On 26 February 2016, Iranians voted to renew the 290-seat parliament (Majles) and the Assembly of Experts, a body of 88 clerics responsible for planning the succession of the Supreme Leader. Early results suggest moderates making gains, which is likely to have a positive impact on upstream investment opportunities.
During his tenure, President Rouhani has been focused on implementing significant economic reforms. He has achieved tangible success with the nuclear deal in 2015 and the subsequent lifting of international sanctions in January 2016. The legislature is shaping up to be more friendly to the president than the preceding, more conservative parliament of the last four years, which suggests these objectives will continue to be realised.
Reformists make strong gains
Parliamentary elections have been seen as the first real test of public support for the President’s pro-reform policies. While the hardliners held an absolute majority with two-thirds of the seats in the previous legislature, the reformists have made strong gains in a much more balanced parliament - an indication of approval of Rouhani’s approach to date.
Central to the President’s reforms is attracting foreign investment to reinvigorate the oil and gas sector, which represents around a quarter of the country’s GDP. The National Iranian Oil Company (NIOC) recently announced 49 projects to be offered to foreign companies under a new, more attractive fiscal regime: the Iran Petroleum Contract (IPC) .
Capital investment integral to targets
The new fiscal terms were opposed by hardliners within the outgoing parliament, as the terms were deemed too generous to foreign companies. This suggests that the increased proportion of moderates is a positive sign that the IPC will be implemented in 2016. But while the new parliament’s more open stance towards trade and foreign investment will likely reassure potential investors, hardliners will remain influential and could still present challenges.
We estimate Iran has increased crude oil production and exports 200,000 b/d to 300,000 b/d since Implementation Day on 16 January 2016. We forecast the country to reach close to pre-sanctions-level production at 3.7 million b/d by H2 2017. However, in order to meet the government’s long term production targets, billions of dollars of capital investment will be required to fight natural depletion from ageing oil fields and to fund new developments.
Production potential and capital investment needs
The successful implementation of the IPC is essential to bring in foreign capital and technology to enable a strong ramp up in production over the long term. Although much improved from the previous buy-back contracts, we believe the IPC is likely to remain among the toughest terms globally for foreign companies.
In the coming weeks we will be publishing a series of insights on Iran’s upstream sector. We will be analysing the production potential and capital investment needs of the projects on offer, and outlining how they could fit in with major IOCs and NOCs’ asset portfolios.
NIOC’s 49 development projects on offer under the IPC
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