Iran for foreign investors: future rewards outweigh risks?

Oil&Gas Materials 13 February 2016 08:42 (UTC +04:00)

Baku, Azerbaijan, Feb. 13

By Aygun Badalova - Trend:

Despite the risks that Iran's business environment could create for investors, in the long-term, the outlook on the country's energy sector is very positive, Emma Richards, an oil and gas analyst with BMI Research, which is a part of Fitch Group, believes.

Richards told Trend that the re-opening of the economy will draw in a high level of investment, in particular from companies in Europe.

"Iran remains a challenging operating environment, but the rewards more than outweigh the risks," Richards said.

"Contract revisions have been favourable, the country has huge oil and gas reserves and the cost base is very low. It will probably be one of the strongest growth stories over the next 10 years," she said.

On January 16, the International Atomic Energy Agency verified Tehran's compliance with the Joint Comprehensive Plan of Action (JCPOA), opening the way for Iran's return to the global energy market. The same day, the US and the European Union announced that they were lifting their sanctions against Iran.

Free of sanctions, the country plans to increase its oil export by 500,000 barrels per day (bpd), and then raise the figure by another 500,000 to two million bpd within a six month period at the next step.

Iran's return will add to the glut in the global oil market in the near-term, Richards said.

"They've managed to increase their production by around 80,000 bpd over the past few weeks and they're also unwinding barrels from storage," she said.

Richards noted that BMI Research expects the country's production to increase by 500,000 bpd by 2017 and the lion's share of that will go to exports.

"Competition for buyers is intense, so we can assume there will be some competitive discounting, which will put further downward pressure on global oil prices," Richards said.

According to OPEC's February Oil Market Report, Iran produced 2.925 million bpd in January 2016, about 38,000 barrels more than in the previous months.

With regards of the prospects for the global oil market overall, Richards said that the first half of 2016 looks very volatile, both because the market is so oversupplied and because of the broader uncertainties around the health of the global economy.

"Companies are making aggressive cutbacks in spending, which will help the market begin to re-balance in the second half," she said adding that it's unlikely that oil prices will stabilise until that re-balancing gets underway.