Long-Awaited Total Deal Signals Rising Investor Confidence in Iran
On Monday, Total will sign a long-awaited contract to develop Iran’s South Pars gas field in cooperation with China National Petroleum Company and Iranian firm Petropars. Total has been involved in developing the South Pars project since 1997 when it was the first international oil company to be awarded a contract following the Islamic Revolution. The landmark deal, which sees Total committed to a 20 year development roadmap, is valued nearly USD 5 billion. Total's share is 50.1%.
The announcement of the contract signing ceremony follows eight months of deliberations since the heads of terms was signed in November 2016. In the intervening period, Total has had to navigate a changing political environment, stubborn banking challenges, and wavering investor confidence. The move to conclude the contract signals positive developments in each of these three areas.
Total CEO Patrick Pouyanné, who has shown some bravado by speaking publicly about this deal as it progressed, had stated in February that progressing to a contract was contingent on the U.S. continuing its implementation of secondary sanctions relief as part of the Joint Comprehensive Plan of Action (JCPOA). With the increasingly hostile rhetoric of the Trump administration, continued sanctions relief had remained in doubt. But the administration has since confirmed Iran's compliance with the JCPOA and issued the relevant sanctions relief waivers in mid-May. Just a few days later, Iranian president Hassan Rouhani won a landslide reelection, solidifying his mandate to pursue international engagement and investment.
Total will also feel secure in the fact that European government leaders have been very vocal in their support for Iran and the nuclear deal. Federica Mogherini, Theresa May, Angela Merkel, and a host of European ambassadors have strongly advocated that the US stay the course with the nuclear deal both at the White House and on Capitol Hill. Looking together at these factors, Total must feel confident that the political environment remains conducive to the company's long-term investment in Iran.
At a more practical level, Pouyanné had acknowledged in April that Iran’s as-of-yet unsolved banking challenges were an impediment Total’s investment. The hesitance of international banks to provide financing or facilitate the recurring transactions necessary for day-to-day business in the country required Total to make a special effort to find its own solution. Pouyanné disclosed that Total was testing a new banking mechanism to get money in and out of Iran in a compliant way. This likely means that a medium-sized bank, probably French, has carved out a channel for Total to transfer funds to Iran without involving U.S. persons or U.S. dollars, thereby avoiding a so-called “U.S. nexus.”
While major European banks remain hesitant to do this kind of creative banking for Iran transactions, boards of directors are showing an increasing willingness to make exceptions on behalf of their largest clients and at the behest of national governments. Total's move suggests that the banking channel they created works, and this fact may help other large firms in their negotiations to receive banking facilities for Iran business.
Finally, Total’s contract signing will no-doubt boost confidence across sectors among both international and domestic investors. While Boeing and Airbus have notably concluded major contracts prior to the Total deal, the agreements for the sale of aircraft represent large-scale trade. The Total deal, which involves direct ownership and operation of physical, immovable assets in Iran, is true foreign direct investment with all of the attendant risk. That Total is proceeding is even more impressive considering the company will not start seeing revenues until 2021, when it has committed to bringing the first new gas to Iran's large domestic market.
Additionally, proceeding to a full contract reflects that Total was satisfied with the terms of Iran's new standard oil and gas contract, known as the IPC contract. While Total’s clear desire to be the first-mover in Iran’s energy sector has meant that they have been somewhat more willing to overlook the known deficiencies in the IPC model, fear of missing out may see peer companies like Shell, Eni, and OMV decide to press forward with their own investment plans within the existing IPC framework.
For Iran, the true value of the Total deal lies outside the oil and gas sector, which only accounts for about one-fifth of the country's economy. Rather, it is the investor confidence furnished by the Total deal, which will spur activity in other areas like infrastructure, transport, pharmaceuticals, and FMCG, that will really move the needle. Investors in these sectors will no-doubt welcome the deal as the sign of a rising tide.
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