Cross Asset Research

3 July 2015

Iran Primer
The long road ahead
• There is a significant likelihood that the P5+1 and Iran negotiators will strike an ECONOMICS RESEARCH
agreement and even announce it before the 10 July 2015 US Congressional deadline for Alia Moubayed*
a 30-day review. After that date, the incentive to reach a deal will subside until after 7 +44 (0)20 3134 1120
September. While Congress is unlikely to derail a deal, a prolonged debate and/or new alia.moubayed@barclays.com
Barclays, UK
legislation would increase tensions in an already-charged environment.

• Commodities Research: Sanctions relief for Iran’s energy sector is likely to be substantial COMMODITIES RESEARCH
in scope, but the energy market effects should be gradual. Our oil market balance Michael Cohen*
assumes a slow ramp-up in oil production. The latter is likely to increase 200 kb/d +1 212 526 3606
by Q4 15 from Q2 levels, and a further 400 kb/d by Q4 16. As Iran clears some of its michael.d.cohen@barclays.com
~40 mb of oil in floating storage, exports will exceed these newly produced BCI, US

volumes. We have modelled Iranian output at 4.7 mb/d in 2020, above the level it
Miswin Mahesh*
reached before sanctions took hold. Despite Iran’s large gas reserves, growing
+44 (0)20 7773 4291
domestic gas demand will likely curb its export aspirations before 2020.
miswin.mahesh@barclays.com
• Economics Research: The expected removal of sanctions will not reverse Iran’s Barclays, UK
fortunes immediately, given the lack of clarity surrounding the timetable and
snapback mechanisms. Supportive factors (eg, market size, skilled labor force) PUBLIC POLICY RESEARCH
notwithstanding, political economy dynamics, state dominance, and a weak Shawn Golhar*
+1 212 526 0172
business environment will likely constrain growth acceleration in the short to
shawn.golhar@barclays.com
medium term, and may delay productivity enhancing reforms ahead of critical
BCI, US
legislative and presidential elections in 2016-17.

• Equity Research: Implications for energy equities. The Mediterranean-based CREDIT RESEARCH
European refiners are key beneficiaries of any lifting of sanctions in Iran, in our view. Andreas Kolbe*
The return of Iranian crude is likely to enhance relative margins for this group and +44 (0)20 3134 3134

we see Motor Oil, Hellenic Petroleum, Saras and Repsol as most exposed to this andreas.kolbe@barclays.com
Barclays, UK
theme. For the Integrated Oil Companies (IOCs) the impact is likely to be less
immediate and material. We expect the management teams to take a cautious
Walid Bellaha*
approach to returning to Iran. Also, much will depend on the final terms offered
+44 (0) 20 7773 0098
under the new Iran Petroleum Contract (IPC). We view BP, Royal Dutch Shell, Total
walid.bellaha@barclays.com
and Eni as the most likely candidates of the large cap IOCs to discuss a return to Barclays, UK
Iran. Our Top Pick in European Refining is Saras and our Top Pick of the European
Integrated Oils is Royal Dutch Shell. EQUITY RESEARCH
Lydia Rainforth, CFA
• Credit Research: The implications for MENA credit of a nuclear deal with Iran are
+44 (0)20 3134 6669
mixed. The re-emergence of Iran as a large oil exporter may limit upside to oil prices
lydia.rainforth@barclays.com
and weaken financial buffers that support local GCC credit demand. However, oil-
Barclays, UK
importers should benefit. The potential for increased trade with Iran and
implications for geopolitical risk premia will depend on how Iran’s foreign policy
www.barclays.com
stance evolves after a deal. We provide a framework for analysis of these channels.

