Lest we forget

With coverage of Iranian tensions diminishing and more recently overshadowed by COVID-19, we review the likely direction of travel in light of recent events.

On 23rd February 2020, the country held its 11th parliamentary elections with Conservatives securing all 30 parliamentary seats in Tehran and winning control overt most branches of the State. This will continue the Conservatives run in parliament but does set the stage for a more extreme Presedential candidate from the Iranian Revolutionary Guards to win in 2021.

The country has been drastically crippled by the reinstatement of US sanctions with oil production down to c.400mbbl/d from pre-sanction highs of >2mmbbl/d. The public resentment grows stronger both against the US but also its own government after the shooting down of the passenger jet at the beginning of this year. We could well see the path to an escalation in conflict with the US together with further refinement of its nuclear stockpile, although this will only be a real threat and take maximum effect in a tight oil market. With current weak trajectory of oil prices during COVID-19, the US reaction could very well be so what...?

At the same time, COVID-19 has claimed over 200 lives in Iran and question is whether we could see it seek assistance in the international arena if things worsen.

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The nonsense of releasing US Strategic Petroleum Reserves

Trump is on a mission to contain oil prices and has been sending strong tweets and messages blaming OPEC and supposed ally Saudi Arabia for the current levels of “high” oil prices. The Trump administration’s policies are in complete dissonance as tampering with the Iranian sanctions is a key cause of the tightening of global oil supply and strong noises around US energy independence is in complete opposition to Trump asking OPEC to pump more oil, which illustrates that the US is far from energy independence and still needing to call up OPEC in times of need.

Trump is now considering tapping the US strategic petroleum reserves (“SPR”) in an attempt to lower oil prices in the run up to the US midterm elections; logic being that this will translate into lower prices at the pump. However, his administration may be wrongly conflating the two with no guarantee that a release of SPR will lower gasoline prices.

A release of SPR crude will likely do little to alleviate pump prices. US refiners are already running at near full capacity and additional crude will have limited ability to be absorbed and converted to gasoline domestically. In fact, additional crude on the market will likely depress WTI and increase the profits of the refiners rather than the benefits trickling through to the pumps. Furthermore, the SPR holds light crude whereas the feed slate for US Gulf refiners is typically heavy crude from South America.

The SPR was established in 1975 following the Arab oil embargo in 1973. The US, together with 28 other countries, are required by the International Energy Agency to hold no less than 90 days of import cover measured against the previous year’s net imports. It is designed to meet domestic demand in the case of supply disruptions. In the US, the SPR is held across four sites on the Gulf Coast with a total of 660mmbbl of mostly light crude. They can be released with a 13-day window once the POTUS gives the decision.

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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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Total to pull out of Iranian mega gas project if sanction waivers not granted

Total has warned that it will pull out of the giant South Pars development offshore Iran if it is unable to secure sanction waivers. The imposition of sanctions would be crippling for Total as it would completely lock it out of any US related activity including the ability to access the capital markets.

Should Total pull out, partner CNPC will take over Total’s 50.1% stake and operatorship of the project under a previous agreement which was entered with the foresight that Iranian sanctions may be re-imposed.

Source: Al Jazeera

Full press release from Total:

Paris - On 4 July 2017, Total, together with the other partner Petrochina, executed the contract related to the South Pars 11 (SP11) project, in full compliance with UN resolutions and US, EU and French legislation applicable at the time. SP11 is a gas development project dedicated to the supply of domestic gas to the domestic Iranian market and for which Total has voluntarily implemented an IRGC-free policy (Islamic Revolutionary Guard Corps) for all contractors participating in the project, thereby contributing to the international policy to restrain the field of influence of the IRGC. 

On 8 May 2018, President Donald Trump announced the United States’ decision to withdraw from the JCPOA and to reinstate the US sanctions that were in force before the JCPOA’s implementation, subject to certain wind down periods. 

As a consequence and as already explained before, Total will not be in a position to continue the SP11 project and will have to unwind all related operations before 4 November 2018 unless Total is granted a specific project waiver by the US authorities with the support of the French and European authorities. This project waiver should include protection of the Company from any secondary sanction as per US legislation.

Total has always been clear that it cannot afford to be exposed to any secondary sanction, which might include the loss of financing in dollars by US banks for its worldwide operations (US banks are involved in more than 90% of Total’s financing operations), the loss of its US shareholders (US shareholders represent more than 30% of Total’s shareholding) or the inability to continue its US operations (US assets represent more than 10 billion dollars of capital employed).

In these circumstances, Total will not take any further commitment related to the SP11 project and, in accordance with its contractual commitments vis à vis the Iranian authorities, is engaging with the French and US authorities to examine the possibility of a project waiver.

