Home Business Economically ailing Iran votes on new leader to tackle JCPOA, court oil investment – S&P Global

Economically ailing Iran votes on new leader to tackle JCPOA, court oil investment – S&P Global

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Iranians will head to the polls June 18 to select a president who will face the challenges of clinching a nuclear deal to lift sanctions and reviving the country’s oil and gas sector — along with its ailing economy.

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Conservative judiciary chief Ebrahim Raisi is the frontrunner, though observers say he could see a stiff challenge from former Iranian Central Bank Governor Abdolnaser Hemmati, a reform-minded moderate.

Whoever wins will inherit an oil industry that is still robust but suffering from years of underinvestment.

Iran pumped 2.43 million b/d of crude oil in May, according to the latest S&P Global Platts survey of OPEC production, down from a pre-sanctions high of 3.83 million b/d in May 2018, just before the US pulled out of the nuclear deal.

Oil minister Bijan Zanganeh, who has said he will not continue with the next government, outlined a production target 6.5 million b/d by 2040.

But allies of Raisi say that if he wins, Iran may concentrate instead on developing its refining and petrochemical sectors, to reduce crude exports that are vulnerable to sanctions.

Iran’s refining capacity is about 2.2 million b/d, according to OPEC’s latest annual statistical bulletin, though many units are aging and in need of repairs and upgrades.

Former deputy oil minister Alireza Zeyghami, a top energy adviser to Raisi, told Platts that new refining units should be built so that the gap between domestic consumption and production is eliminated.

“We should stop selling crude oil [internationally],” he said in an interview, though he stressed that this was his personal opinion and not necessarily the policy that Raisi would adopt as president. “The value chain of petrochemicals, the value chain of gas plants and the value chain of oil refineries are very high.”

Looking to the east

But until that can happen, Iran, which holds the world’s fourth largest oil reserves, will need to continue exporting oil.

Its reliance on oil revenues has fallen over the last decade, but they still comprised 17% of the country’s GDP in 2017, the last full year before the US reimposed nuclear sanctions, according to the World Bank.

Even with a nuclear deal, western companies are reluctant to engage with Iran, given the remaining US sanctions on banking and other sectors for alleged human rights violations and military provocations.

That means Iran will likely need to turn eastward for help sustaining the industry – to China, Russia and India — especially if Raisi, who is under US sanctions himself, wins the election, said Bijan Khajehpour, a managing partner at consultancy Eurasian Nexus Partners.

“If Raisi wins, there will be very limited interest among western companies to invest and transfer technology to Iran,” he said.

Outgoing President Hassan Rouhani, who can not run for a third term, had a brief opportunity to court foreign investment when the nuclear deal — known as the Joint Comprehensive Plan of Action — was in force from 2016-18.

But western oil companies were largely unmoved by fiscal terms on offer, as well as the political risk of other sanctions.

French major Total, now renamed TotalEnergies, stayed involved with Iran the longest, selling out of the South Pars condensate project in August 2018. For now, however, TotalEnergies plans to remain on the sidelines.

“We need long-term visibility on the sanctions to start considering coming back to Iran,” CFO Jean-Pierre Sbraire said April 29. “It is not on the agenda in the present time.”

Other western companies that had done business in Iran include BP, Shell and Equinor, while Japan’s Inpex also pulled out.

Chinese companies, which developed the North Azadegan and Yadavaran oil fields, could take on a bigger role in the sector amid ongoing talks over other projects, while Russia, which had a crude-for-goods barter deal with Iran, could also see its oil companies invest.

Market competition

More immediately, many long-standing customers of Iranian oil, particularly in Asia, say they are eager to resume buying, once given the sanctions all-clear.

Much of Iran’s production is of heavier grades, which compete directly with crudes from Saudi Arabia, Iraq, Russia, Oman, Kuwait, Venezuela and Mexico, among others.

Iran also exports ultra-sweet low sulfur oil or condensates, which is similar to grades produced by Norway, Qatar, the US and Australia.

That puts in focus the nuclear deal, which remains in limbo despite six rounds of talks in Vienna between US, Iranian and European diplomats.

The presidential election could unlock the negotiations, with the winner having a clearer mandate to finalize an agreement.

Though Raisi is not viewed as particularly friendly towards the West, the hardliner has said he is committed to the JCPOA, and the diplomatic efforts to restore the pact has been endorsed by Supreme Leader Ayatollah Ali Khameini, who controls all state affairs.

S&P Global Platts Analytics expects that a JCPOA agreement could lead to sanctions relief by September, which would boost crude and condensate exports to 1.5 million b/d by December, from 600,000 b/d in May.

That would provide the new president with much needed revenue to begin rebuilding the economy, but the task of modernizing and reinvigorating Iran’s oil sector will require deft handling.

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