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July 1, 2013

New Iranian President Leaves Investors Cautiously Optimistic

Right before the highly anticipated presidential election in Iran, UK energy giant BP released its Statistical Review of World Energy and  classified Iran's natural gas reserves as the biggest in the world — a fact that undoubtedly is of great interest to all energy companies.

But since the Iran Libya Sanctions Act of 1996 and through a series of increasing sanctions, Western oil and gas companies have found it more and more difficult, if not near impossible, to do any kind of business in Iran, although the country has been trying hard to attract foreign investment into the South Pars region that it shares with Qatar. BP also upgraded Iran’s oil reserves, but oil and gas deposits, no matter how large they may be, are completely meaningless to both Iran as well as to energy companies, said Mehrdad Emadi, senior research consultant at UK firm Betamatrix, so long as sanctions are still in place.

Iran is badly in need of investment, of course, since for years, no real money has come into the most important sector of the Iranian economy.

“Things came to a standstill since most of the large oil companies like Total more or less exited Iran and the equipment that’s there is semi-obsolete,” Emadi said. “But the output that could come from Iran’s reserves is huge and clearly represents a huge opportunity for investment and for any companies that can come in and help develop resources, the potential for doing business is huge, since the other industries that support the oil and gas sector also need to be developed.”

Emadi is one of many hoping that the victory of Hassan Rowhani in the recent Iranian election will open a brand new chapter in the fractious relationship shared by Iran and the West, the US in particular, over the past decades, and eventually result in an easing of the harsh sanctions that have been imposed on Iran.

Rowhani, a complete volte face from Iran’s controversial ex-president Mahmoud Ahmadinejad, has certainly indicated a willingness to come to the table and negotiate on all nagging issues in a much more macro and broader level than in the past. To the extent that Western nations, and again, the US in particular, can do the same, then many stand to benefit, Emadi said, not least the people of Iran, for whom the impact of harsh sanctions has made daily life extremely difficult.

“Sanctions have impacted Iranians at every level, from the availability of commodities to the price of basic utilities, and it has contributed to the rising level of unemployment, especially among young people,” he said. Iran is need of investment in a big way and domestically, government spending depends heavily on the oil sector, said Nader Habibi, Henry J. Leir Professor of the Economics of the Middle East, in Brandeis University’s Crown Center, and Senior Lecturer in the Department of Economics there. “The probability of the sanctions being reversed has decreased from a 1% chance of reduction to 15%, which is still low, but there is a feeling that Rowhani is less controversial and that his statements will not provoke the kind of anger toward Iran that Ahmadinejad’s did,” Habibi said. “That is a very positive development and now that Rowhani has the legitimacy of the presidency and he has the backing of mainstream politicians like [Ali Akbar Hashemi] Rafsanjani, he may even be able to exercise his voice in Iran’s nuclear policy.”  

That, of course, is the one wild card that everything depends upon, but to the extent that President Barack Obama can also come to the negotiating table in the same frame of mind as Rowhani, then there really is hope for a new phase in Irano-US relationships. “I take the example of the US and China: After many years of confrontation, they both sat down and said ‘let’s start again,’ and since, we have seen a fresh approach to trade and finance negotiations between the two countries,” Emadi said.

But as much as the future of sanctions will play an important role in Iran’s ability to attract foreign investment and the necessary technology and know-how to develop the oil sector, Rowhani also has much to do on the domestic economic front. For eight years under Ahmadinejad, economic mismanagement resulted in institutional problems that contributed to the worsening situation, and “the high inflation and the falling value of the Iranian currency have as much to do with these as they are a result of the crisis,” Habibi said. “Iran’s economic policy must be revised and people do believe that Rowhani would bring the rationality and reform needed.”

 

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