To Stay or To Go?! The Impact of Recent Iran-Saudi Tension on IPC
Iran-Saudi conflict has roots in history. Two heavy weight Islamic states have invisible borders all around the Middle East and Africa.
Gradual shift of foreign policy of the US in the Middle East and in particular recent agreement on containment of Iran’s nuclear ambitions (JCPOA) seen as a favour to Iran by Saudis. Once US’s strongest ally, Saudis see this shift towards strengthening Shia’s state in different fronts including Syria, BBC concluded (more).
It is unlikely that the Iran-Saudi conflict gets worse. Saudi is at estimated $107 b deficit (according to IMF. 2015 Dec, more) which can only get worse in 2016, and Iran’s condition is not any better. Both countries heavily rely on crude export to meet their fiscal budget. Logically, both should rather continue their proxy war in a safe distance from their soil.
Recent tensions however, could have some impact on the IPC bid rounds that Iran is planning to launch in 2016.
1) In view of the recent tensions, we foresee that majors keep negotiating the projects with NIOC however, some of the small to mid-size oil and gas companies that are preparing to bid might decide to take a backseat i.e. take a no-op position in JVs with majors instead of direct bidding, at least in the first round. Recent clashes between Iran and Saudi is a reminder of the high political risk of the region, an environment that mid-size E&Ps and their creditors may not be ready to invest in. This means less competition in the bid round, what majors would benefit from, but it could deteriorate NIOC’s position in negotiations.
2) Iran`s short-term target for IPC is to boost production by 1.0 million barrels per day by the end of president Rohani`s administration, or at least set the ground for it. There are several challenges that Rohani`s cabinet need to address under extreme pressure from opposition. Series of challenges include improving the banking and monetary policies to ease the flow of FDI, strengthening central bank of Iran to improve stability of country’s macro-economics, getting inflation under control, running a tender for an oil contract that has not been into execution, and the shortage of commercial and contracting experts to run multiple IPC tender rounds.
The size and complexity of these challenges may force Iran to award larger fields through direct negotiation with major IOCs and leave the smaller stakes for 2017 and later, simply to accelerate its field development plan. Advantages of this option may be more than its disadvantages given the immediate need of the country for hard currency and direct investment into its oil and gas industry, a sector that more than 70% of country’s budget depends on. Current oil glut and low price environment just makes this option more attractive to Iran`s leadership. Not to forget that production boost from any field development in Iran could only come in about 2-4 years from the date of award.
What strategic options small-to-medium E&P’s have?
A heated political/social unrest between Iran and the Gulf nations leaves interested small to medium size oil companies with following options:
- Do not engage in 2016 – Revisit Iran against other investment opportunities in Africa, East EU, SA, and APAC. If still interested just wait and watch and see how the situation evolves. Do not engage in any investment in Iran prior to US election in late 2016.
- Stay engaged but conservative – Observe the situation, complete a ranking/screening of the investment opportunities, attend IPC London summit and network with majors, take a non-op position in a JV with Major IOCs. Do not directly bid for, or negotiate on IPC assets.
- Proactive approach – Observe the situation while actively network with NIOC, majors and other stakeholders in preparation for an operatorship role (don’t miss London IPC summit). Have a comprehensive screening of the assets and actively position to bid and/or negotiate the top three targets in your list. Develop a risk mitigation plan and prepare for execution phase. Take the advantage of the situation in your favor in negotiations.
We do not see any change in Majors’ strategy towards IPC. Current regional unrest is the nature of the beast in the Middle East. Majors would take the advantage of the situation in their negotiation with Iran.