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Total’s deal in Iran to pave way for investors

Mena / 05-07-17 / by
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Total Iran oil deal

French energy company Total has signed a billion-dollar contact with the National Iranian Oil Company (NIOC) to help develop the world’s largest gas field, South Pars, in the Persian Gulf.

The agreement, with which the energy giant has committed to an initial investment of US$1bn, marks the country’s first deal with a European oil company in more than a decade.

Total has worked on the South Pars oil field before, and was one of the biggest investors in Iran until international sanctions forced it to pull out of the country in 2006.

Commenting on the new deal, Total’s chairman and CEO Patrick Pouyanné says it is a “major agreement for Total” and that it officially marks the company’s return to Iran following the implementation of the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, in January last year.

“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 says.

Total has taken a 50.1% stake in the gas project alongside the Chinese state-owned CNPC (30%), and Iran’s Petropars (19.9%), a wholly-owned subsidiary of NIOC.

The first phase of the South Pars gas field development is estimated to cost about US$2bn, Total says in a statement, and 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.

 

Political message

It has taken some 18 months since sanctions were officially eased to sign the first international oil contract in the post-sanctions economy. Still today, many foreign investors are cautious about entering the Iranian market, a trend the Total deal could change.

“It marks a new era in Iran’s upstream sector,” Hamid Soorghali, strategy consultant at Iran-focused energy consultancy Energy Pioneers, tells GTR. “The revenues of this deal are estimated to be US$84bn in the next 20 years.”

But, he adds, 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: “It conveys a very strong message to the US that irrespective of what happens in Washington, Iran and France will co-operate. Washington has been claiming that they are having a comprehensive review of Iran’s JCPOA, which is increasing the fear of sanctions.”

He says the deal could break the “taboo of investing in Iran” that exists among major companies today. This also goes for the many western banks who thus far have stayed away from Iranian business altogether, for fear of falling foul of the US sanctions that remain in place. And as previously reported by GTR, very few banks are willing to publicise their engagement with Iran.

“Many other international companies will follow Total, and it will remove those fears of investing in Iran,” Soorghali says. “And 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.”

 

IPC framework

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.

Soorghali says the IPC framework creates a more attractive environment for foreign investors, and that 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 co-operate, and the Iranian side has to be a part of this contract.”

His comments are echoed by Mehrdad Parhizkar, Iran country head at Frontier Partners, which advises corporations on investments in the Iranian market.

“The government’s introduction of the IPC contract and the nomination of approved domestic local players for the purpose of partnerships have made this sector relatively easy to navigate by potential investors, and easier for Total to take the plunge,” he tells GTR, but adds that other sectors, where the regulatory environment is more ambiguous, such as banking and mining, will be more challenging for foreign investors to enter.

He agrees that Total’s deal will pave the way for other energy companies looking to enter the Iranian market.

“This deal will likely be looked into as a case study by other players to find out what has been agreed in relation to the snap back provision eventuality, introduction of further US sanctions and arbitration mechanism in the contract. Potential investors will also be keen to find out the financial institutions behind the deal and the transaction mechanisms that Total will use,” he says.

It has not been revealed which banks are involved in the transaction, but they are likely to be European, and funded in euro.

“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,” Parhizkar says.

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.

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