* These authors are members of the Fixed

Barclays Capital Inc. and/or one of its affiliates Does and seeks to do business with companies covered
Income, Currencies and Commodities
in its research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Research
Investors should consider this report as only a single factor in making their investment decision. This
research report has been prepared in whole or in part by equity research analysts based outside the US
who are not registered/qualified as research analysts with FINRA.
FOR ANALYST CERTIFICATION(S) PLEASE SEE PAGE 53.
FOR IMPORTANT FIXED INCOME RESEARCH DISCLOSURES, PLEASE SEE PAGE 53.
FOR IMPORTANT EQUITY RESEARCH DISCLOSURES, PLEASE SEE PAGE 53.
Barclays | Iran Primer
OVERVIEW
Economics Research
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Barclays, UK
Commodities Research
Michael Cohen
+1 212 526 3606
michael.d.cohen@barclays.com
BCI, US
* These authors are members of
the Fixed Income, Currencies and
Commodities Research
Iran’s oil and gas reserves are
ample, hence, the potential
lifting of sanctions will weigh
on markets
An agreement should change
the region’s geopolitical
outlook and dynamics, and
add volatility to oil markets
Iran’s role is central given its
direct or indirect involvement
in various regional conflicts
3 July 2015
Iran Primer: The long road ahead
Following more than 18 months of negotiations on Iran’s nuclear program, the Iranian
government and the P5+1 appear likely to reach an agreement soon judging by various official
statements made by both negotiating parties1 over the past few days. This could pave the way
for the lifting of sanctions and the re-integration of Iran into the international economy. Our
base case scenario envisages a comprehensive agreement being signed this summer.
Lingering uncertainties about Iran’s actual compliance with a comprehensive deal will
likely mean that sanctions relief, while envisioned as substantial, will not be confirmed
until at least 4-6 months from the signing of an agreement. For example, how will the
impending US Congressional review of the proposed deal pan out? If Congress does approve
a deal, how would a phased implementation work? What happens in the meantime will not
be clean or straightforward. No one, not even the negotiators themselves in our view, can
envision what the compliance process will look like. Despite the uncertainty that lies ahead,
we do expect it to have an impact on energy and financial markets for several reasons.
First, Iran’s energy abundance matters: in the short term, the country’s return could prolong
the situation of an oversupplied oil market and benefit European refineries; in the long term,
Iran’s energy sector represents a new investment opportunity for IOCs, though they are likely
to approach this opportunity with caution. Iran accounts for 10% of proven global oil reserves,
making the country the fourth-largest reserve holder; and it is a top three OPEC oil producer. Its
gas reserves are second only to Russia and account for almost 20% of global gas reserves. In the
short term, we think Iran will seek to sell its oil in storage to Asian markets. Further out, the
prospect of a more comprehensive lifting of sanctions, including the removal of the EU embargo
on Iranian oil, will weigh on market sentiment. In this report, we discuss the constraints on Iran
that are likely to obstruct any attempts to increase its production of oil and gas, noting that Iran’s
export aspirations are likely to play second fiddle to growing its domestic economy and
exporting value added products.
Second, an agreement will alter the security and geopolitical risk environment in the Middle
East. The P5+1 recognize that a deal is needed to delay Iran’s quest for a nuclear weapon. But
Gulf countries remain sceptical and are seeking support from the US and other partners, while
also pursuing measures to enhance their own security. In May 2015, President Obama
confirmed the US’s commitment to the security of its allies in the Gulf and agreed to “further
strengthen security cooperation, and to work together to counter Iran’s destabilizing
activities”2. If such efforts by the Gulf countries bring about further conflict or exacerbate
regional tensions and sectarian violence, this will likely raise the market risk premium.
Although oil is in a state of oversupply, the possible combination of heightened political
tension and a tighter market balance might create a more volatile market environment.
Third, Iran, as the dominant Shi’a state in the region, is a key regional power and is party
to several ongoing conflicts in the Middle East, whether directly or through proxies. The
region is plagued by conflict, wherein growing insecurity and sectarian divides are
weakening traditional nation states and giving rise to unruly non-state actors: be it in Syria,
Iraq, Yemen, Libya or Lebanon. Against this backdrop, there is a hope that an agreement
with Iran will pave the way to a regional entente, which could open channels to an eventual
resolution of a whole host of conflicts in the world. Whether Iran will embrace a cooperative
approach or chooses to pursue its own narrower national interests once sanctions are lifted
remains to be seen.
1
Iranian Official Sees ‘Opportunities’ for Better Ties After a Nuclear Deal, Wall Street Journal, 2 July 2015
2
US-Gulf Cooperation Council Camp David Joint Statement
2
Barclays | Iran Primer

Iran, the second largest
economy in the Middle East
Fourth, Iran’s economic potential, though encouraging, is handicapped by structural issues,
state dominance and a weak business environment. Iran is the second largest economy and
most populous state in the Middle East. Sanctions have crippled its economy and exacerbated
long-standing structural problems. The partial relief of sanctions since November 2013 has
eased pressure on growth and inflation, and the prospect of a full lifting of sanctions should help
to accelerate Iran’s growth recovery. Its sheer market size, large young and skilled labour force,
diversified economic fabric, and abundant mineral riches are all supportive factors, but reforms
are necessary to fulfil the country’s economic potential.

