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Iran Economy Update
Issue 91/2016 – Sunday August 28th
Content
Iran and Caspian Sea states to resumes oil swap deals soon
Tehran ready to offer Letter of Comfort issued by OFAC to allay concerns of foreign banks
Iran attends OPEC unofficial session in Algeria this September
Petroleum minister threatens disclosing names of groups that prevent foreign investment in Iran
Iran and Korea to start using euros in business transactions
IPC model approved in Iran after two-year wait
Iran and Caspian Sea states to resumes oil swap deals soon Last week, a delegation from Swiss Vitol company visited the
structures and installed
equipment at Iran’s northern Neka port oil terminal as part of the company’s plan to resume oil swap from the Iranian northern neighbors to the Persian Gulf states, Mehr News Agency reported on Aug. 27th. The news agency added that the British (BP) Petroleum is considered as
another international oil company that has shown interest in carrying out swap operations between Iran and its Caspian Sea neighbors.
Having confirmed the visit of the Vitol experts to the Neka port, Hamidreza Shahdoost, the head of the Iranian northern oil terminal has said Iran is likely to resume oil swap from Caspian Sea to the Persian Gulf in less than two weeks.
On August 21st, Petroleum
Minister Bijan Zangeneh had said
in a TV interview that many domestic and foreign companies have started negotiations with NIOC for swapping oil of the Caspian Sea states via Iran. He said Russia has shown desire to swap part of its crude oil via Iran to the Persian Gulf states. He said Iran has the capacity to swap 150,000 bpd of oil.
A number of international oil companies such as Swiss Vitol and BP were involved in the swap operations between the Caspian Sea and Persian Gulf states via Iran before this arrangement be fully nullified in May 2010 by the former petroleum minister Massoud Mir-Kazemi under
Ahmadinejad government after he proclaimed that the country doesn’t make any profit from such deals and that they are against national interests.
Swap deals were annulled under former president Ahmadinejad era
What swap deals mean? Under swap deals, Iran receives oil from the Caspian Sea and/or Central Asian oil producers through the northern Neka oil terminal, and this crude is sent via pipelines to the Tehran and Tabriz refineries for domestic consumptions. In exchange, Iran exports an equivalent amount of its own crude produced in southern fields via the Kharg oil terminal to the Persian Gulf customers of the Caspian Sea sates. Leaving the economic benefits through
receiving swap fees aside, another issue that makes oil swaps
interesting to Iran is that they increase Iran’s role in developing the Caspian oil industry.
In a report issued on Nov 3rd, 2015, IRNA—the news agency affiliated to the Rouhani government—wrote that with getting closer to the time for removing sanctions, the
government is drawing attention of the Russian and Central Asian governments to resume the transit
2 and swap of oil and oil products
whereby turn the country into the regional energy hub.
Of note,this is not the first time Iran talks about its intention to resume oil swap deal with its northern neighbors. Earlier on Oct 7, 2013, the NIOC director for international affairs had confirmed discussions with the Caspian Sea littoral states over oil swap. “Iran is ready, in both technical and infrastructural terms, to increase the volume of oil swap capacity with the Caspian Sea nations,” said Mohsen Ghamsari. He confirmed that at present, the Caspian Sea and Central Asian nations have adequate infrastructures to export their crude oil to Europe. “But with its well-established
infrastructures, Iran can help them to reach out to the Asian markets in which, the price of crude oil is at least $2 per barrel higher than the price of crude oil in Europe,”
Ghamsari said.
Iran says oil swap via Iran gives Caspian Sea states an access to lucrative Asian oil markets
Ghamsari said that in addition to help the Caspian Sea and Central Asian states to reach out to the Asian markets, Iran has
infrastructures to deliver their crude oil to their customers in the Persian Gulf as well.
Tehran ready to offer Letter of Comfort issued by OFAC to allay concerns of foreign banks In an effort to alleviate concerns of foreign banks to resume business with Iran, Minister of Foreign Affairs Javad Zarif said “If the media slants staged against Iran by the anti-nuclear deal have caused our friends to worry, we are ready to ask the US Treasury Department’s OFAC to issue letter of comfort for the banks that are going to re-start business with Iran,” said Zarif in an address to the Iran-Chile join economic cooperation commission in Santiago last week.
Meanwhile, an informed source told Tasnim News Agency this morning that the term letter of comfort is a letter which is issued by OFAC indicating the agency’s consent for business engagement with Iranian banks and
institutions. The source said that since the inception of the JCPOA last year, tens of such letters have been issued by OFAC and this trend goes on.
