Higher global oil prices can be explained in one word: Iran.
OK, it’s not quite that simple, but Iran has been one of the major risk “premiums” tacked onto crude oil prices over the last few years.
The nation’s nuclear program sparked widespread panic in the oil markets as both the U.S. and European Union placed heavy economic sanctions on Iran. Those sanctions sent prices for Brent skyrocketing as many countries were forced to look elsewhere for their crude oil needs.
However, with regimen change and Tehran finally playing ball with the U.N. weapons inspectors, Iran could be on the cusp of real change — especially in its oil fields. For investors, the Iranian risk premium on oil could just turn into reward.
It’s amazing what a new leadership base — along with crippling sanctions — can do for a nation.
Newly elected Iranian leader Hassan Rouhani seems to be making the right moves to win over the rest of the world. Last week, the nation halted some of its questionable nuclear operations under a preliminary deal with the U.N. Security Council. That deal — which expands on an agreement originally made back in November — allowed for the United States and European Union to both suspended some trade sanctions and other restrictions against the OPEC oil producer.
Overall, that’s a very big deal for the economy of Iran, whose GDP shriveled by 5% in 2013 under the weight of tough sanctions on oil exports and trade.
It’s also a big deal if you’re an oil company.
See, the problem in Iran — as with several oil-rich nations — has been a sheer lack of investment. Data from the Energy Information Administration (EIA) shows that oil output in the Middle Eastern nation peaked at around 6 million barrels per day back in the 1970s.
However, ever since the 1979 Iranian Islamic Revolution, the nation’s output has continued to dwindle at a rapid pace. Since then, Iran’s mature onshore and offshore oil fields have declined annually by a rate 8% and 10%, respectively. Essentially, the nation is in need of various enhanced oil recovery techniques — like CO2 injection and horizontal drilling — to keep them pumping out crude for the next few decades.
And with the sanctions gone and new leadership in place, Tehran has finally realized that they need the help of the developed world in order to get that production up to snuff. Already, Iran has begun to craft new, “sexy” contracts to lure international oil companies to help develop and reimagine their declining fields once the trade embargo against the country is fully lifted.
And with the world’s fourth-largest oil reserves, officials in Tehran estimate that these new contracts will attract nearly $200 billion worth of foreign direct investments into Iran’s oil sector.
Three Plays For Iran’s Oily Future
With the Oil & Gas Journal estimating that Iran has nearly 154 billion barrels of proven oil reserves — or 9% of the world’s total reserves — the opportunity could be too great for E&P companies to ignore. However, not everyone will be a winner. American energy firms like Exxon (XOM) and Halliburton (HAL) are still banned from doing business in Iran. That means a dose of international energy muscle is in order.