FIGURE 1
Iran and its neighbors: religious divide or possible entente?

Black Sea ARMENIA GEORGIA UZBEKISTAN KAZAKHSTAN

AZERBAIJAN KRYGYZSTAN
65-75%
TURKEY Caspian TURKMENISTAN
10-15% TAJIKISTAN
Sea
IRAQ
SYRIA 65-70%
15-20%
LEBANON The Su IRAN AFGHANISTAN
nn
45-55% iS 10-15%
90-95%

hii
te Li
ISRAEL

ne
JORDAN KUWAIT
20-25%
PAKISTAN
BAHRAIN 10-15%
EGYPT 65-75%
<1% QATAR INDIA
10% 10-15%
UAE
Christian Druze 10% Arabian Sea
SAUDI ARABIA OMAN
Alamite, 10-15% 5-10%
Ismaeli & Large Shiite Minority
Twelver Shiite
Shiite Majority
Sunni
YEMEN Sunni Majority
35-40%
SUDAN ERITREA
Source: Pew Research, CIA factbook, Barclays Research

Iran’s involvement in various
regional conflicts, including
being at the forefront of the
battle against ISIS, gives it a
prominent role
Finally, ISIS’ growing influence has become a regional and global threat, with Iran at the
forefront of the fight against ISIS in Iraq. Since last June, ISIS’ control of territory and use of
brutal force has gained momentum despite containment efforts by the international
coalition and regional governments. ISIS’s severe defeats of Iraq’s military forces over the
past nine months have led to greater involvement by the Iranian Revolutionary Guard Corp
(IRGC) in Iraq and Syria, through the mobilization of Shia militias in Iraq and the support to
Hezbollah and the Assad regime in Syria3.

Prospects for a nuclear deal
with Iran will affect regional
economies…
… and various asset classes
For all the above reasons, the prospects of clinching a nuclear deal with Iran and risks
associated with a failure are significant for the regional economies and financial markets.
For oil, when exactly incremental production and exports meet the market will weigh on
sentiment until a sanctions removal timeline is established. This report provides basic
information about Iran’s economy and oil and gas sectors and, in the sections that follow,
we analyze how a potential nuclear deal may affect various asset classes.

1. Oil and gas markets: We analyze the potential impact of a deal on Iran’s hydrocarbon
resources and likely broader impact on oil markets.

2. Equities: We explain how Mediterranean-based European refiners, Integrated Oil

Companies (IOCs) could be affected by the prospective lifting of sanctions on Iran.

3. MENA sovereign and corporate credit: We outline a framework to understand how a

potential deal with Iran could affect the MENA economies’ credit drivers.

3
Why the U.S. Is Fighting Beside Iran in Iraq and Against It in Yemen; Time, March 26, 2015

3 July 2015 3
Barclays | Iran Primer

POLICY UPDATE

The path to sanctions removal

Public Policy Research There is a significant likelihood that the P5+1 and Iran negotiators will strike an agreement
Shawn Golhar* and even announce it before the 10 July 2015 Congressional deadline for a 30-day review.
+1 212 526 0172 While Congress is unlikely to derail a deal, a prolonged debate and/or new legislation
shawn.golhar@barclays.com would increase tensions in an already-charged environment.
BCI, US
With key critical issues still unresolved, the P5+1 negotiators extended the self-imposed
deadline under the Joint Plan of Action (JPOA) to 7 July 2015 from 30 June 2015.4 Some of
Economics Research
the key remaining issues include:
Alia Moubayed*
+44 (0)20 3134 1120 1. How do the P5+1 and the International Atomic Energy Agency (IAEA) prevent Iranian
alia.moubayed@barclays.com access to past possible military dimensions (PMD) of their nuclear program, notably
Barclays, UK access to scientists and military research and development?

2. Does the deal effectively prevent Iran from developing nuclear weapons throughout the
* These authors are members of agreement’s 10-year tenure? Will it prevent Iran from developing new technologies that
the Fixed Income, Currencies and produce nuclear weapons after the agreement’s tenure is over?
Commodities Research
3. Will the IAEA be granted unfettered access to known sites and will it have access to
suspected sites, including military and secret government installations?

4. Has Iran reduced its stockpile of low-enriched uranium (LEU) to an acceptable level?

Will the US remove sanctions after the deal is “signed” or after verifications? How does the
US maintain the ability to “snap-back” sanctions in the event of an Iranian breach?

