the re emergence of iran

April 2016

- The Re-emergence of Iran

DR NOEL FABRI Principal & Managing Director

N C F E N E R G Y Transactions & Advisory Services 12 April 2016

The Re-emergence of Iran

AGENDA

•  How this has come about – historical context

•  Where we are today

•  Opportunities (in the Energy Sector)

•  Forms of Cooperation & Investment Terms

•  Issues & Challenges

•  Impact on the Capital & the Energy Markets

•  Conclusions

The Re-emergence of Iran 2

N C F E N E R G Y Transactions & Advisory Services

Historical Context

History of Iran & rest of the world in 4 distinct periods

N C F E N E R G Y Transactions & Advisory Services 3

Prior to 2006:

Failed Expectations

•  Multiple incidents relating to Iran’s adherence to Non-Proliferation of Nuclear Weapons Treaty (NPT)

•  Referral to UNSC – First Res in 2006 demanding Iran stop uranium enrichment & processing

•  Restricted business - under Buy-back Contract (BBC) for upstream oil & gas

2006-2013:

Mutual escalation

•  7 year race during which Iran built more centrifuges as the rest of the world slapped more sanctions

•  Little or no business – even under improved BBC terms

2013-2015:

Negotiations

•  Saw a halt to Iran’s nuclear program •  Joint Comprehensive Plan of Action (JCPOA) between Iran

& P5+1 - 14 July ’15; endorsed by UNSC on 20 July ‘15

•  No business

2016:

New Expectations

•  JCPOA ratified by all parties; in force – Jan 2016 •  Limited no of centrifuges/reduced stockpiles in

Iran’s nuclear program •  Sanctions lifted •  Parties abide by terms

•  Open for business -under Iran Petroleum Contract (IPC) for upstream oil & gas


Today and beyond

Joint Comprehensive Plan of Action – 4 major milestones


Milestone 1:

Adoption Day: October 2015

•  Iran notifies IAEA it will apply the Additional Protocol to NPT (enhances inspection regime) provisionally – and fulfills JCPOA commitments

•  EU/other countries take measures to terminate sanctions; US to issue sanction waivers (on banking, energy and oil trading, gas and petrochemicals investments)

Milestone 2:

Implementation Day – Jan 2016

•  IAEA issues report verifying that Iran has implemented nuclear-related measures •  UN terminates sanctions; EU (+ other States) suspend/terminate sanctions; US

‘ceases’ application of nuclear related sanctions for non-US persons; may allow new licenses to be issued to non-US persons owned or controlled by US persons

Milestone 3:

Transition Day – mid Oct 2023

•  IAEA verification continues for ~ 8 years and if IAEA confirms that all nuclear material in Iran is for peaceful activities, then

•  Iran ratifies Additional Protocol to NPT •  EU terminates and US modifies/terminates any remaining sanctions

•  If Iran violates JCPOA, old UN, EU and US sanctions could snap back

Milestone 4:

Termination Day – Oct 2025

•  Provided no UN sanctions are re-instated, UNSC passes resolution approving termination of JCPOA and that it “would no longer be seized of the Iran nuclear issue”


Today and beyond

Australian Companies and Individuals

•  Australia lifted/suspended all UN and certain autonomous sanctions following Implementation Day – see DFAT: http://dfat.gov.au/international-relations/security/sanctions/sanctions-regimes/iran/Pages/iran.aspx

•  Certain restrictions remain in force in relation to arms, certain metals, software and designated persons and entities. A sanctions permit can be obtained from Minister of Foreign Affairs to engage in dealings that would otherwise be subject to remaining Australian sanctions

•  In addition, authorization from DFAT is required for transactions to or from Iran worth $20,000 or more under anti-money laundering laws; and certain restrictions may apply under general export and import regimes

•  Other foreign regimes, like US and EU, have maintained certain sanctions in place (mainly relating to human rights violation, support of terrorism and ballistic missile program) and these have broad extraterritorial reach and may still apply to activities undertaken by Australian companies and individuals involving Iran

