What’s At Risk For Energy If Trump Kills The Iran Deal

Iran, already struggling to attract investors to its energy industry, may find things tougher still as U.S. President Donald Trump tries to undermine the nuclear deal that eased sanctions on OPEC’s third-largest crude producer.

His efforts won’t immediately curb the flow of some 2.3 million barrels of daily Iranian crude exports -- more than three times the amount of oil the U.S. has sold abroad over the past year. For investors, however, the risks could be higher. Companies such as Total SA, which in July became the first major Western energy company to sign a production deal with Iran since the 2015 accord, may face new hurdles in contributing to the Persian Gulf country’s estimated $100 billion need for oil and natural gas investment.

How could a U.S. decision affect energy markets?

A declaration from Trump this week that Iran is in breach of the spirit of the agreement intended to prevent it from developing nuclear weapons could splinter the pact that world powers reached with the Persian Gulf nation two years ago. Iran denies that it seeks to build atomic weapons, and its Foreign Minister Javad Zarif has said the U.S. “failed to implement its side of the bargain.”

If a Trump decision leads to tighter U.S. restrictions, it could choke off the foreign investment Iran needs to rehabilitate aging energy assets and boost oil and gas production. Earlier U.S. energy sanctions, suspended in January 2016, targeted Iran’s oil exports by threatening its customers with financial penalties if they didn’t scale back purchases.

The U.S. has leverage to impose similar punishment on energy companies doing business with the Islamic Republic, as many have operations in the U.S. and use dollars to pay for equipment and contractors. “Project finance and investment will become even tougher than they are today,” said Iman Nasseri, a senior consultant at London-based researcher FGE. 

Trump’s ability to curb crude sales may be more limited, Nasseri said. Under the last round of sanctions, the U.S. relied on the willingness of Asian customers to buy less Iranian oil, while the European Union imposed a full embargo. Unless other parties to the deal are willing to renegotiate or scrap it, the U.S. under Trump is likely to be isolated this time if it targets oil sales.

What would happen to Iran’s oil exports and production?

The U.S. hasn’t bought Iranian oil for close to 40 years, but the Gulf country’s exports have flooded back into Asian and European markets, roughly doubling to between 2.2 million and 2.4 million barrels a day since sanctions were eased last year. Shipments to Europe surged to about half a million barrels a day after the EU lifted its embargo. Iran’s sales to China, its biggest buyer, swelled in August to the highest level since June 2016, according to ship-tracking data compiled by Bloomberg.

“Europe seems unwilling to re-impose oil-related sanctions, as was the case in 2012,” said  Homayoun Falakshahi, an analyst at consultant Wood Mackenzie Ltd. But the U.S. could seek to pressure buyers of Iranian crude, especially those with assets in the U.S., he said.

If the U.S. pulls out of the agreement and succeeds in persuading Europe to reinstate its embargo, Tehran could find oil exports capped at around 1 million barrels a day, or roughly the same level targeted by sanctions between 2012 and 2015, FGE’s Nasseri said. Such a scenario is unlikely. A more plausible outcome would be for the U.S. to uphold the nuclear deal but add sanctions on some Iranian entities and intensify financial pressure, he said.

Could Iran still develop oil and gas fields to boost output?

Iran’s gas reserves, estimated by BP Plc at 1,183 trillion cubic feet (33 trillion cubic meters), are the world’s largest and almost four times the size of U.S. deposits. Iran has raised oil output by about a third to some 3.8 million barrels a day since sanctions were eased in January 2016, and it’s seeking to boost production capacity for crude to 4.7 million barrels a day over the next five years.

A unilateral U.S. decision to re-impose sanctions on Iran “would curb the enthusiasm of European and some Asian corporates for following through with plans to invest in the Iranian upstream sector,” said Helima Croft, global head of commodity strategy at RBC Capital Markets LLC. This, in turn, could “force foreign refineries to source less crude from Iran, especially if the threat of being locked out of U.S. capital markets was revived.”

Who would be most exposed under new energy sanctions?

International companies have been wary of signing new contracts with Iran because sanctions on financial transactions with the country remain in place. Total agreed to develop Iran’s share of the world’s biggest gas field, the offshore South Pars deposit, in the country’s only deal with a foreign energy major since sanctions were scaled back. Paris-based Total estimates the project needs an initial $1 billion to get started.

“Total is the only company with long-term commitment and investments and interest in Iran” right now, FGE’s Nasseri said. “There will be extra risks.” Total can pay for the South Pars project with its own funds, instead of borrowing from banks, to minimize its exposure to the U.S. financial system for Iran-related matters, Nasseri said. 

Officials at Total didn’t reply when asked to comment. “We are respecting international laws,” Chief Executive Officer Patrick Pouyanne said in a July interview. “If rules are changing, we will have to adapt.” 

WoodMac’s Falakshahi expects Iranian service companies to do most of the work for the first phase of South Pars, partly due to minimum requirements for local staffing and content in the project.

Royal Dutch Shell Plc, Italy’s Eni SpA and Russia’s Rosneft Oil Co. PJSC are among more than 30 foreign companies that have qualified for oil and gas projects in Iran since sanctions were eased. The list includes Schlumberger Ltd., an oil-field services business with principal offices in the U.S. and Europe. American citizens can’t do business with Iran, and U.S. companies are prohibited from working there except through foreign subsidiaries.

Source: Bloomberg