While many of the above issues are likely being hammered out in Vienna, we think there is a
possibility that negotiators could reach an agreement and potentially announce it before the
10 July 2015 Congressional deadline for a 30-day review. If negotiators are close but unable
to finalize a deal by 10 July, they may push back an announcement until after 7 September
to avoid a longer (60-day) Congressional review period. On the other hand, in the event the
P5+1 talks stall at this late stage, we expect the Obama Administration to maintain the
framework of the P5+1, reapply sanctions, and strategize about how best to re-approach
the Iranians at a later date.

FIGURE 1 FIGURE 2
Iran sanctions – categorized by targets Iran Sanctions – categorized by triggers
100%
100%
90%
80% 90%
3
7
Percentage of total

70% 6 7 80%
Percentage of total

18 9 70%
60% 16 13
11 60%
50% 8
40% 2 50% 10
2 4 3
30% 40%
20% 4 30%
1 4 4
10% 3 3 3
3 4 1 20%
1
0% 10% 3 1
Assets

Travel Ban
Energy

Trade Ban
Nuclear/

Freeze
Financial

Other
Arms

0%
Missile

Nonproliferation Terrorism Human Rights

US UN EU
EU UN US
Sources: Spider Web: The Making and Unmaking of Iran Sanctions, International Sources: Spider Web: The Making and Unmaking of Iran Sanctions, International
Crisis Group, Barclays Research Crisis Group, Barclays Research

4
Guidance on the Continuation of certain Temporary Sanctions Relief Implementing the Joint Plan of Action, as
Extended, US Department of the Treasury, 30 June 2015.