N C F E N E R G Y Transactions & Advisory Services 5 The Re-emergence of Iran

Today and beyond


Iran Government Overview

•  Led by moderate conservatives/pragmatists, including President Hassan Rouhani

•  Key Ministers served under previous (reformist) Presidents

•  Ministry of Petroleum has exclusive authority to control/manage petroleum industry

•  Led by x-Petroleum Minister, Bijan Zanganeh

•  Managed by experienced, well educated and capable technocrats who occupy key positions (replacing Islamic Revolutionary Guard Corps personnel)

•  New Budget & 2016-21 5-yr Development Plan waiting Parliamentary approval

Iran Government Agenda

•  Restore relations with West/rest of the world

•  Restructure institutional decision making

•  Implement reforms to transform the economy through:

•  sustainable development of the petroleum (and other) sectors, including diversification away from high oil dependence

•  removal of sanctions, and

•  foreign investment (target $50b/y to achieve 8% annual growth)

•  Tighter fiscal policy and gradual removal of energy subsidies (to lower inflation, stabilize the Rial and reduce unemployment > 10%)

Opportunities – Energy Sector


•  Iran is one of the richest oil and gas plays*

•  158 B bbls oil (10% of global oil – world’s 4th largest)

•  1200 Tcf gas (18% of global gas – world’s 2nd largest)

•  High exploration potential: very limited exploration activity since late 1970s - USGS estimates 67 B barrels of oil/liquids yet to be discovered (70% success rate)

•  A large portfolio of energy projects/infrastructure

•  Aging fields are increasingly mature, with an average annual decline rate of 7% – EOR programs through gas injection not implemented in required speed or scale

•  Several giant part or undeveloped onshore/offshore fields – due to financial limitations and lack of technical know-how

•  Numerous small to medium sized proven undeveloped onshore and offshore fields

•  Extensive oil/gas pipeline network and export facilities

•  A reasonably developed petrochemical/refining industries


*Sources: Newsbase, MEES, BP Statistical Review of World Energy 2015, World Fact Book, Wood Mackenzie, NIOC

Courtesy of NewsBase

Opportunities – Energy Sector

Iran offers a vast and largely untapped energy opportunity slate largely on ‘ground floor’ terms:

•  Immediate: IOR/EOR (gas injection)/re-development of giant mature fields to maintain/increase production; oil developments of giant (Azadegan, Yadavaran, South Pars oil layer) and small/medium sized oilfields, with priority given to shared (with Iraq, Saudi Arabia, UAE and Oman) or ‘socially inclusive’ fields; gas field developments (N Pars, Kish, Lavan, Farzad B, Golshan etc.); oil, condensate/NGL purchases

•  Medium/long-term: gas export projects, by pipeline or FLNG/LNG (to Asia, Gulf States, Europe); exploration in Gulf/Caspian Sea; petrochemicals, refining, mining, infrastructure as well as power generation

•  US$150-550bn: required to 2025 (16-63bn/y of which 12-32 bn/y are for energy FDI). 29 upstream oil projects (19 of which are greenfield) and 20 gas projects (19 of which are greenfield) are being offered, holding ~ 216 b bbls of STOIIP and 229 tsf of GIIP, with 28 b boe of oil and gas recoverable


Opportunities Types:


Source: Manaar Energy Group

Forms of Cooperation & Investment Terms - Upstream

Iran Petroleum Contract (IPC): labeled as something in between a risk service contract (RSC) and a production sharing contract (PSC), akin but offering better terms than the 2008 Iraqi Technical Services Contract model

•  Projects will be competitively tendered or negotiated individually, from a slate of pre-approved Project Lists (involving a mix of both oil and gas, and both greenfield and brownfield (re-) developments of existing fields and exploration)

•  IPC format was approved by the Iran’s Council of Ministers in Sept 2015, and unveiled at the RIPI Conference in Tehran on 28-29 Nov 2015 but full details and final terms are yet to be announced

