Poor Iranians are really in bad luck. Or are they?
Their agreement with the world – ending the sanctions they have been living under after many years – is now in full force. They sure have expected a wave of oil investment to hit their country soon – maybe immediately and rightfully so. However, just as they get out of their sanctions-induced predicament for real, oil goes to historic lows and seems to hover there for a little while.
The world market is hopelessly oversupplied.
Iran has always been the Black Swan on the lake although it’s coming back to the world oil market is not exactly unpredictable as an event anymore. Still, the prospect of plenty of Iranian crude – in a market spilling over at the seams – sure must make prices come down even further.
What does this mean for upstream investments in the country? Sensible thinkers know, that no matter how low oil goes and no matter how long its will last there, one day it will rise from the ashes. Then again, by how much is anybody’s guess. As those investments are decadal affairs, one should especially now examine the deck of cards he is dealt and make the stride just to have his wells ready when barrels sell for more than the price of water again.
However, they won’t, as Iran is even after sanctions are now lifted not really the easiest nation to deal with. I don’t want to discuss the rightfulness or not of the Iranian stance but Iranians are proud people with a very demanding leadership which can be exacting to outside investors. They might find an easier deal elsewhere and with the world awash in oil, who needs black goo from Iran?
What’s more interesting is the immediate tactics that will ensue on the side of the IOC.
Oil companies the world over (big and small) are wincing in pain inflicted by those comparatively low oil prices and their cash reserves are dwindling. All of them are slashing budgets, projects and workforce in order to get ready for prolonged slim times. This means that there is very little cash for new oil projects anywhere on this planet.
Whatever money there is left – it will very likely go to places that are either very promising combined with easygoing authorities and regulation for upstream companies or which are politically so important that any pullback might be termed toxic for the portfolio. Those are forces beyond our realm, though.
In all likelihood, Iran is not going to be high on the list of those where quick projects need to be hammered into life. It’s a promising place in terms of reserves but its a very tough place for upstream companies at the best of times as Iranian state counterparts are on the very demanding side when it comes to partnerships. This is a hard one to swallow when there is plenty of cash sloshing through the system but in times of scarcity as right now, it is a double no-no.
Now, of course, one does not tell a country as important as Iran that currently there is little that can be done. So far, sanctions provided a handy excuse for oil companies to say that they would love to engage but, unfortunately, those sanctions prevent them from going the extra mile. The subterfuge has gone overboard so oil companies need to be more inventive with their feet dragging.
The next best thing is opening an office and signing some pre-agreement such as an HOA or a Terms Sheet or even an MOU. This keeps Iranian counterparts believing that engagement is real while costs are low and any potential project can be suspended in cryosleep. How many MOU’s have been signed that have never amounted to more than yellowing paper in a lonely filing cabinet?
It’s an indecent game that has been played countless times over in many countries and hopeful Iranians will likely be the next victims. What can be done then? Iran needs foreign investment in order to raise the enormous potential the country has.
The best thing Iran can do is trying to leverage its own market plus develop markets in the vicinity. The Gulf market is just on the doorstep and it’s certainly a juicy one but there are other prices out there. A little beyond the peninsula lies vast East Africa with its atrophied markets and they have a lot of room to grow.
There will be others having their gaze at this cake but geolocation, cheap stuff to sell and a still very non-financial brick and mortar economy might make Iran a much better fit to those countries than many so called Western countries with their non-business businesses.