Introduction
After weeks of escalation, the conflict is ON between Iran, Israel and USA. Unfortunately, this war was quite predictable and as such its impacts on energy projects, especially Oil & Gas.
Beyond the political and human aspects that we will not cover, it raises many questions regarding its impact on oil and gas projects, given that Middle East produces and exports around a third of the global production.
Over the last few months, we have worked on several scenarios with our customers to evaluate the short and medium term impacts on Oil & Gas Projects.
While this war has only started a few days ago, announcements from political leaders of both sides seem to indicate the conflict will last for a least a few weeks with no perspective of end. It becomes quite important in those conditions to adapt to this new situation.
Immediate impacts on projects in Operations
4 days of Iran war and impacts are already significant.
The first impact to mention is of course Oil & Gas assets being targeted by some strikes. With already few examples of attacks in Qatar and Saudi Arabia, companies have stopped their operations to protect their assets and personnel.
If the situation continues, we can forecast more closure of plants in the region. It will reduce significantly global production and export capacity, pushing oil prices up, but buffered by strategic 90 dasy stocks, while gas prices may see some peak due to Qatar dominating export position. Also, knowing how long it takes to restart operations in a plant, the bet is made by those companies the conflict will last for quite a while.
The second impact comes from Iran decision to close the strait of Hormuz. As you can see from the picture below from the Financial Times the Strait of Hormuz is the only way out for the oil and gas produced by many countries fo the region to be exported. With each red dot representing a tanker/ship, the density of traffic is huge weighting about 20% of the global Oil & Gas transport.
The closure of the Strait of Hormuz is of course a huge problematic for the producing countries but also for the consumming countries. A long period of closure will translate into hiking energy prices and a global inflation.
Short Term impacts for projects in development
For projects in development in design or physically being build the situation is a bit different. Clearly, the projects in construction phase are already suffering as many companies have called their personnel in Middle East to stay home and not to be outside exposed to risk.
Also, the projects will suffer from delays because all the logistic is being disrupted and delivery of equipment is almost impossible at this point. Insurance and transport companies are both invoking “Force Majeure” and recalling many ships heading to the region. Some Operators have already suspended all actions without notice or further explanation.
For projects in design phase, the situation is less critical as work of engineering can be carried out. But for how long? The question of Final Investment Decision will still need to be addressed as no one knows if the war will last for a short or long period. And no projects will be decided before the region comes back to stability.
Projects decision and financing will surely be postponed until the environment allows companies to move forward. Already today, it seems safe to estimate all decision will be delay by few months even if the war would stop tomorrow.
Medium Term Impacts on projects : No political change
1st scenario : No political change in Iran following the end of the conflict
If the war was to stop and the Iran political landscape is remaining what it has been, the stabilization of the situation will trigger different business opportunites.
Of course, a lot of equipment and resosurces will be needed to revamp, upgrade or repair the Oil and gas assets which would have been damaged during the conflict. But beyond this patch, the indirect opportunity will come from a wave of project to escape the Strait of Hormuz.
Few pipelines already exist to export oil and gas, but not enough to transport 20% of the oil & gas produced and exported in the area. A lasting tension in the area will trigger a wave of Midstream projects outside of Iran for other countries to secure their export of energy.
A long lasting a conflict may also trigger wave of opportunities outside of Middle-East, knowing the consumption of Oil & Gas is still raising. Production, if not done in Middle6east will need to be done in other continents.
Medium Term Impacts on projects : Political change
2nd scenario : Political change in Iran following the end of the conflict
In the situation of a political change in Iran, opportunities in the country will be double. First, the Iranian Oil and gas industry still produce 3.7 million barrel per day, and could produce more if able to access international markets. Thus, Iran economy opening up would trigger a wave of equipment importation in order to revamp all existing infrastructure which have not been upgraded since 47 years.
Second opportunity will be for projects to come back to Iran. Given a favorable business environment, projects will be quick to come back to Iran as production cost of a barrel will be in the same range of Saudi Arabia at 9$ per barrel, with easy onshore projects and a great oil quality.
Many companies, especially the IOCs have a long history of projects in Iran and could benefit from access to new fields in order to invest. A wave of investments in Iran will also reshuffle the deck of investments as many projects worldwide will become uncompetitive in comparison.
Could projects come back quickly in Iran ?
Yes, Oil & Gas projects could come back to Iran in the next few years given the easy field access, the local knowhow of the population as well as the production cost advantage.
But…
First issue, that would require a political landscape completely different than the current one open to foreign investments. Second challenge, investments in Oil & gas projects would require a stability and a vision of stability for decades, which is not really compatible with an hard turn on political leadership.
Thus, projects in Iran may restart but it would still require at least 2 or 3 years before any FID, considering a drastic change in politics followed by a stability period starting tomorrow. At the examples of Venzuela and Libya, political changes do not trigger immediate investments in projects. And we look at Egypt and Irak examples, it has taken 2/3 years to materalize.
Conclusion
The conflict in Iran is going to impact largely energy projects in the region with different outcomes depending of the political evolution.
Of course, we will continue to analyze the situation with our customers to make sure they can pivot their business or take advantage of the evolutions.
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