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Warwick Knowles

Iran Nuclear Deal: A Billion Dollar Boom for Business?

by Warwick Knowles | Dun & Bradstreet Editor

April 8, 2015 | No Comments »

Iran-US-Flags_990pxDespite opposition from a number of important actors, Tehran’s and Washington’s interests in concluding the Iran nuclear deal reached earlier this month are greater than at any time previously. Low oil prices and international sanctions are undermining the Iranian economy. Plus, the geopolitical situations in Iraq, Syria, and Yemen are rapidly deteriorating and the US needs Iranian support to try to stop the violence and to stabilize the region.

Lots of technical details still need to be resolved, making the Iran deal’s next deadline of June 30 unlikely to be met. When — rather than if — the agreement is concluded, the sanctions against Iran will likely be phased out over a minimum of 12 months. But the end of sanctions will signal the return to the global economy of the largest market since the end of the Cold War.

The deal certainly represents some big opportunities for global business.

The most obvious industry to benefit is the hydrocarbon sector. Iran has 9.3% of the world’s proven oil reserves and 18.2% of proven gas reserves, but the sector has faced years of underinvestment. If the government can finally update the terms of its contract to international norms, the country will attract significant interest from international oil and gas companies.

However, this will prove to be a double-edged sword as greater Iranian oil production will ensure a ceiling on already weak oil prices, undermining the attractiveness of the sector, at least in the short term. Longer-term, weaker oil prices will also be bad news for the shale sector in the US and other expensive unconventional oil producers such as the Canadian tar sands and the Brazilian offshore pre-salt deposits.

Back in Iran, downstream activities will also see considerable opportunities. Refining capacity, although growing in recent years, needs to increase to meet local demand. LNG and gas-to-liquids (GTL) are two other areas in the petrochemical and gas sectors that offer investment opportunities. In addition, access to cheap energy will support energy-intensive industries, such as steelmaking, aluminum smelting, and cement production. Infrastructure projects also are needed to support economic development. The airline sector is another industry that is woefully underresourced.

Iran’s large population of almost 80 million is growing rapidly, at about 1.3% per year, and it’s a youthful market that will be attractive to global business. Economic growth would drive demand for luxury and branded products, for what could be a rapidly expanding middle class. However, the relative poverty of the population would mean that the main market into the medium term would be for lower-value goods.

A ripple effect is also expected as Gulf logistic and transport firms take advantage of the trade opportunities, while the UAE’s role as a hub for Iranian trade will also expand.

Finally, although the rewards will be potentially massive, risks will also be elevated as the business operating environment in Iran is tricky to say the least. The government needs to address many issues if Iran wants to meet the standards of an advanced country.

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