•  IPC will provide for longer-term involvement of IOCs; full cost recovery and adjusted returns commensurate with project risks and project performance; as well as better financial transparency and competitiveness


Forms of Cooperation & Investment Terms - Upstream IPC is reported to provide for improved terms: •  Longer contract term (20-25 years) allows for better transitions between

the exploration/appraisal, development and production phases, with the possibility to extend into IOR/EOR phases

•  A continuous project revenue installment schedule once production starts for: cost recovery (from up to 50% of production); and remuneration in the form of a per-barrel/boe “fee”

•  Reduced risks through elimination of pre-set CAPEX ceiling for cost recovery, allowing for upward variance in costs if required

•  A floating remuneration that is both variable (to reflect field technical complexity and incentivize exploration) and adjustable (to incentivize cost savings, schedule milestones and higher production over a longer period) and allows for upside (exposing investors to upside oil price risk, if oil price benchmarks rise substantially)


Forms of Cooperation & Investment Terms - Upstream

IPC is also reported to provide for some tough requirements: •  Establishment of JVs with pre-qualified local Iranian companies and/or

National Iranian Oil Company (NIOC) subsidiary to manage project operations and the appointment of IOCs as ‘Operating Manager’ •  Local companies linked to clerics/Islamic Revolutionary Guard Corps have

extensive business interests and are likely to present lengthy and troublesome due diligence processes that may create friction (not least due to the continued and fresh application of secondary sanctions by the West) and may present challenges in dealing with potential corrupt practices

•  Iran’s local content is set at a minimum of 51% of the value of the contract (to facilitate knowledge and technology transfers)

•  Onerous and may create substantial risks to project implementation from both a cost, schedule and quality perspective


Forms of Cooperation & Investment Terms -Downstream

•  NIOC, the National Iranian Gas Company (NIGC), the National Iranian Gas Export Company (NIGEC) and the National Petrochemical Co. (NPC) are likely to (re-)design the contracts for foreign participation in Iran’s downstream sector and be in a format prevalent in the region, including joint venture, build-operate-transfer and pure lump sum or cost plus service arrangements

•  It is reported that NPC has submitted a revised model of cooperation for the petrochemicals sector, which is now lodged with the Petroleum Ministry and related bodies for final approval


Issues and Challenges

•  TECHNICAL - Key Reservoir & Geological Challenges •  Generally simple anticline structures

with shallow reservoirs •  Fractured carbonates & gas/oil

gravity drainage (esp. for heavy oil/sour gas)

•  Deeper, lower-permeability carbonate reservoirs

•  3D seismic imaging of fold/thrust traps

•  Subtle structures and depth conversion

•  Mixed carbonate/clastics systems (offshore/Iraqi border)

•  Management of IOR/EOR processes (mainly gas injection) in mature fields


Bushgan Field

Kuh-e Kaki

Kuh-e Mond

Persian Gulf

Horizon Depth(Surf.)

Interval (m)

Hydrocarbon type

API Oil water contact

SW%

H2S %

Hydrocarbons (in place)

Reserves (recoverable)*

Asmari-Jahrum

1285 1285-1595 Oil 34 -775m 39 1 .1 30MMbbl 3MMbbl(10%)

Busghan

*The recoverable reserve is calculated based on natural flow. That will be improved by artificial lifting and/or gas Injection.

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Issues & Challenges


ìTHE POSITIVES THE NEGATIVESî SANCTIONS

Sanctions snap-back does not apply retroactively to contracts signed

JCPOA violation during the Transition Period leads to sanctions snap back

INTERNATIONAL RELATIONS

Improving relations depend on attitudes of next US President & Iran’s Supreme Leader/conservative factions

Turbulent history with the West, as evidenced from US/Iran relations

(see chart below)


Post-sanctions Iran: confrontation, containment, compromise or cooperation?

