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September 2017, No. 85


Oil & Gas

France’s Total Bets Big on Iran’s Gas Fields


“Today, for Total, is a historic day, the day we come back to Iran,” Total CEO Patrick Pouyanne said at the signing ceremony in Tehran on July 3.


France wasted no time in rebuilding its economic ties with Iran since international sanctions were lifted as part of Tehrans nuclear deal with world powers.

In early 2016 — just after the sanctions began to roll back — France made deals with Iran to sell Airbus commercial jets, return carmaker Peugeot and have energy giant Total buy Iranian crude oil.

Another big bet by France was made (July 3rd) as Total signed a multibillion-dollar deal to help develop part of the massive South Pars gas field, one of the world’s most extensive energy reserves. The pact with the National Iranian Oil Co. marks the first major Western investment in Iran since the nuclear deal was reached in 2015.

An even bigger message sent by the deal is that France and the United States are blazing different paths when it comes to Iran’s vast oil and gas fields.

French leaders and business envoys spent months hammering out the Total deal. In Washington, President Donald Trump has not missed any opportunity to take potshots at the nuclear deal as part of his attacks on all things Obama.

It has left US oil companies waiting on the sidelines for clues on whether they could one day get official clearance to make a foray into the Iranian market. A push in Congress for new sanctions on Iran — in response to Tehran’s ballistic missile tests — suggests that it could be a long time before US oil companies can look in Iran’s direction.

Total will invest an initial $1 billion (880 million euros) in the South Pars offshore gas field as part of a consortium with Chinese and Iranian firms.

The 20-year project, which will eventually see the firms inject $4.9 billion, is by far the biggest vote of confidence in the Islamic Republic since sanctions were lifted under the 2015 nuclear deal.

“Today, for Total, is a historic day, the day we come back to Iran,” Total CEO Patrick Pouyanne said at the signing ceremony in Tehran on July 3.

“We are proud and honored to be the first international company to sign an IPC (Iran petroleum contract), which offers an attractive commercial framework, and to therefore contribute to the development of relations between Europe and Iran. Total will develop the project in strict compliance with applicable national and international laws,” he said.

“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,” he told AFP.

“We are here to build bridges, not walls,” he added.

The deal, worth $4.8 billion, was signed in Tehran by the National Iranian Oil Company Managing Director Ali Kardor, Total Chief Executive Officer Pouyanne and executives of China National Petroleum Corporation and Petropars, the French company’s partners in the South Pars project. 

According to Kardor, with oil at $50 a barrel, Iran can make $84 billion from the gas deal by the end of the term of the contract. Natural gas prices are closely associated with the price of crude oil.

The project in South Pars, a field shared between Iran and Qatar, is the first under a new Iranian petroleum contract which offers better terms to foreign investors but has faced intense criticism from hardliners who said it was too generous.

The first phase of the South Pars gas field development is estimated to cost about 2 billion dollars, Total said in a statement. It consists of 30 wells and two wellhead platforms connected to existing onshore treatment facilities by two subsea pipelines. A second phase, which involves the construction of offshore compression facilities, will be launched at a later stage.

IRI Oil Minister Bijan Namadar Zangeneh said the deal was a direct result of moderate President Hassan Rouhani’s resounding re-election victory in May and strong public support for rebuilding ties with the West.

“The people said firmly that our oil policies should continue,” he said. “We shall never forget Total being the forerunner.”

Zangeneh said Iran’s oil industry needs some $200 billion in investment over the next five years, and European firms have been hungrily eyeing opportunities in a country with the world’s second-largest gas reserves and fourth-largest oil reserves. But they have been cautious about investing due to continuing US sanctions.

Total has appointed a compliance officer with the sole task of ensuring it does not fall foul of US measures against Iran.

The White House is also in the midst of a 90-day review on whether to abandon the nuclear deal entirely, which President Trump threatened to do during his election campaign.