3 July 2015 4
Barclays | Iran Primer
If negotiators strike a deal, the
UN Security Council is
expected to pass a resolution
to lift sanctions…
… followed by a vote in the
European Union and a vote in
the US Congress
In a rare show of
bipartisanship, the US Senate
passed the Corker-Cardin Act
(Iran Nuclear Agreement
Review Act) by a vote of 98-1
3 July 2015
Sanctions removal process – UN, EU, and US
The web of sanctions imposed on Iran is one of the most complex in history and will be
difficult to untangle, given the multiple bureaucratic layers across several jurisdictions (refer
to Appendix 1 for a list of key sanctions). If a deal is reached, there will be a coordinated
international process to remove key sanctions, although each jurisdiction will follow a
different process.
UN sanctions
If the P5+1 team strikes a deal, the United Nations Security Council (UNSC) is expected to
pass a new resolution that will lift its sanctions. While UNSC resolutions are binding on UN
member states, under some circumstances, the US is able to enforce its own bilateral
sanctions extra-territorially on third-country governments and companies, as we have seen
recently. With a deal in place, the US will want to secure a final accord that would permit the
automatic reinstatement – or “snap back” – of sanctions against Iran, without a UNSC vote,
out of concern that Russia and China could veto a new resolution. When asked, Samantha
Power, the US Ambassador to the United Nations, said, “We will retain the ability to snap
back multilateral sanctions architecture back in place, without Russian or Chinese support…
we will not support a snap-back mechanism or an agreement that includes a snap-back
mechanism that leaves us vulnerable.”5 To maintain the ability to snap back sanctions, the
UNSC may suspend sanctions – rather than provide permanent relief – and require the IAEA
to certify Tehran’s compliance every six months.
EU sanctions
In 2014, the EU exported €6.4bn of goods to Iran, primarily machinery, transport equipment,
and chemicals, but its imports from Iran amounted to a mere €1.2bn. Due to the sanctions,
oil imports from Iran have stopped. The EU used to be the “first trading partner of Iran, but
due to the sanctions regime, China, the UAE and Turkey are now Iran's main trade partners,
followed by the EU.”6 For a suspension or termination of sanctions, the European Council
will need to agree with a qualified majority and vote for sanctions relief.7 European leaders
have indicated that they will lift sanctions in concert with their American counterparts.
Although we expect the UNSC and EU processes to be fairly straightforward, the US process
to remove sanctions will be a bit more complicated.
US sanctions
After a lengthy exchange between the White House and the Congressional leadership, in
May 2015, Congress overwhelmingly passed the bipartisan Iran Nuclear Agreement Review
Act of 2015 (INARA), otherwise known as the Corker-Cardin Act. INARA amends the
Atomic Energy Act of 1954 to provide for congressional review and oversight of a potential
nuclear-related agreement with Iran, maintains that only Congress can “permanently
modify or eliminate” sanctions that Congress imposed through legislation (known as
“statutory sanctions”), states that a Congressional vote is not needed for an agreement with
Iran to begin, and the Act lays out the following key parameters:8
1. Initial notification: Within five days after reaching an agreement with Iran, the President
has to verify that the agreement meets certain standards and is required to send
Congress: 1) the full text of the agreement; 2) a report by the Secretary of State
5
U.S. Official: Iran Sanctions Could Be Snapped Back Without Approval Of Russia Or China, Huffington Post, 16 June 2015.
6
Iran Trade Picture, European Commission.
7
Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, Belfer Center for Science and International Affairs,
Harvard Kennedy School, June 2015; and Iran’s Economic Reintegration, Center for a New American Security, June 2015.
Tabrizi, Aniseh, “How EU would lift sanctions.” Al-Monitor, 9 July 2014.
8
Iran Nuclear Agreement Review Act of 2015, 22 May 2015, US Congress; Iran Nuclear Agreement Review Act Becomes
Law, Davis Polk & Wardwell LLP, 29 May 2015; Iran Sanctions, Sullivan & Cromwell LLP, 28 May 2015; and Barclays
Research.
5
Barclays | Iran Primer
If the president vetoes
Congressional legislation
rejecting the deal…
… Congress may not have the
votes to override the veto
3 July 2015
addressing the agreement’s safeguards and ability to ensure compliance; and 3) a report
from the IAEA on its ability to verify compliance.
2. Review period: During the Congressional review period “the President may not waive,
suspend, reduce, provide relief from, or otherwise limit the application of statutory
sanctions with respect to Iran under any provision of law or refrain from applying any
such sanctions.”9 The review period will be 30 days if the administration submits the
deal to Congress before 10 July 2015 or after 7 September 2015; however, if the
administration submits a deal between 10 July and 7 September, then the review period
will be 60 days.
2.1. Congressional disapproval: After the review, if Congress passes a joint resolution
of disapproval, the INARA restrictions remain in place for at least 12 days. If the
president vetoes the joint resolution, sanctions may not be relieved for an additional
10 days following the veto. While there is no mention of a Congressional override of
a presidential veto, some argue that the restrictions would remain.
2.2. Congressional approval: If Congress supports the deal and passes a joint resolution
in favor of it (or if there is no resolution of disapproval passed during the review
period), the INARA restrictions cease.
3. Ongoing compliance: After a nuclear agreement is in place, the president must report to
Congress every 90 calendar days and certify that “Iran is transparently, verifiably, and fully
implementing the agreement… has not committed a material breach [and]... has not taken
any action… that could significantly advance its nuclear weapons program.” If the US or
international authorities learn that Tehran has breached the agreement, the president must
submit the information to Congress within 10 days and the president has 30 days to
determine if this is a “material breach.” Lastly, the president must provide a semiannual
