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Russian oil and gas companies ready to invest into hydrocarbons production in Iran

The new phase of interaction between Iran and foreign investors started after the sanctions had been lifted, experts say

MOSCOW, May 10. /TASS/. Russian oil and gas companies are ready to invest into production of hydrocarbons in Iran despite challenging operating conditions in that country, analysts questioned by TASS say. Cheap resources remain an attractive asset even in absence of clearly spelled conditions of cooperation, they say.

The new phase of interaction between Iran and foreign investors started after sanctions lifting. However, certain foreign investors, such as Total, Eni, OMV and Lukoil, said they will return only after improvement of terms of the buy-back service contract used in Iran before introduction of sanctions. The concept of a new contract, known as the Iranian Petroleum Contract (IPC), was already developed but its launch has been postponed repeatedly.

The IPC indeed appears a more attractive contract as distinct from the traditional production buyback scheme, experts say.

"The buy-backs and the IPC are both service contracts: contracts where the contractor brings capital and operates the field. In exchange, it receives its costs back and remuneration. The main advantages of the IPC appear to be its higher flexibility, longer length, and its similarities with a classic Production Sharing Contract (PSC)," Wood Mackenzie’s Senior Analyst Middle East & North Africa Homayoun Falakshahi said.

"Foreign companies will now be able to create joint ventures with Iranian companies. Remuneration of investors has been increased; it is finally depending on the oil price in the new scheme," head of Skolkovo Energy Center Tatiana Mitrova said. Conditions of the new Iranian contract may be similar to those used for West Qurna 2 project operated by Russia’s Lukoil in Iraq, Fitch analyst Maxim Edelson said.

Experts explain the interest of Russian companies in the Middle East oil by "the cheapest resource base in the world" held by Iran. Furthermore, the most interesting resources inside Russia have already been distributed. "Our opportunities to grant licenses to companies are highly limited in recent years and it is natural they are looking for options overseas," Sberbank CIB analyst Valery Nesterov said.

It will take years for Russian companies to develop Iranian projects, experts say. "It is difficult to say something specific about when Russian companies might be able to start production. But if what happened historically in Iraq could be viewed as an analogy, the West-Qurna-2 field in Iraq to it was put on stream around 4 years after Lukoil won the tender to develop the field," Norwegian-based Rystad Energy said. "1.5-2 years will be needed in Iran," department head in the Kazan Federal University Vladislav Zatsepin said.

"Russian companies' key advantage over Europeans is good political relations between Tehran and Moscow, having improved a lot over recent years," Falakshahi said. At the same time, Russian majors do not enjoy the expertise or access to finance as international oil companies do, he added.

Lastly, Russia is not a consumer of Iranian oil like China, for example. "Asian companies could lean on their position and present themselves as a long-term partner for Iran, both from an upstream and a marketing point of view. Russian companies will not be able to compete on this point," Falakshahi said.

However, this issue can be settled in the nearest future through talks resumed by Russia and Iran on restart of the Oil for Goods program, with Russia to purchase up to 100,000 bbl of Iranian oil daily within its framework. The relevant agreement can be signed already this year, Russian Energy Minister Alexander Novak said earlier.