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This Week In Energy: Iran Woos Oil Companies Ahead of Nuclear Deadline

Iran is reportedly readying a collection of contract terms that it thinks will be very attractive to international oil companies weighing whether or not to invest in Iran’s oil and gas sector. We have heard this story before, but Iranian officials have provided more clues into their thinking. While not yet officially public – pending a final agreement with the West over its nuclear program that leads to the removal of sanctions – Iran says that it will pay companies more if they produce more, and Iran may even be prepared to offer production-sharing agreements. That is something that the government has long been opposed to since it technically allows for part ownership of sovereign oil by international companies. But for financial reasons, that is exactly what oil companies want, since it allows them to book more reserves, which boosts their share prices. Iran also wants international companies to enter into joint ventures with the state, and share technology.

With the deadline for the nuclear negotiations now just about two weeks away, the extensive work that Iran’s oil ministry has done to prepare these new contract terms is a testament to the country’s resolve and desire to see the negotiations with the West culminate in a comprehensive deal. Iran is desperate to see its oil and gas sector freed from sanctions, which would allow it to potentially ramp up output by an additional 1 million barrels per day. Related: Why OIL Will Break Out Of Its Range Soon & What To Do About It

Another sign that the nuclear talks are heading in a positive direction comes from a Reuters report that says that Israel has largely resigned itself to a deal between Iran and the P5+1 nations. “Israeli officials broadly accept that a deal will be done and have begun examining how to align themselves to ensure Israel's interests are best protected if sanctions on Iran are lifted,” the report says. That does not mean that Israel will sit back and do nothing.

On the contrary, Reuters says that Israel is engaging with Arab Gulf states on a much deeper level than it has in recent memory. While many Middle Eastern countries do not recognize Israel and in public, they disavow any cooperation with their sworn enemy, behind closed doors they are finding common ground thanks to their shared enemy: Iran. Israel and several Gulf Sunni states are reportedly sharing intelligence, and their relationship could grow if the international community allows Iran back into the fold by removing sanctions.

On June 19, the Obama administration revealed new rules on carbon emissions on heavy-duty trucks, the latest move in a string of announcements aimed at reducing the nation’s carbon footprint. The rules will target trucks that are built between 2019 and 2027, and could lead to the reduction of 1 billion tons of greenhouse gases. Heavy-duty trucks currently average about six miles per gallon, but the new rules will require fuel economy upgrades of about one-third. A few weeks ago the administration proposed new rules on airline emissions, and in the months ahead limits on power plants will be finalized. President Obama is in a race against the clock – his presidency will expire in a year and a half, and many of these rules have a lengthy period before they can legally go into effect, and his administration is rushing to complete a spate of greenhouse gas regulations before the next president comes into office. Related: Oil Demand Weaker Than Many Expect

For another week oil prices have bounced around within a narrow band of a few dollars per barrel. WTI has hovered around the $60 per barrel mark for a few weeks, displaying a period of relative stability after about a year of volatility. Crude prices rose a bit this week on news that inventories continue to decline. The EIA reported that inventories declined by an additional 2.7 million barrels for the week ending on June 12, meaning storage has now been drawn down by about 23 million barrels from a peak earlier this spring, although storage is still way above average.

While that data point pushed up crude prices, the brewing economic crisis in Europe has dragged prices back down. The negotiations between Greece and its European creditors are coming down to the wire, with a very real risk of a Greek default. An emergency meeting is set for Monday, June 22. Greece is not a major oil consumer, but if a default led to an exit from the currency union and a broader economic contagion, that would have a large psychological effect on the oil markets, if not a direct one via lower European oil demand.

In South America, another economic crisis raises red flags for the oil markets. Venezuela is teetering on the brink of a deeper disaster. The Wall Street Journal reports that China is experiencing a lot of headaches from the $37 billion that it has leant the Venezuelan government since 2008. With funds running out for the South American OPEC member, China has stepped in to keep it afloat, providing huge loans in exchange for oil. But Venezuela has failed to live up to its side of the bargain, sending lower-than-expected volumes of crude, and paying back loans in the local currency instead of dollars. Venezuela’s cash reserves are running low and the currency has lost most of its value. Venezuela has even turned to Russia for help, securing $5 billion in fresh loans. This will likely only get worse. Related: Why The Oil Rally May Well Be Over

Speaking of Russia, this week saw movement on two key natural gas projects for the Kremlin. Gazprom announced that it has agreed to build an expansion of the Nord Stream pipeline, which delivers gas to Germany via a pipeline beneath the Baltic Sea. Phase 3 and 4 of the Nord Stream would see 55 billion cubic meters of natural gas per year heading to Europe. The pipeline has been an important plank in Russia’s effort to bypass Ukraine.

Separately, Russia signed a preliminary deal with the Greek government, pushing forward Russia’s “Turkish Stream” pipeline. The agreement is not binding. And one can’t help but notice the timing. It comes just as Greece is in emergency talks with Europe over its debt, and Russia has even said that it would consider providing financial assistance to the Greek government. The announcement will give Greece added leverage in negotiations, and it also helps Russia push its project forward.

By Evan Kelly Of Oilprice.com

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