The gradually increasing competition and tensions between the U.S. and the EU have recently risen to the surface through Iran. Donald Trump’s decision to withdraw the nuclear agreement signed with Iran in 2014 and his proposal of sanctions have disturbed the EU that aims to expand its sphere of influence towards Iran.
In this manner, Iran’s energy sector emerges as a potential arena of conflict. While Germany, which rather seems to head for Russia within the intra-EU cooperation in energy, maintains silence about Iran, France comes into prominence in the Middle East and raises the voice in Iran. On the other hand, recent developments lead us to think that France is looking for a consensus rather than a conflict with the U.S. over Iran.
FROM THE WESTERN PERSPECTIVE
Iran appears as a key country in energy due to its rich reserves, geographical position and its role in the Middle East politics. Iran holds 9 percent of the world oil reserves and 18 percent of the natural gas reserves. Besides, Iran is located by the Strait of Hormuz where nearly 20 percent of the world total oil trade and 30 percent of the liquefied natural gas (LNG) trade are carried out.
However, wars and international restrictions prevent the reserves from turning into production at the same scale. While Iran’s share in the world oil production is 4 or 5 percent, its share in natural gas production is around 5 or 6 percent.
The raw oil production of 5,5 to 6 million barrel/day prior to the Islamic revolution in 1979 could only reach 3,8 million barrel/day following the revolution. The lack of required investments in wells, of which production capacity decreased due to wars and sanctions, led to the loss of production.
Iran’s raw oil production reduced by 30 percent, to 2,7 million barrel/day, because of the sanctions led by the U.S. and the EU at the end of 2011. Along with the withdrawal of sanctions following the nuclear deal in 2015, Iran’s production and exportation revived. The production swiftly escalated, reaching up to 3,8 million barrel again at the end of 2017.
The withdrawal of sanctions led to an expectation that big oil companies would tend to the Iranian energy sector which had been closed to the foreign investors for a long time. However, since the oil prices were very low and most of the companies suspended their investments, Iran’s oil fields did not gain the anticipated attraction.
THE PICTURE OF IRAN
At present, only the Chinese companies have restricted operations in improving Iran’s oil fields. Iran’s natural gas projects that are essentially composed of the South Pars field are completely operated by a state-run company in Iran.
On the other hand, according to the Iranian officials, Iran needs an investment of 100 billion U.S. dollar in order to escalate the production in oil and natural gas sectors and for the infrastructure and the rehabilitation of fields where production has decreased. They argue that Iran needs a foreign source of 20 billion dollars in the future five years just for the ongoing investment projects.
Until 2016, international investors could carry out search and production operations only through temporary partnerships with state-run companies in Iran where private property in natural gas was banned. According to the model, such companies made investments with their own capital and took shares from production revenues, thus retaking investments costs and designated rates of return. The rates of return varied from 12 to 17 percent while the payback period varied from 5 to 7 years.
The contract periods were extended to 20-25 years in maximum, and a new system was launched for sharing production revenues so as to attract foreign investors following an amendment that was implemented at the end of 2016. While the new system maintains the condition of national contribution margin at the rate of 51 percent in investments, foreign investors must provide annual plans regarding improvement and transfer of technology and information.
FRANCE TAKES TO THE STAGE
In this context, there are two agreements which have been completed until today. The first one is the South Pars Phase 11 development project which was signed in July 2017 with the consortium of the French Total and the Chinese National Petroleum Corporation (CNPC). This 20-year contract project aims to produce 80 thousand/year natural gas condensate. An investment of 1 billion dollars is targeted for the first phase within this project in which the share of Total is 50,1 percent while the CNPC’s share is 30 and the Iranian state-run Petropars’ share is 19,9.
The second project was signed with the Russian state-run Zarubezhneft corporation in March 2018 in order to develop the fields in West-Paydar and Aban near Iraq. The 10-year contract aims to escalate the production of fields, reaching it up to 48 thousand barrel/day.
Iran’s most important natural gas field, the South Pars was opened to foreign investment for the first time along with the Total-CNPC partnership. The South Pars field holds 40 percent of Iran’s proved natural gas reserves. 55 percent of total natural gas production in 2016 was obtained from this field.
As the Total-CNPC partnership took Phase 11 of the South Pars development project, the project is composed of 24 phases, 18 of which commenced production. Until today, the Iranian government has spent 71 billion dollars in total in the field which was explored in 1990 and commenced production in 2003. A further 20-billion-dollar investment is necessary for completing the other fields where are projected to be completed until 2022 as the investments are continuing.
MUTUAL OBLIGATIONS
The completion of investments in the South Pars field is important for Iran to meet it's gradually increasing natural gas consumption and its exportation commitments. Iran’s main exportation commitment is the sale of the agreement, 10 billion cubic meter/year, which was signed with Turkey in 1996 and would continue until 2026. Turkey’s importation from Iran corresponds to around 18 percent of its natural gas consumption.
Yet another striking point is that Iran is also an important energy consumer. Its production equals its consumption, particularly in natural gas. High energy consumption stems from Iran’s use of its natural resources for improving its heavy industrial infrastructure. Iran’s developed energy-dense sectors such as chemistry, petrochemistry, refining, iron-steel and fertiliser industry escalate domestic consumption considering that 90 percent of electricity production comes from natural gas and oil.
Nevertheless, inefficient and overconsumption in energy is widespread in Iran. Outdated technology in industrial facilities, high losses and low consumer tariffs leading to wastes culminate in high energy densities. While Iran’s gross domestic product is as low as a half of Turkey, its energy density is nearly five times bigger than of Turkey’s.
Considering the Total-CNPC partnership in this respect, financing and technology transfer come into prominence for Iran. From the view of France and the EU, the access to the Iranian natural gas in the medium-long term is important for diversifying their sources in the EU markets and for access to the considerably big Iranian domestic market that is rapidly growing.
France is challenged by the U.S. decision to withdraw the Iranian nuclear deal for imposing sanctions again. France demands exemptions from the U.S. sanctions in the South Pars project, which have not come to a conclusion yet. According to a Reuters report on May 14, France announced to terminate its projects until November 2018 if the U.S. would not respond positively towards its demands for exemption.
