Energy Investors: The New Iranian Oil Boom is Just Getting Started

Iranian Oil BoomA peace deal between Iran and the United States is about to open up the country’s energy industry to foreign investors, and the first people to get in on the action could make a killing.

Last week, Iran’s Deputy Oil Minister announced that his country is looking to offer $185 billion in investment by 2020, setting their sights on a reported 50 oil and gas projects. However, years of sanctions and economic stagnation have left Iran’s infrastructure and technological capabilities in a questionable state that will require reconstruction and foreign investment.

But which companies are the right pick? Iran is about to make itself the most attractive energy investment opportunity in the entire Gulf, and BP p.l.c. (NYSE/BP), Royal Dutch Shell plc (NYSE/RDS.A, RDS.B), Eni SpA (NYSE/E), and Total SA (EPA/FP) will reap the benefits.

They have all released similar statements that they are committed to upholding the sanctions as long as they are in effect, but are actively considering potential contracts. Several high-level Europeans have visited Tehran in the last few weeks. Translation: they are preparing to enter the market and have cash in hand to invest.

Their interest is simple. Iran is about to offer foreign investors the most generous and attractive opportunities of any country in the region. They plan to offer Integrated Petroleum Contracts (IPCs), the details of which are as yet unclear. But they will take the form of joint-venture contracts which will purportedly address the deficiencies of buyback contracts.

Buyback contracts require foreign investors to provide the initial capital, after which they are reimbursed by the Iranian government for operating costs. But after a set period, the entire operation is taken over by the state. Such contracts offered foreign companies little incentive to increase production or benefit from a rise in oil prices, as they were reimbursed based on a negotiated figure between themselves and the state.

Analysts speculate that the new contract structure will allow foreign investors several years for oil and gas exploration, and then a period of 15 to 25 years of secure production rights. The NIOC would pay the foreign company a sum based on the complexity of the field, extraction volumes, and the price of oil. Such joint ventures would be incentivized to make significant long-term investments, and insulate them from potential losses in going over budget on production by recouping them on the market.

Most importantly, the new contract structure will change the relationship between oil and gas field ownership and foreign investors. Iran had never previously allowed foreign ownership over fields, but concessions are planned which will allow external companies to lay claim to wells it plans to extract as “produced oil.” No other Gulf state allows for such security of supply, and the arrangement would significantly boost investor confidence.

The bottom line; Iran is sitting on the world’s second-largest natural gas reserves and fourth-largest oil reserves. For oil behemoths like BP, Shell, and Total, that could translate into record profits (and higher dividends). Investors need to stay tuned.