Foreign oil firms are eying Iran’s post-sanctions upstream. While giant oil and gas fields have attracted the headlines, lower profile opportunities in EOR, part-completed projects, and gas development offer the best hope of near-term profits.

By-Narsi Ghorban*

Iran’s petroleum industry is over 100 years old – the Middle East’s oldest. Over these 100 years, probably more than one million Iranians have passed through the industry at some point, creating a wealth of knowledge, skills and human resource.

Iran’s petroleum industry has witnessed exploitation, occupation, nationalization, war and sanctions during its long history. It’s interaction with the international oil industry began with a concession agreement signed with the Anglo Persian Oil Company – later the Anglo Iranian Oil Company (AIOC), the forerunner to BP – around 100 years ago.

Iran nationalized its oil industry in 1950 and entered a new era with a consortium of major international oil companies (IOCs) following a major legal struggle with AIOC. In the 1960s and 1970s various production sharing, profit sharing and service contracts were signed with the international companies and oil production peaked at around 6mn b/d in the early 1970s.

Iran was one of the five countries instrumental in the establishment of Opec in September 1960. Indeed, Opec’s first Secretary General was Iran’s Fouad Rouhani, who laid the foundation of the organization during his initial four year term. In the 1970s Iran led the negotiations with the major IOCs, which ultimately led to the full sovereignty over oil resources by the group’s members.

Iran’s 1979 revolution and the subsequent war with Iraq ended the cooperation with the IOCs and curtailed the role of Iran in Opec. The Iran-Iraq war damaged a significant portion of the petroleum industry and delayed all expansion plans. After the war, reconstruction of the economy preoccupied the government and a new service contract – the buyback – was introduced for deals with international companies for the exploration and development of hydrocarbon resources in Iran. However, in the past 10 years investment in Iran’s petroleum industry has gradually come to a standstill due in a large part to the various sanctions imposed on the country, and the lack of interest in the buyback contractual framework.


Iran accounts for around 1% of the world’s population and land, but around 10% of the world’s oil reserves and 18% of global gas reserves. With its strong private sector and mature oil and gas industry, the country could be a major player in the global hydrocarbon industry for many years to come. At present, the Iranian oil and gas industry and the private sector companies that provide a variety of services to it, employ over 350,000 skilled Iranians – more than the entire native population of some oil producing states.

However, Iran’s role in the global oil and gas industry has been severely curtailed due to internal political upheaval, eight years of war with Iraq, and sanctions on investment in its oil and gas industry imposed by western countries. These were in 2012 extended to include the sale of Iranian oil and relevant financial transactions. The sanctions have resulted in oil export and production cuts, yet the industry has survived due to the hard work of the dedicated people within the industry, and also the increasing involvement of the private sector.


If sanctions are removed, Iran will make every effort to regain its lost oil customers. This may add around 1mn b/d of oil to world markets within a year.

Ideally this output expansion would happen with the tacit agreement of other major oil producers both within and outside Opec. But even without help from other producers, Iran will proceed to regain the markets it lost due to sanctions, irrespective of whether this precipitates an easing of international oil prices.

Such moves to robustly take back Iran’s market share will be popular within the country regardless of their consequences, given the historic development of the oil industry in Iran and the conditions surrounding the sanctions: namely that some producers rapidly moved in to take Iran’s markets. Russia took most of Iran’s customers in Europe, while some neighboring oil producers replaced Iran’s oil in the Indian subcontinent, and in East Asia.

Regaining Iran’s lost markets is possible, due to the fact that those consuming countries that had to switch away from Iranian oil to other sources would also want to have access to the Iranian market in order to sell their goods after sanctions. Buying Iranian oil would allow them to sell their products to a rich market of 80 million people which for a long time was not accessible due to sanctions. The balance of trade is also of the essence in choosing different oil suppliers in the long term.


Iran’s hydrocarbon industry has been deprived of the inflow of capital and the best oil field technology for almost 35 years. Thus, there are several areas in which the industry could benefit from the introduction of fresh capital, technology and experience by the major IOCs.

The most immediate impact of the removal of sanctions would be on energy saving and energy efficiency within Iran’s energy industry. Iranian gas losses from flaring or transmission wastage are around 14 bcm/year – almost twice the amount of gas Iran exports to Turkey, and more than the consumption of Greece, Denmark, Sweden and Norway combined.