The uncertainty has been enough to deter global firms such as BP from dipping their toes in Iranian waters, while Shell and Russia’s Gazprom have signed only preliminary deals to date. 


“We are proud and honored to be the first international company to sign an IPC (Iran petroleum contract), which offers an attractive commercial framework, and to therefore contribute to the development of relations between Europe and Iran.


US Hostility

Even without the threat of sanctions, investing in the Iranian economy is not for the faint-hearted.

Iran’s large population of middle-class consumers presents an irresistible opportunity for many businesses in Europe and beyond.

Any attempt to scupper the nuclear deal will likely face major push-back from its other signatories: Britain, France, Germany, China and Russia.

Iran’s Foreign Minister Mohammad Javad Zarif was warmly received by EU leaders last month and tweeted that they were committed to the nuclear deal “despite reckless US hostility”.

At the signing ceremony, Pouyanne said: “Total has a long history in Iran,” pointing to its development of phases two and three of South Pars in the 1990s.

It will take a 50.1 percent stake in the new phase 11 project, while China National Petroleum Corporation (CNPC) will own 30 percent and Iran’s Petropars 19.9 percent.

The aim is to start pumping into Iran’s domestic grid in 2021, eventually reaching 56.6 million cubic meters (2 billion cubic feet) of gas per day.

Iranian officials said the products would be worth a total of $54 billion at current prices.

Total had signed up to develop phase 11 back in 2009 but was forced to abandon its Iranian projects in 2012 when France joined European Union partners and imposed sanctions, including an oil embargo.

Total’s agreement is one of the first to be signed under the IPC, a new contractual framework for the Iranian upstream oil and gas sector, which was ratified in September, and followed by the government’s announcement to hold the first round of tenders under the framework.

The IPC framework creates a more attractive environment for foreign investors, and the deal with Total makes it clear that the new contracts are functioning as they should.

With the older contracts, the companies would come and just develop the field and leave,” he says. “Today, these contracts are 20-year in nature and the international operator has a share in that field. Another obligation is that everyone will cooperate, and the Iranian side has to be a part of this contract.

Total has been testing a number of European banks – without naming them – in order to establish ease of transactions in the last couple of months. As CNPC is involved in the deal, Chinese banks are also more than likely to be involved.

Total will begin producing gas for the Iranian market in 2021, at which point the project is expected to have a capacity of 2 billion cubic feet per day, the equivalent of about 400,000 barrels of oil. 

Who Else Is Ready to Invest in Iran?

Already, India, one of Iran’s most steadfast trading partners, announced that a consortium of domestic businesses would offer up to $11 billion to develop another of Iran’s natural gas fields, Farzad-B field, and create the infrastructure to export the fuel, Bloomberg reported, citing Narendra Kumar Verma, managing director of the overseas investment unit of India’s largest explorer, Oil & Natural Gas Corp.

Iran is the second-largest supplier of crude oil to India, and, as a result, India is one of the largest foreign investors in Iran’s oil and gas industry. However, fraught diplomatic relations between Iran and other states have made it a difficult relationship to uphold.

Under US sanctions, which were reinforced in June, India has been unable to trade with Iran using the dollar – the world’s premier reserve currency – and had to defer payments or revert to payments in rupees and, more recently, euros. 

Europe Will Not Be Bullied by US

According to analysts, the deal marks a new era in Iran’s upstream sector. They believe the political significance is even higher than the economic, as the deal demonstrates that Europe is serious about Iran and will not be bullied by the US.

The deal could break the “taboo of investing in Iran” that exists among major companies today. This also goes for the many Western banks which thus far have stayed away from Iranian business altogether, for fear of falling foul of the US sanctions that remain in place.

Observers expect other international companies to follow Total and abandon the fears of investing in Iran. As the volume of these investments get bigger and bigger, it will be very difficult for banks to ignore such deals. It will compel them to gradually open up their relationships with Iran.

 

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  September 2017
No. 85