Total confirms that its actual spending to date with respect to the SP11 contract is less than 40 million euros in Group share. Furthermore, considering the various growth opportunities which have been captured by Total in recent months, Total confirms that a withdrawal from SP11 would not impact its production growth target of 5% CAGR between 2016 and 2022.

Original link: https://www.total.com/en/media/news/press-releases/us-withdrawal-jcpoa-totals-position-related-south-pars-11-project-iran

South Pars development scheme

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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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CNPC could take over Total's interests in Iran

CNPC is considering taking over Total's stake in a the giant South Pars development if Total needs to exit Iran to comply with any new U.S. sanctions. In October, President Trump refused to certify Iran's compliance with the nuclear deal leading to a Congressional vote on whether to reimpose sanctions on Iran.

The date of the vote has not yet been set , but if sanctions are reimposed they could prohibit companies working in Iran from also operating in the United States. For Total, the stakes are high, where they have much larger operations in the United States.

Total signed the USD1 billion deal to develop the South Pars gas field in July. However, the contract provided mechanisms to allow Total to pull out in the case of sanctions imposition, whereby CNPC has the option to take over Total's stake. CNPC could take over Total's 50.1% interest and become operator of the project if Total is forced to withdraw from Iran. CNPC has a 30% stake, while the Iranian national oil company's subsidiary PetroPars holds the remaining 19.9%. If this goes ahead, then CNPC would shoulder 80.5% of the cost of the project, estimated at $2 billion for the first stage.

Any change would also delay the project as Total is already in discussion with service companies and is expected to award contracts early next year.

The South Pars project will have a production capacity of 2bcf/d plus condensates, Total has said. It would start supplying the Iranian domestic market starting in 2021.

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OPEC may extend yet

Saudi Arabia has been working tirelessly behind the scenes and appears to be gaining good momentum with the major actors of OPEC + 1 (i.e. Russia) for extending the OPEC output agreement beyond April 2018. Saudi Arabia and its new ally, Russia, are keenly in favour of maintaining the cuts until June 2018 and several other producers have recently signaled their support for an extension as well.

Iran: Initially one of the tougher partners at the November 2016 pact discussions given its demand to return to pre-sanction production levels, Iran has played along with the creation of the special cap arrangement. Iranian oil minister, Bijan Zanganeh, has indicated that the country “will cooperate with the majority” on any extension proposal.

Iraq: Has publicly been a vocal critic of the current arrangements arguing that it was not exempt from the cuts (like Libya and Nigeria) as it needed funding to fight the war with Islamic State. Iraqi oil minister, Jabbar al Luiebi, has also been critical of the fact that Iraq has not been allowed to use its own numbers for the calculation of the output cut). Up until now, Iraq has been sending mixed signals about whether it would actually agree to any extension. However the Saudi oil minister, Khalid al-Falih, has been working behind the scenes and made a special visit to Baghdad in May before the OPEC meeting to ensure that Iraq would agree to a 9-month timeframe. Saudi’s diplomatic efforts may have paid off as Iraq is now softening its tone and affirming its commitment to the current agreement; in August 2017, Luiebi stated during a visit to Moscow that it would go along with an extension if one is agreed.

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Iran interim agreement: the Minotaur's labyrinth

In the story of the Minotaur, Daedalus was tasked with building a labyrinth under the order of King Minos of Crete to imprison the dreaded creature. The Minotaur, part man part bull, was an unnatural being. He was created when Pasiphae, King Minos’ wife mated with the bull sent by Poseidon; this was made possible by the wooden cow crafted by Daedalus into which Pasiphae climbed into. The Iran framework agreement, is in some respects like the labyrinth – an artificial solution to a man-made problem. As the tale goes, only a great Athenian hero (Theseus) is needed to finally slay the Minotaur.

On 2 April 2015, the P5+1 and Iran had agreed to the framework agreement against all odds. The details of the agreement were also more granular than had been expected by the international community. Initial expectations were that high level terms would be agreed by the end of March deadline, with the finer details to be thrashed out over the following months ahead of the ultimate 30 June deadline. Reaching a nuclear deal with Iran has been a desire for the US for decades, and following lengthy negotiations, it appears that things are now moving in the right direction. Iran has also been more willing to come to the table following years of sanctions which have crippled its economy.

The main elements of this interim deal are:

• Centrifuges: Reduce the number of centrifuges from 19,000 to around 6,000
• Enrichment: To no more than 3.37% for at least 15 years
• Stockpile: 10,000kg stockpile to be reduced to 300kg
• Facilities:
• Fordow to be converted for research purposes with no enrichment
• Enrichment only allowed at Natanz which will house 5,060 first generation centrifuges
• Arak to be redesigned as a heavy water research facility with no plutonium production capabilities
• Monitoring: IAEA to monitor supply, usage and sale of nuclear technology with inspections to last for up to 25 years

In return, sanctions on Iran will be suspended upon IAEA certification of compliance with the final terms of the deal. Any breach of the terms will result in immediate reinstatement of sanctions. However, cracks are already in sight with Iran declaring that there will be no deal unless sanctions are lifted immediately upon conclusion of the deal. Also, in the latest twist of events, the US Senate Foreign Relations Committee voted unanimously (19-0) on 15 April in support of legislations that would give Congress authority to approve any final deal thus undermining the President’s authority to conduct foreign policy with Iran.