But the inefficient use of petroleum products, gas and electricity within the country is well known: it was only recently that Iran’s parliament passed legislation to reward companies taking initiatives to stop waste, and to improve energy efficiency within the industrial, commercial and household sectors.

With the removal of sanctions even smaller foreign companies would be able to team up with Iranian partners to benefit from existing schemes. This has the guarantee of repayments of capital engaged, and a more than 25% return on their dollar investments.

A second immediate step that could prove profitable for energy companies is to enter into an agreement with the state oil, gas and petrochemical companies – NIOC, NIGC and NPC respectively – to improve the latter’s existing operations by introducing new technology and knowhow which has been absent from Iran for decades. There are plenty of opportunities which do not require lengthy negotiations with the government and huge capital expenditure. Introducing new equipment and technology to existing production, refining and transportation operations of oil and gas would lead to quick rewards, and thus would be the best policy to gain a foothold in Iran’s energy industry for further involvement in the future.


Like all big firms, international energy companies ultimately seek long-term profitable growth. This fact alone means that they cannot, and will not, ignore a country which arguably holds the world’s largest combined oil and gas reserves.

Many international energy companies that were previously involved in the Iranian oil sector would like to return and invest in Iran’s oil and gas industry provided win-win scenarios are found. The recently announced Iran Petroleum Contract (IPC) is designed to provide Iran with a new framework for cooperation with the international companies.

But while the present political and economic circumstances surrounding regional oil and gas investment opportunities could see major oil companies – particularly US majors – rush in to evaluate and negotiate with Iran, most would be cautious to invest heavily for some time.

Paramount to this is the evaluation of the new contractual framework on offer. The IPC is designed to attract capital and technology to Iran, and engage the Iranian state and private sector in future energy participation with the outside world. The details of the IPC were supposed to be presented to the international energy community in September, but it seems that this has now been pushed back to December. This is a very wise decision as the practical aspects of the removal of sanctions and the possible UN resolution that follows may take some time.

I believe that this contractual framework has enough flexibility to attract interested parties to the Iranian energy scene, within the constraints that the ministry was faced with in coming up with a new framework.


In the upstream, the most rapid returns will likely be from enhanced oil recovery (EOR) projects. The IPC offers favorable terms for EOR; companies can negotiate to determine the amount of capital expenditure required, with their profit to come from the additional oil produced from the various fields.

The negotiation time for these kinds of contracts would be much shorter than those for projects involving exploration and production of oil from new reservoirs. The technology is already tried and tested, with major IOCs already knowledgeable about many of the oil fields under consideration from their past activities in Iran.

Another quick way of getting involved in Iran would be by participating in the development of unfinished oil development projects, and/or South Pars gas field phases. The progress on the unfinished oil and gas projects ranges from 10-90%. Collaboration with the existing developers of these fields, through the injection of capital or the introduction of better technology, could prove very profitable in a relatively short period. Negotiations for these ventures should be reasonably fast, and risks are limited compared to those faced when engaging in new fields.

Those companies that are more interested in gas-based industries in Iran, or are keen to be involved in the export of natural gas from the country may find this approach rewarding. Iran’s gas production can easily increase considerably. According to BP’s latest Statistical Review of World Energy, Iran’s gas reserves at end-2014 were nearly 3.5 times that of the US, while its gas production in 2014 was less than one quarter of US production. Iran’s gas production was one third of Russia’s, despite holding roughly the same level of reserves. With the largest gas reserves in the world, Iran will be an important player in supplying the world’s energy requirements for decades to come.


Last but not least is Iran’s interest in major international energy companies developing new oil and gas fields. Around 49 fields are going to be offered to IOCs alongside the presentation of the new contractual framework of the Iran Petroleum Contract in December (MEES, 8 May).

It will probably take all of 2016 for the oil ministry to formalize the required bidding process and negotiate with each interested company separately to reach a win-win agreement. Oil and gas production from these new fields cannot be expected to reach markets much earlier than 2020.

Iran’s balanced participation in both regional and world energy markets will be welcomed by most energy importing countries and will be constructive for the world oil and gas industry in the coming decades. Iran’s full entry into the world energy markets may initially have a limited impact on oil prices, but this would ultimately depend on the trajectory of future world economic growth, which would determine the demand for petroleum products in the long run.

The re-emergence of Iran in the world economy, coupled with the possibility of investment in its huge oil and gas resources would be also welcomed by major IOCs, and will ensure more favorable conditions in world energy markets in the years to come.