Issues & Challenges


ìTHE POSITIVES THE NEGATIVESî COUNTRY RISK: isolation vs. interaction

Relatively stable politically; moderate conservatives dominate government (most reformists were banned) and have recently won seats in the Majlis (parliament) and the Assembly of Experts (chooses future Supreme Leader)

Hardline conservatives exercise effective power through: the office of the Supreme

Leader (can veto Laws); the Guardian Council (can veto candidates); Judges;

Clerics; and Islamic Revolutionary Guard Corps (control of big business)

FINANCE, BANKING & INSURANCE

Short term, there will be some appetite for equity (large IOCs) and venture capital (small qualified companies)

ECA financing/ Political Risk & Other Insurances – not yet available and will

likely be restricted to certain sectors; banking slowly resuming in non-US

currencies


The Economist: “In reality hardline and softer clerics intermarry, shift positions, and hedge their bets to keep power”

Issues & Challenges


ìTHE POSITIVES THE NEGATIVESî LEGAL RISKS

Iran Law: well established civil legal system; principle of freedom of contract and adherence to contract terms followed

Dispute resolution: ICC/UNCITRAL accepted; party to 1958 NY Convention

..No modern legal concepts (JV, agency etc.); mandatory rules at times not clear;

local contract models preferred making negotiations long and difficult

..but not a party to ICSID Convention

FOREIGN INVESTMENT PROTECTION

Domestic Laws: Iran 2002 Foreign Investment Promotion & Protection Act

Treaties: party to Bilateral ITs with 66 countries and Multilateral ITs with: – Islamic States (OIC Investment Treaty) – The ’tan States & Turkey (ECO-APPI Treaty)

..limited protection (domestic courts)

..but not with e.g. Australia, Netherlands, Luxembourg, Singapore, UAE, UK, US

..untested, Islamic States only ..not yet in force


Issues & Challenges


ìTHE POSITIVES THE NEGATIVESî IMPLEMENTATION - COMMERCIALITY

Issues that may affect FID/production: -  Development/Production costs are

relatively low (70% of fields are onshore, many with reservoirs at shallow depths)

-  Well educated workforce, with some

local service contractors developing well suited indigenous technology/capabilities c

-  Improved terms and returns

..local JV partner, possible carry ..JMC-NIOC approvals for forward plans/

type of costs that are recoverable

..80% of workers have to be local (no exposure to modern technology,

management skills) ..51% local content

..Unitization ..OPEC ceiling

..OIL PRICE

..IPC Terms untested


Issues & Challenges

•  In the short term, taken together, the Negatives (political, country, finance, legal and local partner/local content issues) present a major counterweight to the Positives (sanctions lifting, opportunity slate and new and improved petroleum contract terms), which in a less risky political context with such low production costs and large reserves would be considered as very attractive

•  In the long term, the outlook trajectory appears positive as available opportunities will be hard to ignore, investment framework progresses, legal and political uncertainties unravel, and remaining risks/hurdles are managed through the contract negotiation and JV project and procurement implementation processes


Impact of Iran’s Re-entry: Capital

The landscape for scarce hydrocarbon sector investment funds for Iran is very competitive:

•  ~ US$100-300bn in new capital is required to bring Iran’s oil and gas sector up to standard international development levels and achieve production targets, with the amount varying according to timeframes for completing key projects

•  For IOCs, 2016 is shaping up to be a year of cutting CAPEX, streamlining operations, restructuring and focusing on geographies where break-even points are low enough to sustain profitability

•  Long term, Iran’s impact on scarce investment funds capture will depend on type of projects offered, how attractive terms of investment are, oil price and political risk perceptions


Impact of Iran’s Re-entry: Energy Markets

•  Potential for new Iranian production for oil, gas and petrochemicals is significant

•  Home to the 4th largest crude oil reserves in the world (or 13% of OPEC’s total) and to the 2nd largest gas reserves (or 33% of OPEC’s total). Potential to compete with the likes of US, Saudi Arabia, Russia and Iraq

