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This Week In Energy: How Iran Plans To Attract $100 Billion In Oil Investment

This Week In Energy: How Iran Plans To Attract $100 Billion In Oil Investment

There was little movement on oil prices this week – a few down days and a few up days. WTI closed out the week trading in the mid-$40s, with Brent at $48 per barrel.

Crude seemed to weather a huge bearish development – the EIA reported that oil storage levels surged for the week ending on October 16. Inventories jumped by 8 million barrels to 476 million barrels. That is the highest level in months and is close to the 80-year high seen in the spring of this year. Storage levels are filling up as refineries undergo maintenance season, and should reverse course in the coming weeks and months. Still, the sky-high inventories do not necessarily offer strong reasons for crude prices to rally in the near-term.

Iran released some more details on its oil contracts this week, revealing some specifics on its reforms intended to attract international investment. For example, Iran will pay larger fees to operators than previously thought. It will also offer 20-year contracts. “What’s been announced so far looks like an attractive contract -- no doubt it’s a vast improvement on the buy-back contracts,’’ Robin Mills, of Dubai-based consultancy Manaar Energy, told Bloomberg in an interview. Related: Is Solar Without Subsidies Now Viable?

An Iranian official who helped design the new contracts also told the Financial Times that domestic Iranian companies should be entitled to a 20 percent stake in any joint venture project. Mehdi Hosseini didn’t reveal a specific figure, but said “Naturally you would think of 20-25 or 30 percent as a minimum percentage,” according to an interview on October 21. “We don’t want to just give some small share [around 5 percent] to an Iranian company to try and make some money. We have a long-term view.”

The new contracts are seen as crucial to attracting the $100 billion in investment that Iran says is needed to develop its oil and gas industry. In the past, Iran only offered buy-back contracts, which paid companies fixed fees over a short period of time. There were few incentives to ramp up output and time horizons were short. International companies have said that they would likely not invest unless the terms were sweetened. The contract terms will officially be revealed in November. A list of companies are interested, particularly from Europe, such as Royal Dutch Shell (NYSE: RDS.A) and Total (NYSE: TOT).

BP (NYSE: BP) and China’s government-owned CNPC announced a partnership agreement during Chinese President Xi Jinping’s visit to London this week. The two oil companies decided to parlay their successful cooperation on Iraq’s Rumaila field into something deeper. They pledged cooperation on developing China’s shale resources, with their sights set on the Sichuan Basin. Details are a bit vague for now, but both countries are holding up the agreement – along with separate deals on other sectors, such as new nuclear reactors in the UK – as evidence of a growing relationship. The UK went to great lengths to play down concerns over China’s human rights record, seeing the business opportunities between the two countries as paramount. Related: Is Russia The King Of Arctic Oil By Default?

The ongoing slump in oil prices is putting pressure on Saudi Arabia’s currency. Saudi Arabia’s riyal has been fixed to the dollar for three decades. But the country’s foreign exchange reserves are depleting at an untenable rate. To be sure, Saudi Arabia can last several years before it runs dry of foreign reserves, but the kingdom certainly doesn’t want to blow through them entirely. If oil prices do not rebound, something has to give. And there is growing speculation that the riyal peg could be a casualty. Of course, there are a few positives for Saudi Arabia if it decided to devalue its currency. It sells oil in dollars, and finances its social spending in riyals. That means a devalued currency will lighten the burden on the government’s budget. But the downsides are also significant – aside from inflation and the worsening burden on consumer debt, the move could be seen as a loss of control, according to some analysts. The

On a related note, the IMF estimates that if oil prices stay low, Middle Eastern oil-producing countries face a $1 trillion budget hole unless reforms are taken.

Refining margins are falling as the spread between WTI and Brent shrinks. Citigroup downgraded five refining stocks this week from “buy” to “neutral: CVR Refining (NYSE: CVRR), HollyFrontier Corp. (NYSE: HFCC), Western Refining (NY`SE: WNR), Alon USA (NYSE: ALDW), and Northern Tier Energy (NYSE: NTI). Refiners make their money on differentials, buying discounted crude to turn into higher margin refined products. The discount between WTI and Brent, which widened in recent years, offered a unique – but temporary – opportunity. Now that U.S. oil production is falling, the margin for refined products is not as juicy as it once was. For investors, the bullish period for refining stocks could be nearing an end. That is especially true if the U.S. moves to scrap the ban on oil exports. Related: U.S. Shale Drillers Running Out Of Options, Fast

Australian oil and gas company Santos (ASX: STO) rejected a $7.1 billion takeover offer from Scepter Partners, a group of “Asian and Gulf based high net worth families.” Santos has struggled with high development costs for Australian LNG export projects, but it called Scepter’s offer “opportunistic in nature and did not reflect the fair underlying asset value of the company.” Santos’ share price has lost 60 percent of its value in the last year.

Royal Dutch Shell received approval this week to drill one exploration well off the coast of Nova Scotia. The Shelburne Basin, located off of Canada’s Atlantic coast, was once thought to be not a particularly desirable area, but Shell says that it has not been explored and thinks that the basin offers large oil and gas potential.

Finally, North Dakota regulators loosened limits on the time they require drillers to complete their wells, extending the time limit by an extra year. The move is intended to provide a bit of leeway for struggling drillers that are putting off completions. The change will give companies two years instead of one to complete their drilled wells. It also means that the backlog of fracked wells – or “fracklog” – may not be worked through in the next few months as the law would have previously required.

By Evan Kelly of Oilprice.com

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  • Gantal on October 23 2015 said:
    "The UK went to great lengths to play down concerns over China’s human rights record"

    Wisely. China's human rights record is slightly better than the UK's, as a quick perusal of the 30 paragraphs in the UNUDHR reveals.

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