report to Congress on Iran’s compliance and an assessment of all of the sanctions relieved.
Though there is significant possibility of opposition in Congress, they are unlikely to have a
veto-proof majority and will therefore not be able interfere with the Administration’s policy
path. This process would allow Congress to express its opinion but not interfere with the
president’s ultimate decision. The Republican’s policy disagreement gained attention in
March 2015 when Senator Tom Cotton (R-Arkansas) secured support from 47 fellow
Republican Senators and sent a letter to the leadership of the Islamic Republic of Iran
casting doubt on President Obama’s authority to strike a nuclear deal. While the
constitutional validity of Senator Cotton’s argument was thoroughly questioned – and in
some cases mocked – in some political and policy circles, the impact was felt in Congress
and by the administration. 10
Timing of sanctions removal
Given the complexities of the sanctions regime that has been in place for over 30 years and
the required US intra-agency processes for sanctions relief, removing the first major layer of
sanctions is likely to take four to six months, according to Treasury officials. This will be
subject to Iranian compliance to the P5+1 agreement and comprehensive IAEA inspections.
According to policy contacts and media reports citing Iranian sources, the agreement
consists of three phases – the “adoption of agreement”, the “operationalization of the
agreement”, and implementation of the deal. The “operationalization” phase was
supposedly added due to the Corker-Cardin Act so the US Congress may review the final
deal. During this phase, all the international partners will circulate the agreement
9
Iran Nuclear Agreement Review Act of 2015, US Congress.
10
The Error in the Senators’ Letter to the Leaders of Iran, Lawfare and The misguided, condescending letter from
Republican senators to Iran, The Washington Post.
6
Barclays | Iran Primer
The President has “substantial
flexibility” and the “authority to
tighten and relax restrictions.
The example of Cuba may
provide basic similarities, but
the sanction regime for Iran is
much more complex
Obstacles that could derail a
deal include US domestic
politics, the 2016 US
presidential election, and
Middle East power dynamics –
namely, Israel and Saudi
Arabia
3 July 2015
domestically. As mentioned above, there is a significant chance the US Congress will
disapprove of the deal requiring the president to veto Congressional legislation.11
After the Congressional review process, assuming the deal is not derailed, the IAEA will
begin the verification processes and the P5+1 will begin relieving sanctions. This follows
comments from Iranian President Hassan Rouhani, who expects economic sanctions relief
within a “couple of months” after an agreement is signed. 12 It also explains the statement of
Supreme Leader Ali Khamenei, widely misinterpreted by many media outlets, when he said,
“the economic, financial and banking sanctions, whether related to the [UN] Security
Council or the US Congress or the US administration should be lifted immediately when the
agreement is signed” and that “the removal of sanctions is not tied to the implementation
of Iran’s commitments.”13
We expect the president to issue waivers for temporary sanctions relief as that step would
provide his administration with the capability to “snap back” sanctions in the event of a
compliance breach. We expect the Europeans to remove most of their sanctions,
including the ban on Iranian oil imports and the measures prohibiting Iran’s use of
European payment systems. At the same time, the US will begin to lift sanctions on Iran’s
banking system as well as the energy and trade sectors. Iran may also access its foreign
exchange reserves held in escrow, which are estimated to be $30-50bn. 14 Any breach of
the agreement would delay the sanctions removal process, and the US and Europeans
may “snap back” their sanctions regimes.
As a note of comparison – given the normalization of relations between the US and Cuba –
President Obama submitted a report and certification to rescind Cuba’s designation as a
State Sponsor of Terrorism on 14 April 2015, which was the start of a 45-day review period.
The process with Cuba provides some insight for removing sanctions against Iran, but the
sanctions regime against Iran is substantially more complex and.
What could get in the way?
Even if the negotiators piece together a deal, the road ahead will be long, windy, and fraught
with risks that could derail the agreement. There are a number of factors that could
sabotage a deal over the next six to twelve months, including US and Iranian domestic
politics.
US domestic politics: From ‘axis of evil’ to strategic partner?
While the Obama Administration has continued the path towards a comprehensive deal,
some have been publically criticizing the president for negotiating naïvely with Iran, failing
to effectively curb Tehran’s nuclear capabilities, and disrupting the regional dynamics in a
way that could reshape Sunni and Shia alliances and the US-Israel alliance. While President
George W Bush’s 2002 speech that labeled Iran a member of the “axis of evil” may be a
distant memory to some, there is still a considerable amount of concern within the
Republican Party.
As the 2016 election approaches (debates start in August 2015), we expect significant
opposition to a deal from a majority of the GOP candidates. Many of the leading candidates
have already signaled their disapproval, and we expect very few of them to voice support for
the administration’s policy. That said, if negotiators strike a deal and Iran fully complies with
IAEA inspections, a Republican president, who would take office in January 2017, would face
11
P5+1 and Iran Have Settled Framework for Sanctions Relief Timing, Says Iranian Sources, Huffington Post, 28 June 2015.
12
Iranian President Expects Sanctions to Lift Within Months of Deal, The New York Times, 13 June 2015.
13
Did Khamenei Demand Immediate Sanctions Relief?, Al-Monitor, 26 June 2015
14
Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, Belfer Center for Science and International
Affairs, Harvard Kennedy School, June 2015; and Iran’s Economic Reintegration, Center for a New American Security,
June 2015.
7
Barclays | Iran Primer

