The Energy Briefing: Implications of Iran gas deal with France’s Total

The Energy Briefing: Implications of Iran gas deal with France’s Total

On July 3, Iran concluded a $5.9 billion deal with a consortium led by French energy giant Total to develop and produce gas from phase 11 of the South Pars gas field, the largest gas field in the world. This deal is a major victory for Hassan Rouhani’s administration, and could pave the way for other foreign investors willing to enter the Iranian market.

With this deal, Total is the first Western company to resume its activities in Iran since the lifting of the nuclear sanctions in January 2016. Under the terms of the 20-year contract, the French multinational now holds 50.1% of the consortium, alongside state-owned oil and gas company China National Petroleum Corporation with 30%, and National Iranian Oil Co subsidiary Petropars with 19.9%. As a first step, Total will invest an initial $1 billion in the South Pars gas field, before eventually injecting $4.9 billion in the project.

“We aren’t a political organization, but I hope this agreement will encourage other companies to come to Iran because economic development is also a way of building peace,” Total CEO Patrick Pouyanné said after signing the deal in Tehran. Total already has extensive knowledge of the Iranian market realities and practices, as it was the last Western energy company to suspend its activity in Iran, after sanctions were imposed by the international community nine years ago. This multi-billion-dollar gas deal could give a fresh impetus to Iran’s energy sector, and may encourage other investors to launch large-scale projects in the Islamic Republic.

A crucial deal for Iran’s economic future

Two years ago, the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States), the European Union (EU) and Iran reached a Joint Comprehensive Plan of Action (JCPOA), which imposed restrictions on Iran’s stockpiles of uranium and its ability to enrich it. In return, the EU, United Nations and U.S. agreed to remove sanctions which had been imposed on Iran for its nuclear program, opening the way to Tehran’s return to the bosom of the world economy. Indeed, Iranian President Hassan Rouhani, who played a significant role in the negotiation of the nuclear deal, counted on the lifting of sanctions and normalization of relationships with the West to boost the country’s economy.

The Iranian economy gained momentum in 2016 with an estimated 6.4% growth as a result of sanctions relief, following a 1.8% contraction in 2015. The International Monetary Fund (IMF) projected that Iran’s non-oil growth would reach 3.5% in 2017, up from 0.75% a year prior. Furthermore, Iran exhibits a tremendous energy market potential. According to the BP Statistical Review of World Energy, Iran has the world’s largest natural gas reserves and the second-largest oil reserves in the Persian Gulf. Yet, the JCPOA did not have the hoped-for effects on the economy, and medium-range growth forecasts are expected to be modest due to the lack of infrastructure and investment in the oil and gas sector.

Iran has even struggled to meet its own energy needs, and has long been a net importer of gas, largely from Turkmenistan. If it wants to increase its FDI inflows, Iran must attract foreign companies ready to invest and develop the energy industry. In this regard, the gas deal with Total is an important first step.

According to the BP database, in 2016, Iran’s daily natural gas consumption was about 1.6 billion cubic feet. In this context, the deal is extremely important for the country’s long term energy security, since it is expected that Total’s investment will produce 2 billion cubic feet per day for the Iranian domestic markets by 2021.

More importantly, the announcement of a wide-ranging deal with one of the most important company of the energy sector will sent positive signals to multinationals contemplating a return to Iran. For example, the deal could accelerate the implementation of a major project between the National Iranian Oil Co. and Royal Dutch Shell Plc, regarding the development of three of Iran’s largest oil and gas fields. In the days following the signing of the deal, an Indian consortium also declared that it was willing to invest $11 billion to develop the Farzad-B field, another of Iran’s natural gas fields. Italian oil major Eni has also signed a provisional agreement with the National Iranian Oil Company to develop the Kish gas field and the third phase of the Darkhovin oil field in southern Iran.

Important political risks remain

For Western companies thinking about investing in Iran, several risks remain, especially regarding the Trump administration policy towards the Islamic Republic. Mr. Trump has long promised a tough line on Iran, and has described the 2015 nuclear agreement as “the worst deal ever.” Although sanctions against Iran had already been reinforced in June, on August 2nd, as a result of considerable pressure from the US Congress, Mr. Trump signed a legislation implementing a new set of sanctions against Russia, North Korea, and Iran.

According to several US officials, Iran has continued to test and develop ballistic missiles, but Washington did not give any detail of when or how they did so. The sanctions mostly target the Islamic Revolutionary Guard Corps, and include “the blocking of property, exclusion from entering the United States and the freezing of transactions with people subject to sanctions.”

In mid-July, the US had sanctioned 18 entities and individuals suspected of supporting Iran’s ballistic missile program, as well as alleged criminal organizations based in the Islamic Republic. The Trump administration also regularly charged Iran with hostile rhetoric with respect to its purported sponsorship and support of terrorist groups, such as Hezbollah and Hamas, or the Palestinian Islamic Jihad. If the Trump administration pursues its hardline stance against Tehran, it could discourage international companies from investing there. For example, the impossibility of using the US dollar banking system in commercial transactions with Iran makes it tougher for multinationals to develop large-scale projects in this country.

Iran’s policy in the Middle East is another area of concern for foreign investors. Tehran’s policies on Syria and Yemen are at odds with its neighbors, including Saudi Arabia, which is currently showing its opposition to Iran by cutting ties with Qatar. In this way, for Western companies seeking stability, the geopolitical context of the region could act as a real deterrent. Finally, with widespread corruption and traditional political opposition to foreign investment, Iran’s business environment can be difficult to navigate for foreign investors.

Let Leo Kabouche be your guide to the issues that matter in the energy sector. The Energy Briefing breaks down the complexities and signposts the risks in key markets around the world.

About Author

Leo Kabouche

Leo is a Toronto-based analyst who has worked for several consulting firms in Canada & Europe. His areas of expertise include the intersection of energy and geopolitics in oil and gas markets, in climate policy as well as in national security. His research also delves into the relationship between political risk and extraterritorial regulations tackling corruption and money-laundering practices on the international stage. He holds a MSc in International Affairs from the University of Montreal.