Hardliner's victory in Iran seen impacting foreign investment

London (Platts)--29Jun2005

The victory of hardliner Mahmood Ahmadinejad in Iran's presidential election
is likely to result in changes in the leadership of the country's oil sector
and could slow down the foreign investment needed to develop the world's
second largest oil reserves, analysts said this week as they digested an
outcome few had expected.

Any compromising of Iranian oil production capacity growth also has
implications for oil prices, already above $60/bbl, they said.

Ahmadinejad's rise to power, which one analyst described as "an internal coup
d'etat," also brings the Islamic Revolutionary Guards Corps back to the
forefront of Iranian politics--a development which in itself has implications
for foreign investment already overshadowed by US extra-territorial
legislation aimed at preventing international investment in Iran's oil and gas
sector.

The Revolutionary Guards had already a year ago increased their clout to a
level they had not enjoyed since the early days of the Islamic Revolution, as
Washington-based PFC pointed out in a note to clients in July 2004. PFC
referred to an incident in May last year when the IRGC prevented the opening
of a new airport on the outskirts of Tehran--ostensibly because of a dispute
between the conservatives and reformists over allowing a Turkish-led
consortium to operate the airport. 

"The ascendance of the IRGC as a potent political force signals the emergence
of a new elite and comes at a time when hardline conservatives increasingly
dominate Iranian politics," PFC said at the time.

Talking to Platts June 27, PFC's Julia Nanay noted that current US
extra-territorial legislation, which in fact has never been implemented, could
be tightened in the form of the Iran Freedom Support Act currently before
Congress.

"It may make ILSA [the Iran-Libya Sanctions Act] a permanent fact of life,"
Nanay said, adding that the legislation "would probably make investors think
twice."

In October last year, Republican senator Ilena Ros-Lehtinen, who chairs the US
House of Representatives' International Relations Middle East and Central Asia
Subcommittee, introduced legislation to tighten the Iran-Libya Sanctions Act,
a 1996 law that threatens reprisals against foreign oil companies investing
more than $20-mil annually in Iran's petroleum sector. Libya was dropped from
ILSA earlier in 2004 when the US rescinded unilateral sanctions against
Tripoli. 

The Iran Freedom Support Act would require that the president "certify" and
not simply notify Congress that he was waiving sanctions against a foreign
company. It would also require that the president determine no later than 90
days after an oil company makes a public or private disclosure of a deal
whether there has a violation of the act. Any waiver by the president of the
ILSA sanctions would be for six months only and based on a determination that
the waiver is vital to US' national security. "The provision for a waiver has
been changed to prevent the kind of blanket waiver applied in 1998," a
Ros-Lehtinen aide said at the time.

PFC sees potential for a heightening of tension between Tehran and Washington,
suggesting that the victory of Ahmadinejad, a former IRGC commander, and his
subsequent comments supporting Iran?s right to develop civilian nuclear
technology could "embolden" hard-liners in Washington who argue that regime
change is the only means of blocking Tehran?s acquisition of nuclear weapons.
European efforts to negotiate a solution that will allow Tehran to shelve its
plans for uranium enrichment activities could flounder as a consequence.

"At the very minimum, rhetoric on both the Iranian and US sides will grow more
shrill, heightening tensions and raising the specter of a military
confrontation," PFC said. "As a result, pressure on oil prices will persist in
the medium term."

Even when investors are willing to invest in Iran, they have to cross the
innumerable hurdles thrown up by the unwieldy buyback system which governs
upstream contracts with foreign oil companies. Foreign entities are barred
under Iran's constitution from holding equity in the country's oil and gas
reserves, so the buyback system--essentially a sophisticated service
contract--was devised to pay companies back through project revenues.

But foreign investors are finding the buyback system increasingly difficult to
live with: negotiations are long-winded, rates of return are considerably less
attractive than in earlier deals, penalty clauses have been introduced, and
more recent adjustments include linkage of upstream contracts to LNG projects.

Iran needs to keep up the momentum on signing new upstream deals with foreign
companies, not only to develop new crude production capacity but also to
maintain existing capacity, given high depletion rates in the older fields.

Ahmadinejad pledged after he was elected that he would favor domestic
companies in the awarding of oil contracts and vowed to instill transparency
in the sector. "Today the most important asset of our people is the oil
industry and our oil resources," he said.

"It's early days, but there are concerns about any turn inwards in terms of
the investment environment," said David Fyfe, an analyst at the International
Energy Agency, the west's Paris-based energy watchdog. "The international
companies have been concerned for some time about the terms on offer in Iran."

PFC's Nanay sees activity slowing down in Ahmadinejad's Iran. "It creates a
lot of uncertainty for foreign investment [which] will move slower in Iran,"
she said.

