Joint Plan of Action alters Iranian oil and gas market

The Joint Plan of Action (JPA), agreed to by Iran and the permanent United Nations Security Council Members (China, France, Russia, the UK and the U.S.) and Germany (the so-called P5-plus-1), has, the potential to impact the international oil and gas market, as it contains a number of measures designed to relax certain, existing secondary sanctions. The impact of the relaxation of these specific sanctions is not likely to have an enduring effect, as the JPA will only last for six months, with the potential for a further six-month extension, and any comprehensive, long-term deal is far from certain. The plan’s negotiation has seen commentary from the market on the potential impact of regular, increasing production from a sanctions-free Iran.

The JPA contains an agreement to hold Iran’s crude oil exports at a flat rate, for a period of six months, rather than requiring further significant reductions in the amount of Iranian oil purchased by those countries currently purchasing oil from Iran. As part of the sanctions in effect, these countries have been required to show a continuing decrease in Iranian oil imports. The JPA now permits them to continue importing Iranian oil at the current depressed levels, without requiring a further show of reductions during the six-month JPA. Under the JPA, no other country is permitted to begin importing Iranian oil. On Nov. 29, the U.S. Department of State issued formal waivers covering five of these countries, to allow their crude purchases to continue at current levels, without the consequence of U.S. sanctions.

The sanctions on Iran’s petrochemical exports, and associated services, will be suspended temporarily under the JPA. It is anticipated that the suspension of these sanctions specific to associated services would extend only to the provision of associated services for non-designated Iranian entities. The White House has estimated that this specific suspension will permit Iran to generate a maximum of $1 billion in new revenue over the next six months, but only if Iran is able to produce additional petrochemicals for export. This also relies on finding petrochemical customers, who will be willing to endure the uncertainty of a short-term supply contract.  In the event of any violation of the JPA, the suspension of sanctions is liable to see immediate revocation, providing a level of uncertainty and risk that could be unappealing to customers.

The relaxing of the sanctions on associated services could impact the ban on European insurance for shipments of Iranian oil, which has previously hindered Iran from getting its oil to market. If these restrictions are removed from the insurance policies, then those countries currently importing Iranian oil would find it more stable to do so.

The JPA allows for a financial channel to be established, which will facilitate humanitarian trade for Iran’s domestic needs, using Iranian oil revenues held abroad. The JPA has defined humanitarian trade as “transactions involving food and agricultural products, medicine, medical devices, and medical expenses incurred abroad.” This channel would involve specified foreign banks, and non-designated Iranian banks, to be defined when establishing the channel. The JPA also considers that the channel could enable transactions required to pay Iran’s UN obligations, and direct tuition payments to universities and colleges for Iranian students studying abroad.

The JPA is due to be implemented this year, although it is subject to action on behalf of both parties, a factor that has the potential to cause issues. An example of this occurred on Dec. 12, when the Treasury and State Departments of the U.S. government designated more than a dozen companies and individuals, worldwide, which have potentially assisted Iran to evade international sanctions, and facilitate nuclear proliferation. The JPA specifically states, as a voluntary measure, that “the U.S. Administration, acting consistent with the respective roles of the President and the Congress, will refrain from imposing new nuclear-related sanctions.” There is concern that continued designations of this nature could derail the likelihood of both the substantive implementation of the JPA, and any sustainable, comprehensive, long-term plan to see the sanctions lifted.

Since 2011, oil sanctions imposed by the EU and the U.S. have forced Iran’s oil exports to decline from about 2.5 million bpd, at the end of 2011, to about 1 million bpd in December 2013. The White House has estimated that Iran has forfeited more than $80 billion since 2012 in lost oil sales. The successful negotiation of the JPA, and its anticipated implementation this year, has prompted low-key discussions between Iranian officials and international energy companies, as parties seek to prepare for a situation, where they might again be permitted to operate and invest in Iran.  According to media sources, the National Iranian Oil Company, Total and Shell recently discussed projects in the South Pars and West Karoon fields. At the time of writing, it remains to be seen whether the JPA is both implemented, and sees out its initial six months.