+44 20 7246 7880
Featured China research
|China Global: Trump and Xi see off the storm – for the moment, Jonathan Fenby, 10 Feb 2017|
Recent China research
|China: More debt, higher rates, “stable” RMB, Bo Zhuang, Trey McArver, 17 Mar 2017|
|China: Not the healthy growth mix you hope for, Michelle Lam, 16 Mar 2017|
|China: Regional risk-off rises in growing crisis, Jonathan Fenby, Konstantinos Venetis, 13 Mar 2017|
See all our China research >>
Recent blog posts
Sino-French gas development in Iran under pressure from government to move ahead,
10 Mar 2017
China moves ahead with more nuclear in 2017,
7 Mar 2017
Gas to become more price-competitive in China – positive impact on demand,
21 Feb 2017
Chinese gas in 2016: Better outcomes than expected,
13 Feb 2017
See all China Blog posts >>
Sino-French gas development in Iran under pressure from government to move ahead
French oil major Total has been one of the most upbeat energy companies among those discussing investment in Iran. As all Iranian investment is now caught up in the latest US political developments, Iran has started to increase pressure on Total (and indirectly its development partner CNPC) to move ahead with its plans.
Last November Total was the first Western oil company to sign a preliminary deal with the National Iranian Oil Company (NIOC) under the revised Iran Petroleum Contract (IPC). This was an outline agreement to develop Phase 11 of the giant South Pars gas field with a target output of 18.6 bcma (total Iranian gas output was 192 bcma in 2015 so South Pars is very significant for the country). Under this deal, Total would control the project with a 50.1 per cent stake while CNPC would hold 30 per cent and NIOC company Petropars 19.9 per cent.
A final investment decision (FID) and contract signature was expected by this summer. However Total’s CEO said recently that everything depends on US policy – even though the Iranian side has noted that the contract would be designed to adhere to EU law rather than US law. The oil company is still aiming to take an FID by the summer but of the 10 FIDs that the company is currently considering, it views South Pars as the most risky – and here the company is probably referring to political rather than economic or technical risk.
President Trump is expected to decide by May whether to continue waiving sanctions on Iran (the waivers expire around then). If he does renew them – while there has been a lot of talk from the White House about not doing so, it is true that not everything discussed becomes reality – it is very likely that Total will proceed with South Pars Phase 11. However, if the waivers are not renewed and sanctions are reimposed, Total will likely not proceed: after all, its CEO has commented that Total will need to follow international rules. It is understandable that European companies are going to be nervous about the US position, given the need to use the US financial system for transfers, among other things, and hence are likely to wait for clarity before taking FIDs on any projects related to Iran.
Iran is, of course, unhappy about all this. The head of NIOC has said that Total will be going ahead and has already started providing financing for the project; but this is something that Total has not confirmed. The Iranian Oil Minister, for his part, has objected to Total’s comments and stressed that information about the South Pars project should not be passed to Qatar (Qatar’s North Field is part of the same giant structure as Iran’s South Pars and Total has a strong presence in Qatar’s offshore sector). When sanctions were lifted, Iran set itself the target of overtaking Qatar’s output from its North Field by 2018 – which could prove difficult. Qatar was quicker off the mark in exploiting its gas reserves from the shared reservoir, even though there have been no further developments of the field since 2005. Iran’s plans to begin development have met many delays over the years, mainly owing to Western sanctions on the country. Through the lifting of those sanctions, Iran was hoping to significantly increase energy production and exports.
The comments by the head of NIOC and the Iranian Oil Minister are almost certainly motivated by domestic Iranian politics. If US sanctions are reimposed by the Trump administration, much-needed Western energy investment in the country will be put at risk and, along with it, Iranian plans to grow their output. The country has signed more than a dozen upstream agreements with a range of oil companies; and these, too, will be at risk if sanctions are reimposed. The Oil Minister – who led the drive to draw up a more investor-friendly IPC – is under pressure to show results, which means signing final deals with investors such as Total.
Conservative politicians opposed to President Rohani’s efforts to open up the economy argue that the IPC offers too favourable terms to foreign investors and want it revised. But President Rohani is aiming to be re-elected this May for a second term and will want to have something concrete to show from his policy of opening up the economy, ending Western sanctions and encouraging foreign investment.
Our view is that Total is going to wait for President Trump’s decision on US sanctions – likely to emerge in April or May – before making any FID. This is unlikely to cause the company (or its partner CNPC) any serious problems with Iran because it is unlikely that any other company will step up to the plate ahead of the decision on US sanctions.
Iran, of course, will continue to press Total for a decision because it would improve the popularity of the current Iranian government – and indeed it is probably a good government for Western investors to deal with since it wants to open up the economy and reintegrate with the world in other areas too. However, as the elections loom, it needs to show concrete results to the electorate from its open-door policies. A positive decision from Total on South Pars would be a major win.
Thus we are in wait-and-see mode as far as the US is concerned. President Trump has talked tough on a number of issues and reversed course on several, so it is hard to predict what will happen in the end. However, there are influential voices in his administration – such as that of Defense Secretary Mattis – who oppose the Iranian nuclear deal and will presumably argue for the reimposition of sanctions. Another seemingly influential voice is that of Secretary of State Rex Tillerson, formerly ExxonMobil CEO, who has been non-committal on the issue, other than saying he would carry out a full review of the Iran nuclear agreement that allowed the lifting of sanctions.
In the meantime, the jury remains out on Western energy investment in Iran in general until the US administration announces its decision on the sanctions waiver that Iran needs for projects like Total’s South Pars investment to continue.