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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.
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.
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.