February 10, 2009 / 4:47 PM / 11 years ago

U.S.-Iran thaw may bring big oil cash back

DUBAI/TEHRAN (Reuters) - International oil companies are reassessing, cautiously, the risk of investment in Iran after U.S. President Barack Obama offered direct talks with Tehran.

Obama has yet to define his policy, but signaled his expectation on Monday that a new relationship could begin within months.

Western firms may move more slowly than that and need a clear improvement in ties before acting, especially ahead of June presidential elections in Iran, the world’s fourth-largest oil exporter.

“The big oil companies are looking at Iran again,” said one oil company executive. “They have to. The potential gains are too big to ignore.”

The administration of George W. Bush pressured any country or company that courted Iran for energy deals to stay out, as the United States aimed to isolate it over its disputed nuclear program.

Washington’s sanctions have barred U.S. firms investing in Iran’s oil and gas sector since 1995 and include provisions to deter companies from other countries investing.

Royal Dutch Shell and Total delayed decisions on multi-billion dollar investments in Iranian liquefied natural gas (LNG) plans last year due to political tension.

The political landscape could change again with an Iranian presidential election in June that will see hardline President Mahmoud Ahmadinejad pitted against Mohammad Khatami, who pursued detente with the West when in office from 1997-2005.

“Nobody will want to stick their neck out and sign a new deal yet,” said Ghanem Nuseibeh, senior analyst at think tank Political Capital. “They will hold fire until after the Iranian vote.”

Iran’s energy sector remains a daunting investment prospect. Low oil prices and tight credit have hurt the spending budgets of international energy firms, adding to their reluctance to take on Iran’s poor terms, complex bureaucracy and tendency for project delays and cost overruns.

“International oil companies know that firms that have invested a lot of money in Iran have got little back,” said Ross Millan, analyst at consultancy Wood Mackenzie. “Things could change but it won’t be overnight.”

ASIAN HEADSTART

Asian energy companies, keen to secure long-term energy supplies, have got ahead of western oil firms in Iran.

Tehran has increasingly turned for capital and expertise to the east, where state-owned companies are less susceptible to political pressure and concerns about profit margins.

The latest to strike a big deal was top Chinese oil firm China National Petroleum Corp (CNPC), which agreed in January to develop the North Azadegan field.

Big oil firms might look to take a stake in some of the projects that Asian companies have won as a way back into Iran, analysts said.

“Asian companies would certainly be interested in having powerful Western companies in their consortiums,” said Narsi Ghorban, analyst at the International Institute for Caspian Studies.

Also ripe for investment is the LNG sector. Iran has made little progress toward ambitious targets to export gas as Asian firms lack LNG technology.

Poor contract terms have also presented a larger obstacle for investment to many western firms than sanctions.

“If the project is good with sufficient returns, there is capital in both the east and the west,” said Ghorban.

Companies struggled to recover costs when projects ran late or over budget under the terms of oil and gas contracts known as buy backs.

Iran announced new terms when it launched a new exploration round in early 2007. But few international firms found the terms attractive and only three of 17 blocks on offer were subsequently awarded, Millen said. Oil majors took none of them. Low oil prices have made Iran’s need for foreign investment more urgent. Falling crude revenues were expected to cut into state funds and Iran could struggle to maintain output and exports, analysts said.

“I don’t foresee any immediate drop in production or exports but looking out over the next 2 years, if sanctions and low prices remain, then I could see this beginning to impact production,” said Julia Nanay of Washington-based consultancy PFC Energy.

Iran has said it needs $160 billion investment in the next five years in energy. It wants to expand output capacity to 4.5 million barrels per day in 2010 from around 4.3 million bpd now. Iran exported around 2.4 million bpd before recent supply cuts by the Organization of the Petroleum Exporting Countries (OPEC).

Writing by Simon Webb; editing by William Hardy

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