•  Production under sanctions

•  For crude oil, averaged 2.88 Mbbl/day (down from 3.7 Mbbl/day in 2011), exports about 1.15Mbbl/day (down from 2.6 Mbbl/d in 2011). In addition, Iran produces about 0.7 Mbbl/day of condensate and NGLs

•  For natural gas, averaged 22 Bcf/day (8.1 Tcf/y), most of it is marketed domestically (5.7 out of 6.5 Tcf/y), and the remainder re-injected into oil wells to enhance recovery of oil (1.0 Tcf)/y or vented/flared (0.6 Tcf/y)



•  Iran’s plans, post sanctions, are ambitious: •  Increase crude oil production to at least 4

mbpd in 2016, and then to 5.7 mbpd by 2018; condensate from 550 to 850 kbpd

•  Increase natural gas production from 22 to 35.3 bcfd by 2018

•  Increase annual petrochemical production from 47 to 180 mt by the end of 2022.

•  These plans face significant issues: •  how quickly can Iran bring new oil and gas

and petrochemicals to the market? •  how quickly can Iran market the new oil and

gas and petrochemicals given the current competitive landscape for market grab and price wars?


Source: Wood Mackenzie & Manaar Energy Group

Iran: oil and NGL production by field Major new/re- developments required to

arrest decline/increase production

Iran: natural gas production by field

Major new production from remaining undeveloped phases of South Pars, onshore Khuzestan (associated gas) and other large offshore non-associated gas fields (North Pars, Kish, Farzad, Lavan, Golshan etc.)


Hossein Kazempour Ardebili (Iran OPEC governor) shed some light on these questions:

“Iran can almost immediately ramp up production by 400-600,000 b/d from fields where the flow of oil has been slowed because of lack of buyers (during 2016).”

î -  Only 300,000 b/d have been put into the market by end Feb (or 3.3 MM b/d) – no or modest impact on oil price

“Following that, a further 500,000 b/d can be achieved by re-starting wells that were shut down (earliest 2017).”

çè -  By 2017, world markets should absorb + 1 MM b/d due to projected decline in non-OPEC supplies (N America, Russia etc.) / demand growth from emerging economies

“Further increases (beyond 2017) will depend on whether and when foreign capital and technology will flow in. This will not only depend on the continued successful implementation of the JCPOA but on oil price and the terms that are offered”

î -  5.7 MM b/d by 2018 is ambitious – low CAPEX/OPEX per barrel but tough price environment +competitive supplier market

-  Higher gas production possible but export success subject to financing, pricing/contract and geopolitical issues being resolved

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N C F E N E R G Y Transactions & Advisory Services The Re-emergence of Iran


•  Now that Iran is allowed to sell its oil more freely (major buyers include China, India, Japan, South Korea, Taiwan and Turkey), export volumes will substantially increase*

•  Iran is reported to be willing to enter into output freeze but only after it reaches 4 M b/d (Iran is not taking part in this month’s OPEC talks in Doha to agree a process for freezing output at Jan 2016 levels)

* Iran’s index value is highest in the PRIX INDEX Analytical Note Q1 2016 (>85%), a political risk forecast for global oil exports. This implies that PRX country analysts are confident of a substantial rise in exports by end Q1 2016


CONCLUSIONS

•  Post lifting of sanctions and long term, Iran is likely to re-emerge as one of the top nascent global hydrocarbons superpowers

•  For this to happen, IOC technology and billions of dollars in investment are needed to arrest the decline in production from Iran's aging oil fields and modernize refinery/petrochemical industries, and ultimately increase capacity; and for new gas field developments to be brought online

•  Much will depend on (i) no sanctions snap back; (ii) type of projects on offer; (iii) acceptable terms; (iv) local operating hurdles removed; and (v) Iran’s ability to gain market share

•  Many big opportunities, interwoven geo-politics and economics, operating challenges…


CONTACT DETAILS

DR NOEL FABRI Principal and Managing Director N C F E N E R G Y P T Y L T D Tr a n s a c t i o n s & A d v i s o r y S e r v i c e s [email protected] +61 488 400 425

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the re emergence of iran

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