Earlier on June 14th, Zarif had stated in a press conference in Norway –a day before meeting his American counterpart—that the US must do more to encourage banks to do business with Iran. "I believe the US on paper has removed all the sanctions...but Washington needs to do more to remove the psychological
remnants of measures which had been in place for decades.”
In a report published by the
Financial Times on August 26th, the author argues that one year after the conclusion of the nuclear deal, expectations for an easy
movement of money to Iran to kick-start economic grow hasn’t played out as planned. The author argues that given the fact that since 2010, the US Department of Justice has fined non-American banks some $15 billion, the Asian and European banks are nervous and ask for guarantees of not being penalized for deals with Iran. The FT has quoted Stuart Levy, chief legal officer of HSBC as saying earlier in summer that this bank wouldn’t follow US Secretary of State’s verbal assurance
because “there are no assurances as how such business activities would subsequently be viewed by US regulatory and law
enforcement authorities.” The chief executive of another European bank told the FT that
“the American position is bizarre, we cannot take the risk.”
Iran attends OPEC unofficial session in Algeria this September Petroleum Minister Bijan
Zangeneh confirmed on Thursday that Iran will attend an OPEC unofficial meeting scheduled to be held in Algeria in late September, Mehr News Agency reported. The OPEC session will be held on the sidelines of the International Energy Forum (IEF) on Sept. 26-28 in which oil producers and
consumers are convened.
3 Zangeneh also said OPEC Secretary
General Mohamed Barkindo will visit Tehran in the near future, without giving an exact date.
Iran has already shown a subtle consent to join the oil freeze scheme to boost prices
The participants at the OPEC’s unofficial session in Algeria are expected to revive the oil freeze scheme –to cut output and boost prices—which was initially raised in a session in April in Doha, Qatar but failed due to Iran’s refusal to join the scheme citing its right to recapture its market share post- sanctions. Iran has recently shown a subtle consent to the oil freeze scheme after its oil output and exports having reached to the pre- sanctions levels.
In a separate development, Foreign minister who was on a Latin America tour last week told the Venezuelan President Nicolas Maduro that Tehran and Caracas
“will continue efforts to seek consensus to stabilize the oil market.” Maduro similarly said
"We continue to build common ground and a new consensus on stabilizing oil markets,
strengthening industries, strengthening OPEC," and declared that his ministers of Oil and Foreign Affairs will make [oil- related] announcements in the coming weeks but didn’t give details.
Iran and Korea to start using euros in business transactions The Deputy Minister of Foreign Affairs and a member of the Iranian nuclear negotiating team confirmed on Friday that Iran and South Korea are to start trading in euros to circumvent US sanctions on dollar transitions. "With US approval, converting South Korean won to euros without any direct intervention of dollars has got possible", Hamid Baeedinejad said on his Instagram page. Below is the full translation of his post on his Instagram page1:
“
The Korean currency is among the exchanges that is only used for trade settlement inside thiscountry and based on the decision of this country, during decades of business dealings, their currency should first be converted to US dollar and then, if necessary, is converted to a third currency like euros. But in regards to Iran, since there are restrictions in converting won to US dollar and also due to the decision of the CBI for not to use US dollar in transactions, the conversion of won to euro was practically impossible in bilateral business ties and this had turned into a restriction. With the concrete negotiations that were held between the US and Korea, for the first and with the US government’s approval, Korea managed to find a technical way for converting won to euro without
1 www.instagram.com/hamid_baeidinejad
a direct intervention of the US dollar. With this step which is deemed as yet another measure to implement the JCPOA, necessary conditions are prepared for resolving the problem of converting some other local currencies to euro, and this can facilitate transactions between the business executives and companies of Iran with the counterparts in other countries.”
On August 25th, Reuters quoted Korean Finance minister Yoo Il-Ho as saying that his country will start trading with Iran using the euro on August 29th and that the move
"will greatly resolve obstacles that stood in the way of facilitating investment and trading with Iran."
Petroleum minister threatens disclosing names of groups that prevent foreign investment in Iran
One week after the general terms and structures of Iran’s new form of oil contracts known as IPC was officially enacted by the
Petroleum Ministry, Bijan
Zangeneh said the new form of oil contracts will be used in contracts soon, but in a direct jab against the opponents who try to nullify the IPC, he threatened to disclose the name of those who try to prevent foreign investment in Iran.” “That some [domestic]
media outlets and special persons constantly bombard the media with their [fake] press releases that Iran is a unstable country,
4 discourages potential investors.”