Nanay also sees little likelihood of current oil minister Bijan Zanganeh, who
has been in the job since 1997, being kept on. There will be "probably a
change in oil minister," she said. "Within [the National Iranian Oil Co]
itself there could be a shake-up."

Mehdi Varzi, former analyst at Dresdner Kleinwort Wasserstein and now
president of Varzi Energy, said it was "too early to make judgments" about
what kind of changes the new president would make in the oil industry, though
he agreed that Ahmadinejad would probably want to "put his own people in place
right at the top."

Ahmadinejad has talked since his victory about achieving greater transparency
in the oil sector. A lengthy review of the buyback system--including scrutiny
of every deal signed since the system was introduced, would be detrimental to
Iran's efforts to maintain and boost its crude output capacity, Varzi said.

"He hasn't said he is going to revise the buybacks," Varzi said. But "if he is
going to go for a complete restructuring then that's bad. It will delay
upstream projects and, with Iran's rate of depletion, will imply falling
capacity." he said.

However, "if he looks at a couple of deals to set an example and to streamline
negotiations, that will be welcomed by companies and will be good for the
sector," he said.

Manouchehr Takin, an analyst at the Center for Global Energy Studies in London
and a former official at NIOC predicted changes at the helm of the oil
ministry, perhaps several months of policy turmoil, and eventually the signing
of new buyback deals.

"In the oil industry, we'll see the minister and deputies change," he said.
"We will have probably six months to a year of turmoil rippling in policies
here and there. But after six months to one year, the president will sign more
buyback deals," Takin said. "I don't think oil policy has been a choice of the
president only. It wasn't only the technocrats and reformists that wanted
buyback deals. Buyback deals have been bipartisan decisions. That will remain
so. The need for foreign investment and new technology is there, and they know
it."

After six months to a year of turmoil, "the decision-making in the oil
industry will improve," Takin said. "As far as foreign investment is
concerned, I think companies that remain in Iran will benefit because then
they will get involved in the next phase."

Shell, which has renovated Iran's Soroosh and Norooz oil fields under an
$800-mil buyback contract, said it remained interested in investing in Iran.

"We appreciate the election result as a decision taken by the people of Iran,"
company spokesman Simon Buerk said. "The Middle East region as a whole is a
very important and strategic region in our operations. Shell has been active
in the Middle East for over 100 years and we have committed significant
long-term investments. Shell will always be interested in exploring growth
opportunities in the region."

France's Total is one of the leading international oil companies working in
Iran. It won the contract to develop the Sirri oil field in 1996 after US
major Conoco was forced by presidential order to pull out of the deal. Total
has since been involved in the Balal oil field, phases two and three of the
South Pars gas project, and the Doroud oil field project. Its head of
exploration and production, Christophe de Margerie, said June 28 it was "too
early" to make any judgments on Ahmadinejad's victory in relation to the
company's operations there.

De Margerie said he had never met Ahmadinejad. "I had no contact with him
before he was elected," he told reporters on the sidelines of a Paris seminar
organized jointly by the Organization of Arab Petroleum Exporting Countries
and the French Petroleum Institute.

Analysts say Iran, OPEC's second biggest producer, needs to make conditions
more attractive if it wants to boost foreign investment and raise its crude
production capacity from the 4.2-mil b/d it currently claims to 5.4-mil b/d by
2010 and 7-mil b/d by 2015.

In fact, analysts say, Iran's capacity is well below 4.2-mil b/d. Mehdi Varzi
believes Iranian capacity has already fallen below 4-mil b/d while PFC's Julia
Nanay reckons Iran's current capacity is somewhere between 3.4- and 4-mil b/d.

Citigroup Smith Barney, meanwhile, is concerned that following the "muddying"
of the investment climate in Bolivia, Venezuela, Argentina, Russia and
Nigeria, the doors to international oil company capital may be closing
further.

Furthermore, it argues that "a more confrontational relationship" with the
international oil companies is likely to call into question Iran's oil
production capacity growth targets as well as the timing of major gas
projects.

"This growth ambition looks to be pretty compromised in light of the latest
elections, because we argue that much of the growth was contingent on the
technical expertise of the IOCs--both in [enhanced oil recovery]...and in new
field developments," Citigroup Smith Barney said. "In a $60 oil world, this
can only serve to add further fuel to the positive momentum behind oil
prices."

This story was originally published in Platts Oilgram News. Request a free
trial to this daily newsletter at
http://www.platts.com/Oil/Newsletters%20&%20Reports/Oilgram%20News/

Copyright © 2005 - Platts

Please visit:  www.platts.com

Their coverage of energy matters is extensive!!.