Signing ceremony of Iran-France oil deal

Total’s adventure in Iran

Financial Times | : Total’s deal over the development of the next phase of Iran’s huge South Pars gas field was announced in Tehran on Monday to coincide with President Emmanuel Macron’s State of the Nation address at Versailles. The deal is a sign of both France’s renewed self-confidence and the ever-changing dynamics of politics in the Middle East. For the international oil and gas business, it marks the beginning of re-engagement in Iran after almost 40 years of exclusion.

Having been mildly critical of one of France’s large companies last week, it is good to be able to praise another one. Total has shown the nerve to ignore the hostility to Iran displayed by the US administration. President Donald Trump has roundly criticised his predecessor Barack Obama’s deal to control Iranian nuclear developments but has offered nothing in its place. Continuing US sanctions and the threat of more attempts to isolate Iran have kept most western companies away. Total has decided not to fall in line.

The French company’s investment is not that big — $5bn to be spent over the next few years as a more than 50 per cent stakeholder in the development project alongside CNPC from China and Petropas — a subsidiary of the state-owned National Iranian Oil Company. But it should be seen as just the beginning as much bigger opportunities open up in the country.

The investment has been a long time coming. Total has been interested in the South Pars project for more than a decade and was close to signing a deal in 2012 before the process was interrupted by the imposition of European sanctions against Iran.

Total is not state owned but it is impossible to believe that the deal was done without the blessing of Mr Macron. I would not be surprised if the president now decided that a visit to Tehran was an appropriate symbol of the renewal of the close relationship between France and Iran, which can be traced back to Louis XIV and Colbert.

For both France and China, the deal clearly represents a belief that engagement rather than isolation is the best approach to Iran. It is a triumph for Total’s chief executive, Patrick Pouyanné. The risks of going into a country such as Iran are real but Mr Pouyanné has balanced them by the inclusion in the deal of CNPC, which no doubt has Beijing’s backing.

The involvement of CNPC assures a market for the gas from South Pars and potentially for oil and gas from future investments in Iran. If US sanctions are tightened and if the international banks refuse to handle funds involving Iran, Total can continue operating through Chinese financial institutions. If things go really wrong, the investment can be written off without damaging the French company’s balance sheet, which has been strengthened by the upgrading of the portfolio. Total’s business is now fully viable if oil prices remain at $50 a barrel or less.

But that is all about limiting the downside risks. More interesting is the potential. Iran signed the nuclear deal with Mr Obama because it wants and needs to increase revenue and recognises that that requires external capital on a large scale. Iran’s oil minister, Bijan Zanganeh, talked this week about an investment requirement of $200bn, of which 70 per cent would have to be raised internationally.

For international oil and gas companies, Iran holds one overwhelming advantage: the scale of its undeveloped resource base which makes it a long-term, low-cost producer at a time when energy is plentiful. According to the latest BP Statistical Review, the country has over 150bn bbls of oil and 33tn cubic metres of gas — but those figures cover just proven reserves and many areas remain unexplored. There is a premium for all the majors in winning access to long-term sources supplies at the low end of the cost curve.

The American companies that cannot be involved in Iran must be furious. Other western-based international companies that have been slow to move and timid in the face of US sanctions have only themselves to blame.

What happens next? Perhaps the US will retaliate against Total, or against France. Maybe Mr Trump will cancel his trip to the Bastille Day celebrations in Paris. Anything is possible. On balance, however, the more rational conclusion in Washington would be that the best way to overshadow Mr Obama’s deal with Iran would be for Mr Trump to come up with a deal of his own that reaffirms Iran’s commitment to limit nuclear development but ensures that US companies do not remain excluded from the country’s rich potential.