considerable international opposition to dismantling a UN/IAEA-approved, Iran-compliant

sanctions relief program. While many of the GOP candidates might campaign against the deal
now, it will be very challenging to do so after 18 months of Iranian compliance.

On the Democratic side, we expect the presumptive nominee Hillary Clinton and her
challengers – if she loses – to support the deal. Given Secretary Clinton’s statements, work
on the issue, and her network of advisers, we expect her to support an agreement.

Regional spoilers: Targeting the Congressional vote

AIPAC and the pro-Israeli
lobbies are preparing a
campaign to reject the deal
As we mentioned above, we see a significant risk that the US Congress will reject the deal and
force the president to exercise his veto powers. A public rejection of the president’s plan by
Congress may spawn a new debate in the US on the merits of a nuclear deal with Tehran. In an
effort to sway public opinion, Congressional Republicans invited Israeli PM Benjamin Netanyahu
to address a joint session of Congress in March 2015. It is not common for a foreign leader to be
invited by the Speaker of the House to criticize the foreign policy of the President. Mr Netanyahu
reiterated his vehement opposition to the deal and criticized western powers for having made
unnecessary and hasty concessions that are “getting worse by the day.”15

If there is a wave of US domestic dissent, Israel and Saudi Arabia may weigh in – both
privately and publicly – as they may view an agreement as a major threat to their national
security. The American Israel Public Affairs Committee (AIPAC), a prominent Israeli lobby in
the US, has mobilized its members and is ready to challenge the Administration’s position.
AIPAC’s campaign is focused on securing a joint resolution of disapproval from Congress.

While we think the chances of derailing the deal in Congress remain low, the divisive
debates that are likely to follow would increase tensions in an already charged
environment. Those dynamics would also provide material for hardliners in Iran to
undermine the deal by questioning the US commitment in the short term and after the
2016 elections.

FIGURE 3
Views of select Republican presidential candidates
Jeb Bush Marco Rubio Scott Walker Rand Paul John Kasich Rick Perry

“Iran remains a major "I would argue that a "Obama’s dangerous “I do believe that "This is a very, very, "I would
destabilizing force in bad deal almost deal with Iran rewards negotiation is better very dangerous suggest…[that we]
the region, working guarantees war, an enemy, undermines than war.” situation. I think that sign an executive order
against American because Israel is not our allies and threatens the administration has wiping out this
interests… I cannot going to abide by any our safety.” fallen in love with agreement… it's a bad
stand behind such a deal that they believe trying to get an deal for the Middle
flawed agreement.” puts them and their agreement.” East, it's a bad deal for
existence in danger.” Israel.”

Ted Cruz Chris Christie Bobby Jindal Rick Santorum Mike Huckabee Ben Carson
"This is a very bad deal "The President’s "President Obama "At the end of the "[I]t can’t be a good "The main conclusion
and it is a grim day for eagerness for a deal… seems ready to pay any agreement they’ll be in deal because you can’t from these recent
America… Because has him ready to price to get a deal – a position where they trust a government months of negotiations
absent Congress's accept a bad deal.” any deal – out of Iran.” can be a nuclear that is vowed openly is that the Iranians are
consent, it will not be power, and that to me and publicly that it’s superior negotiators.”
binding when President is completely going to wipe another
Obama leaves office.” unacceptable.” nation off the face of
the earth.”
Source: Right to Rise PAC, the National Review Idea Summit, Scott Walker's Twitter account, The Today Show, Hugh Hewitt's Radio Show, The Washington Examiner,
Ted Cruz’s campaign, Time, The National Review, Fox News, and Breitbart News Network.

15
Netanyahu: Western concessions to Iran growing as nuclear deal looms, Haaretz, 28 June 2015.

3 July 2015 8
Barclays | Iran Primer

Iranian domestic politics: Consensus holds, but power struggle remains

Consensus in Iran on the
proposed terms of the deal
holds so far, despite recent
statements of Supreme Leader
Ali Khamenei
Despite public statements ushering some disagreement within the ranks of the Iranian
leadership, we think the consensus in the Iranian polity on the terms of the negotiated deal still
holds. Supreme Leader Ali Khamenei holds the final word and has been able to bridge the
existing divide between various domestic stakeholders, namely between President Rouhani and
his hardline opponents. Therefore, Mr Khamenei’s recent statements, in which he insisted that
many of the key economic sanctions must be lifted before IAEA inspectors can verify that Iran is
adhering to its commitments, should be viewed in context and examined carefully, as we noted
in the “Timing of sanctions removal” section16.

