Iranian sanctions supports Chinese cause for the Petro-Yuan

Iran is not short of heavyweight supporters following the decision to re-impose strong sanctions on the country by the US. Although Europe works to salvage what it can of the JCPOA, most likely going down the ex-US route, President Trump’s decision on 12 May will still likely cause a retrenchment of European investment into Iran given the far reaching implications for any company (US or not) with a connection to the country.

The Chinese and Indians see the sanctions as a massive opportunity to strengthen ties with Iran. Both countries had negotiated waivers under previous sanctions under a US diplomatic push. However, with trade tensions now in the mix, especially between the US and China, the latter could use this opportunity to secure additional oil supplies from Iran at improved pricing – an economic decision, but also to send a message to the US. Indian refiners have also agreed to double imports to 500,000 bopd under improved terms.

In April, China (re)launched its long awaited Petro-Yuan – Yuan priced oil futures. An experiment which China tried before and abysmally failed when retail punters had so much sway on volumes and caused such volatility in pricing, that the government had to step in and close it down. The story is different this time as the Petro-Yuan hopes to attract serious institutional traders. Iran should also be on board, having stated a desire to settle its trade in currencies outside of the US Dollar.

As a result, the sanctions may not have the full intended effect of fully taking Iranian crude off the market, especially if it can find willing buyers in the likes of India and China for its oil. The current oil price highs, hitting USD80/bbl on 17^th May, may be short lived as the markets have priced in foamy speculation and geopolitical risk, and not looked beyond alternative buyers for Iranian oil or the ability of the other OPEC members to step up and compensate for any lost Iranian barrels.

Iran currently exports c.2mmbopd. The members to the JCPOA, the P5 + 1, comprises China, France, UK, USA, Russia plus Germany

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OVL to bid for South Azadegan oil development in Iran

Indian oil giant ONGC Videsh Limited ("OVL") will bid for the development rights of the giant South Azadegan in Iran. There is strong competition with the likes of Gazprom, Lukoil, Rosneft, Shell, Total, Eni Petronas, Inpex, Sinopec and CNPC. of Malaysia and Russia’s Gazprom. OVL is one of 34 companies that pre-qualified last year for development of the field which is estimated to contain 6bnboe recoverable and currently produces 80mbbl/d - with the right investment, this could reach 320mbbl/d.

The National Iranian Oil Co ("NIOC") will issue a tender for the development shortly.

Separately, OVL will also rework the Farzad B gas field at a cost of USD6.2 billion, which it had discovered a decade ago and is trying to get Iran to award rights of the field to it. Sources say that OVL had last year made its ‘best’ offer to invest USD11 billion in developing the Farzad-B field and building export infrastructure but Iran has deterred awarding the rights of the field to OVL owing to differences over pricing of the fuel. OVL has now instead offered to do just the upstream part of bringing the field to production while leaving the marketing of the fuel to Iran, which will cost USD6.2 billion.

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