Total Plows Into Iran, Leaving Shell, BP on Sidelines

By Benoit Faucon and Sarah Kent Features Dow Jones Newswires

The $1 billion pledged Monday by French oil giant Total SA in an Iranian gas field is a breakthrough for the resource-rich country, but it is unlikely to unleash the flood of foreign energy-industry investment that Tehran is seeking.

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Total executives signed a contract Monday to press ahead with developing the country's massive South Pars gas field, in which it holds a 50% operating stake. The contract is the first Iranian exploration and production project awarded to a major European company in 10 years, after a deal with global powers last year ended Western sanctions on Tehran over its nuclear program.

To make it happen, the Paris-based company spent years maintaining relationships in Iran even after Western sanctions were tightened in 2012 and then took months to negotiate the details after announcing a preliminary agreement last year.

"We were here 20 years ago. We've come back today," Total's Chief Executive Patrick Pouyanné said at a Tehran news conference. "And again it's a long history for the company."

Total was in a stronger position to make a deal than competitors like Royal Dutch Shell PLC, which has long eyed going back into Iran. BP PLC, which helped build the Iranian oil industry, remains on the sidelines.

Those companies do more business in the U.S., where President Donald Trump has said he would re-examine the deal that lifted Western sanctions on Iran last year, said Homayoun Falakshahi, a research analyst at energy consultancy Wood Mackenzie.

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Mr. Falakshahi said he didn't expect the deal to open a floodgate of contracts with other foreign oil giants.

"It's an exceptional situation, by a long stretch," he said of Total's contract.

Iran's oil output has jumped 1.2 million barrels a day to 3.9 million barrels a day since sanctions were lifted. But it still needs $100 billion of investment in its oil and gas fields to reach a goal of 5.7 million barrels a day the end of 2020.

Shell signed a preliminary agreement to explore opportunities in Iranian oil fields late last year. The Anglo-Dutch company held meetings in Tehran and Dubai in the two past months with the National Iranian Oil Co and Chinese state-run Sinopec to work together on an oil field called Yadavaran, according to a person familiar with the discussions. But people who work with the company said it is concerned about its exposure to the U.S. and is more selective in the choice of its banks than Total.

A Shell spokeswoman said the company remained "interested in exploring the role it can play in developing Iran's energy potential. We have been engaging with Iranian officials but it is still too early to discuss potential Shell investment in any project."

U.S. sanctions remain on Iran over terrorism, weapons and human rights, prohibiting deals with American companies like Exxon Mobil Corp. and Chevron Corp., but European companies can still try to make a deal work. Total said it was in compliance with all sanctions.

A diplomatic crisis in the Persian Gulf is adding another level of uncertainty for big oil companies looking to invest in Iran. Saudi Arabia and its Arab allies have mounted a campaign to isolate their neighbor Qatar, partly because of its rapprochement with regional rival Iran.

"The landscape of political risk in the region is changing profoundly," said Neil Quilliam, the European head at consultancy the Rapidan Group.

Total built Monday's deal out of a longstanding knowledge of and commitment to Iran. Back in the 1990s, Total signed a deal to work on the South Pars -- the massive sub-Persian Gulf field shared with Qatar. Total was the first Western company to load an Iranian oil cargo in February 2016 after sanctions lifted.

According to people familiar with the matter, Total's decision to enlist China Petroleum National Corp. as a 30% partner enables the easy transfer of money in and out of Iran. CNPC owns its own financial institution, Kunlun, one of the few sizable banks that work with Tehran.

This first contract is also less politically sensitive than most, Mr. Falakshahi said, because it is for natural-gas production headed to the domestic Iranian market along with condensates and liquefied-petroleum-gas.

It will be harder for big energy companies, including Total, to make deals for the country's crude-oil fields, which generate export revenues and are caught up in Iran's political push and pull between outward-facing moderates and religious hard-liners wary of foreign influence.

Write to Benoit Faucon at benoit.faucon@wsj.com and Sarah Kent at sarah.kent@wsj.com

(END) Dow Jones Newswires

July 03, 2017 12:02 ET (16:02 GMT)