, Iran’s oil ministry said it wanted to attract $150 billion over the next five years. In the two years since the Joint Comprehensive Plan of Action took effect, it has signed a handful of deals worth a fraction of that amount. No blockbuster deals have materialized up to now. May 12 could prove decisive this year as that’s when President Trump will next decide whether to waive sanctions or re-impose them. (He’s telling the Europeans to fix the JCPOA or else.)
As the Iranians tell it, blame for Iran’s post-sanctions investment woes falls squarely on the White House. “If the same policy of confusion and uncertainties about the JCPOA continues, if companies and banks are not working with Iran, we cannot remain in a deal that has no benefit for us,” Iran’s Deputy Foreign Minister Abbas Araqchi said last month. “That’s a fact.”
The reality is more complicated. Trump’s hostility is a major obstacle to foreign investment; more so for oil and gas firms that think in terms of decades and many billions of dollars. Despite Trump’s threats, however, the Iranians inked a gas deal with a consortium led by France’s Total last year and this year they signed an oil deal with Russia’s Zarubezhneft. (Combined these commitments add up to $5.5 billion.) Several memorandums of understanding or MOUs could still turn into deals. But it’s not all about Trump. What’s holding back Iran these days is a combination of developments inside and outside the country.
The lifting of sanctions in 2016 kicked off a nasty political debate inside the country about revised contract terms and who exactly should benefit from Iran’s oil sector revival.
To start, the lifting of sanctions in 2016 kicked off a nasty political debate inside the country about revised contract terms and who exactly should benefit from Iran’s oil sector revival: Iranians or foreigners. In November 2015, with the nuclear deal agreed to, Iran began hyping its new and improved Iran Petroleum Contract or IPC. But the debate dragged on well into 2016. Dozens of changes were made and Supreme Leader Ali Khamenei saw fit to chime in at one point because he felt the terms were too friendly to foreign companies. Iran could not tender new projects until the terms were finalized, but, going into an election year in 2017, those opposed to President Hassan Rouhani were bent on denying him any deals that could boost his economic program. Thus, the oil ministry was stuck in a holding pattern until after the elections. Rouhani was re-elected last May. The first deal was done in July.
The politicization of Iran’s energy sector creates headaches and delays otherwise. Last month, a $600 million deal to liquify Iranian gas and export it from Kharg Island fell apart after the terms were attacked by hard-liners in parliament. The project—a joint venture with a Norwegian firm—would have been the first of its kind for Iran. The row last year between India and Iran over the Farzad B gas project points to more uncertainty even when firms are convinced they’ve reached the finish line and have political clout in Tehran. The Indian proposal could still be retooled but a year has passed in the meantime.
Besides domestic politics, the Iran investment bonanza is stalling because its banking sector isn’t up to international standards.
Besides domestic politics, the Iran investment bonanza is stalling because its banking sector isn’t up to international standards. Iran’s corporate registries (those that prove ownership) are unreliable and outsiders are afraid to accidentally do business with criminals or sanctioned individuals and companies. In February, Iran’s shortcomings were made clear yet again by the Financial Action Task Force (FATF), an intergovernmental coordination group dedicated to raising standards and transparency to prevent money laundering, terror finance, and WMD proliferation.
FATF identified nine issues that make Iran a dangerous jurisdiction to do business in, all of which pointed to a lack of terror finance and money-laundering safeguards. FATF has called on Iran to criminalize terror finance and remove exemptions for terrorist groups “attempting to end foreign occupation, colonialism and racism.” That’s easier said than done as it would require a constitutional amendment that’s absolutely not in the cards. Iran’s constitution calls on the state to support “the oppressed” around the world, wherever the Supreme Leader deems them worthy. Iran’s support for terrorist groups is state policy enshrined by law and commanded by God. Thus, UN Resolutions and the American-European consensus have no bearing on Iran’s definition of terrorism.
Its export recovery coincided with lower prices and it’s seeking investment at a time when the industry is slashing capital spending across the board.
All these factors complicate the picture, but they’re also playing out against the backdrop of relatively weak prices, averaging around $45 in 2016 and $55 last year. The timing could not be worse for Iran. Its export recovery coincided with lower prices and it’s seeking investment at a time when the industry is slashing capital spending across the board. Where would Iran’s push for foreign investment stand now if oil prices were still at $100?
To be clear: There’s no denying that Trump’s rhetoric has put foreign companies on edge. If Hillary Clinton had won the 2016 election, and the Iran nuclear deal was entrusted to another Democrat, it would be safe. Iran’s investment outlook would be better, for sure, but it would not be spotless. It’s plausible that international oil companies would be less hesitant, but it’s hard to imagine a mad dash to Tehran, given other circumstances laid out here.