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Iran negotiations: the US conundrum

The intensifying rift between President Obama and Congress poses a risk that could derail the Iranian nuclear talks.

Republican Bob Corker, Chairman of the Senate Foreign Relations Committee, has sponsored the Iran Nuclear Negotiations Act of 2014 which calls for the President to submit any Iranian deal to Congress for approval. The bill would remove the President’s current authority to waive any sanctions imposed by the legislature. In short, Congress will have the final vote on any deal with Iran.

The Foreign Relations Committee will vote on the bill on 26 March and if approved, would move to a vote in the Senate. Should it progress beyond the Senate, Obama retains the right to veto the bill, however, given the Republican majority and signs of Democrat support for the bill’s measures, the bill could become veto proof.

The passing of such a bill would more than throw a spanner in the works and could seriously scupper the negotiations as well as reverse the progress made to date. It would raise further questions around President Obama’s authority in international negotiations which have already been partly undermined by the Republican letter to Iran on 9 March.

A scenario that could play out, should the bill be implemented, is the blaming of the US by the international community on the breakdown of the nuclear negotiations (should it occur). The US would no longer be seen as a reliable and trustworthy partner which would make it difficult for the US to garner future support for additional sanctions against Iran.

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Iran framework agreement - Kerry makes the rounds with the P5+1 and Gulf States

Over the past few weeks, John Kerry has been busy meeting with his P5+1 counterparts and members of the Gulf States in the run up to the 31 March 2015 deadline for the framework agreement on the Iranian nuclear programme.

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Iran negotiation: an untimely letter

On 9 March 2015, Republican senators issued an open letter to Iran that essentially warned the latter any deal entered into with President Obama would be considered an "executive agreement" that would require Congress ratification and more importantly, could be revoked by the next president.

The message it clearly sends out is that the US could back out of any agreed nuclear deal, raising serious doubts on whether the US will keep up its side of any bargain, including the lifting of sanctions. The letter was drafted by freshman Republican Senator Tom Cotton and signed by 46 other Republican senators. The timing of the letter is a major blow to the framework agreement which is due to be made by the end of March.

Hilary Clinton has denounced the letter saying that "these senators were trying to be helpful to the Iranians or
harmful to the commander-in-chief in the midst of high-stakes international diplomacy", while John Kerry called it "absolutely calculated...and unthought-out". Even Iran's foreign minister, Mohammad Javad Zarif, found the move by the select Republicans distasteful.

Cotton defended the letter and said that Obama is "negotiating a deal that is going to put Iran on a path to a
bomb". This in itself is a weak argument as the lack of action by the international community could also see Iran ramping up its enrichment programme and further developing nuclear capabilities. Whilst Iran could argue in future that any slight slip up by the US as reneging on an agreement, it is likely that this would be one of a myriad of excuses that they could use.

It is also worth scrutinising the letter further.

1. The letter suggests that a "mere executive agreement" holds little sway in terms of power, yet it is worth remembering that the withdrawal of US forces from Iraq was by such executive agreement and not a treaty.
2. It is also untrue to say that "future Congresses could modify the terms of the agreement at any time" - Congress cannot renegotiate such an agreement, but can pass legislation to contradict it and therefore nullify its terms.
3. Also, the claim that the next president "could revoke the agreement" neglects the fact that the agreement will become binding international law through a UN Security Council resolution.

The letter muddies the water at a bad time (or a good time as some may say) as the negotiations intensify over the next few weeks. Although the damage to the negotiations and to President Obama's authority can be contained, it further chips away at the delicate pillars which have supported the efforts of the P5+1 which have progressed the discussions with Iran to the point they are at today.

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Obama Administration to bypass Congress on deal with Iran?

Obama Administration reported plan to bypass Congress on a deal with Iran

• Administration’s plan to suspend economic sanctions against Iran without a vote in Congress
• …Administration says Congress will have final say in whether to permanently lift sanctions

Permanent sanctions would only be lifted if Tehran demonstrates compliance with restrictions on its nuclear programme

• …and Iran must make sufficient progress in conceding its programme

At the same time, consider whether US requires Iranian support in the battle against the Islamic State?

According to Saudi intelligence, the P5+1 have conceded that Iran can maintain a civilian nuclear infrastructure

• Saudi wants the GCC to influence Congress to not approve retention of any nuclear facility

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