Mendoza School of Business

Iran Oil Return May Be Slow Amid Jostling for Foreign Investors

Published: April 7, 2015 / Author: Javier Blas and Bradley Olson

Finance Prof. Gianna Bern weighs in on Iran’s return to the international marketplace for The Washington Post.

Iran’s full return to world oil markets will be hindered by strong competition for foreign investment dollars from rival producers including Iraq, Mexico and Brazil, among others.

In a world of surplus supply, prices hovering around $50 a barrel and deep cuts to capital expenditures by oil companies, Iran will be challenged to find investors should it finalize a nuclear agreement that leads to a lifting of sanctions.

Other jurisdictions have already seen super-major oil companies walk away from reserves because returns were deemed inadequate. Exxon Mobil Corp. has rejected renewing a concession in Abu Dhabi because that country didn’t offer enough returns, and BP Plc has told Mexico it needs better terms to attract foreign investments as it reopens fields.

Even if all the obstacles are resolved, “negotiations could take a year” once sanctions are lifted, Nader Sultan, who ran state-owned Kuwait Petroleum Corp. for over a decade, said in an interview.

Tehran took the first step to reopening its fields last week when it reached a framework agreement with the U.S. and other leading powers to resolve a decade-old nuclear spat. The deal, if finalized by June 30, could prompt the U.S. and Europe to lift sanctions that have stopped foreign oil companies from investing in Iran.

Once that occurs, Iran will be eager to show the world it is open for business, according to Sultan. “They need the oil revenues,” he said.

Price Recovery

The potential addition of millions of barrels of Iranian crude to the market promises to further delay a recovery in oil prices, hurting profitability of some of the world’s biggest producers, including Exxon and Royal Dutch Shell Plc.
Brent crude, an international benchmark, rose 6 percent to $57.96 after Saudi Arabia said it would increase the price for oil it sends to Asia.

Iran’s return as a dominant power in the international marketplace is “not going to be immediate,” said Gianna Bern, an energy consultant who teaches international finance at the University of Notre Dame in Indiana. “European companies such as BP that have a long storied history in Iran are likely to take the first crack at coming back into the country, although some may be wary initially.”

Read the entire story on The Washington Post website.