“Some try to prevent [foreign]
investment in Iran. If I deem necessary, I will disclose their names and also the name of the entities from where they are organized and receive their orders,” threatened Zangeneh.
According to ISNA, Zangeneh who was speaking in the southern Assalouyeh region on Friday said that after making the necessary amendments, the IPC has been approved by the Parliament Speaker and will just need a final approval by the Cabinet for implementation.
Zangeneh’s estimation on losses inflicted by delays in IPC implementation in gas sector alone: $240 billion in few years
Zangeneh said that delays in implementing the IPC in the past few years have caused some $240 billion in loss in the South Pars gas field alone.
IPC model approved in Iran after two-year wait
After almost two years of discussions and disputes among the proponents and opponents, the general terms and structures of Iran’s new form of oil contracts known as IPC was officially
enacted by the Petroleum Ministry on August 22nd after the opposing sides in the parliament finally agreed to consent.
According to ISNA, Deputy Petroleum Minister for
International & Commercial Affairs Amir-Hossein Zamani-Nia said on August 20th that what has been prepared by the government is just the “outlines and general features” while details and
material terms of contracts will be drafted later, each being different from all others based on the type of the project. After the
preparation of the drafts, tender bids will be floated, he said.
“Without any doubt, Iran’s oil projects will be presented in two months and I have no doubt that before this yearend, big deals will be signed in Iran’s oil industry,”
added Zamani-Nia.
On July 10th, Zamani-Nia had said he expects the first oil contract under IPC model will be signed in the next three months and that priority for negotiations would be on the fields that are shared with the neighbors. Zamani-Nia said Iran expects attracting about $40-
$50 billion funding yearly in investment in the petroleum sector post-sanctions.
The released IPC only contains general terms that will be observed in all contracts while drafting finalized terms will take place through bilateral talks
between NIOC and potential investors.
The IPC Resolution was initially unveiled by the Petroleum
ministry in November 2015, but due to the staunch opposition from the conservative groups in parliament and other power bases, it underwent several rounds of revisions. After numerous modifications, the revised IPC Resolution was approved by the Cabinet on August 1st and then was sent to the parliament to ensure they are conforming to the Iranian laws and regulations. According to the local media, Bijan Zangeneh attended the Majles session on August 21st that was held to evaluate the IPC and managed to convince the opponents that the new contractual framework wouldn’t hurt the state’s
sovereign right and ownership of oil and gas reserves. Zangeneh also convinced the lawmakers that the IOCs cannot withdraw their projects if new sanctions are levied against Iran and explained that the IPC model has been designed in a way that if under sanctions, no production and export of oil takes place, Iran will have no payment to the foreign investors.
One day prior to be appeared before the parliament to explain details of the IPC, Zangeneh explained some details of the new contract model at a TV program and told the Iranian people that in order to improve the recovery rate of the aging oil reserves, the country needs capital and technology that will be provided by foreign investment.
5 As a developed form of
the old less-investment- friendly buyback system, IPC will be used in Iran’s new deals with IOCs
The Iranian Ministry of Petroleum believe that the existing buy-back contract system that bans IOCs (International Oil Companies) from owning stakes in Iranian
companies are not attractive enough to absorb the required investment. The Aug 18th issue of the daily Shargh published the report of the Majles Research Center2 (MRC) which confirms that the petroleum sector requires an investment of $150-$200 billion within a five year timeframe and underscores that failing to attract this amount of investment would hold the country back from
maintaining its position among the leading global oil and gas
producers. The MRC emphasizes on the necessity of attracting modern technologies, and underscored that this volume of investment and technology cannot be provided merely by the
domestic resources and capabilities.
Before being approved and enacted by the Petroleum Ministry, the IPC model faced strong oppositions from the hardliners that according to the daily Jahan-e-Sanat, were
2the non-partisan research arm of the Iranian parliament
politically-motivated. A few days before the IPC receives the parliament’s green light, NIOC Director for International Affairs Mohsen Ghamsari criticized what he termed as the “strong
politicized atmosphere”
surrounding the IPC. Ghamsari said “those who criticize the IPC have caused a two-year delay in implementing such contracts.”
This two-year delay, he explained, has resulted in further delay in production from the fields shared with the neighbors and caused them to enjoy the most benefits.
Some months ago, Mehdi Hosseini, the head of the IPC revision committee within the ministry of Petroleum had underscored that any further delay in launching the IPC would inflict a loss of $8-$10 billion per month to the country.
