Development costs in Iran are just a fraction of US, Canada; oil majors in talks to enter country when sanctions lifted

Bloomberg
London


The world is awash in crude, but big oil companies are lining up to develop new fields in Iran even as they slash spending and abandon exploration elsewhere. One thing explains this paradox: cost.
The Middle Eastern country is one of the cheapest places in the world to tap new oil fields and pump from existing wells. The slump in crude prices makes Iran even more attractive to investors, assuming its nuclear deal with world powers leads to an easing of sanctions, said the International Energy Agency.
“Costs are low because they have giant fields which produce economies of scale, the terrain is mostly straightforward and reservoirs are highly prolific,” Robin Mills, a Dubai-based analyst at Manaar Energy Consulting, said by e-mail. If prices stay low, production costs could drop even further in Iran and its neighbour Iraq, he said.
Cheaper barrels are a significant lure to companies as they eliminate jobs and defer expensive projects following a 40% plunge in oil prices in the past year. Royal Dutch Shell abandoned its exploration campaign in the Arctic last month, citing high costs, while Total reduced production targets after a fresh round of investment cutbacks. Both companies have dispatched executives to Tehran in recent months for talks with the National Iranian Oil Co.
While the cost of developing a field in Canada or the US can range from $59 to $114 a barrel, the expense in Iran doesn’t exceed $31, the IEA said in an October 13 report. While the data show Saudi Arabia also has low costs, the country is largely off limits to foreign investment in oil.
Iran will offer about 50 energy projects to investors and plans to boost output by about 2mn bpd, NIOC Managing Director Roknoddin Javadi said in Berlin October 1. The country pumped 2.8mn bpd last month, according to data compiled by Bloomberg.
Iran has worked up a “vastly improved version” of its oil contracts to attract international oil companies, according to the IEA.
Iran’s neighbour Iraq offers a good illustration of the rewards, but also the hazards, of chasing low-cost barrels in the Gulf.
After decades of neglect due to war and sanctions, international oil companies started to redevelop aging oil fields and explore for new resources after the US-led invasion in 2003. Output has doubled in the past decade to a record 4.3mn bpd in September, turning the nation into the second-biggest oil producer in the Organization of Petroleum Exporting Countries, IEA data show. Genel Energy, which operates in Iraq’s semi-autonomous Kurdish region, says it can pump oil for as little as $1.50 a barrel. “Our operations are therefore profitable even during a time of a sustained fall in the oil price,” Andrew Benbow, a spokesman for London-based Genel, said by e-mail.
“The ongoing dispute between Baghdad and Erbil has created quite a bit of political risk,” James Davis, head of oil supply at FGE in London said by e-mail. “Undefined payment terms, broken agreements, concerns over whether contracts are valid or not” remain problems, he said.
Companies looking at re-entering Iran also need to weigh the political risk, said Manaar’s Mills.
Even after sanctions are lifted, investors will still face the danger restrictions will “snap-back” if Iran is perceived as breaking its side of the deal. This provision could be a “major problem” for lenders financing projects there, according to Francisco Blanch, global head of commodities research at Bank of America Corp.