The Majlis is pushing for a
greater say on nuclear deal
Having said that, Mr Khamenei continued to dismiss freezing Iran’s sensitive nuclear enrichment
for a decade, as agreed in the April preliminary understanding, and he refused to allow IAEA
inspectors unfettered access to Iranian military bases to verify that they are not secret nuclear
sites.17 These two issues are at the heart of what is delaying the conclusion of an agreement,
especially since the Iranian Parliament (Majlis) ratified legislation on June 23 that requires the
government to “maintain the nuclear rights and achievements of the Iranian nation”. Those
rights include the refusal to allow inspections of military sites, the immediate and complete lifting
of sanctions after the Security Council approves the deal, a refusal to allow the IAEA to interview
nuclear scientists, and the ability of Iran to improve its centrifuge technology.

But legislation gives final word
to the Supreme Council for
National Security
Although this could still create problems, the new legislation “gives the Supreme Council for
National Security (SCNC) the ultimate authority to approve the prospective nuclear deal and
not the Majlis (Figure 4). It also says that the SNSC should provide a report to Majlis every
six months about the proper implementation of a possible final deal. The recent attempts by
some parliamentarians to interfere in the negotiations process were shunned by the
Supreme Leader, who said threats from the Majlis during the talks are “unacceptable".
Speaker Ali Larijani, who is close to the Supreme Leader, also opposed the move by his
colleagues. While, these recent conflicting statements on whose responsibility it is in Iran to
adopt or endorse any nuclear agreement reflect a deep and latent power struggle among
various Iranian political factions, we think, the Majlis is unlikely threaten a deal.18

FIGURE 4
Overview of nuclear decision making in Iran
SUPREME LEADER
Ayatollah Ali Khamenei
Lifetime
EXPEDIENCY COUNCIL
Majma-e Tashkhis-e Maslahat-e
Nezam
COUNCIL OF HEADS
IRGC1 Akbar Hashemi Rafsajani
(ISLAMIC REVOLUTIONARY GUARD CHAIR
CORPS) 39 members
Sepah-e Pasdaran-e Enqelab-e Eslami SNSC
Maj. Gen. Mohammad Ali Jafari (SUPREME NATIONAL SECURITY
COMMANDER COUNCIL)
Shura-ye Ali-ye Amniyat-e Melli
MINISTRY OF FOREIGN AFFAIRS President Hassan Rouhani
Vezarat-e Omur-e Kharajeh CHAIR
Mohammad Javad Zarif
HEAD
Tiered Meetings:
1. Supreme Nuclear Committee
ATOMIC ENERGY ORGANIZATION OF 2. Nuclear Policymaking Committee
IRAN
3. Techical Expert Committee
Sazman-e Enerzhi-ye Atomi
Ali Akbar Salehi
HEAD
MAJLIS
Majlis-e Shura-ye Eslami
Ali Larijani
SPEAKER Informal input
290 representatives
Formal input
(elected for 4 years)

Source: The domestic politics of Iran’s nuclear debate: Leadership divided, NimaGerami, The Washington Institute for Near East Policy, 2014. Note: *The IRGC is
subsumed under the umbrella of the Ministry of Defense and Armed Forces Logistics, but MODAFL is not formally represented in the SNSC

16
Did Khamenei blur his own red lines on sanctions?, Al-Monitor, 28 June 2015
17
Iran’s Supreme Leader, Khamenei, Seems to Pull Back on Nuclear Talks, The New York Times, 23 June 2015.
18
Iranian parliament also wants a say on nuclear-deal, US news, 15 May 2015.

3 July 2015 9
Barclays | Iran Primer
COMMODITIES
Commodities Research
Michael Cohen
+1 212 526 3606
michael.d.cohen@barclays.com
BCI, US
Miswin Mahesh
+44 (0)20 7773 4291
miswin.mahesh@barclays.com
Barclays, UK
Economics Research
Alia Moubayed
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Barclays, UK
* These authors are members of
the Fixed Income, Currencies and
Commodities Research
3 July 2015
Sanctions on Iran’s energy sector: Paths to
recovery
• Sanctions relief for Iran’s energy sector is likely to be substantial in scope, but the
energy market impacts will be gradual. We do not expect “Sanctions relief’ to shift the
oil market balance in 2015, but think it will have an impact on the perception of the oil
market balance in 2016 and beyond. Iran’s oil-marketing bottleneck in the medium term
will be political, not infrastructure- or upstream-related. Iran’s primary aim is not to only
increase its exports, but rather to also export value added products and improve its self
sufficiency in the case of a snapback in sanctions.
• If a deal is signed and the agreement proceeds as planned, the market will start to
price in that reality beforehand, even if incremental barrels are months away. The
weight of possible new oil from Iran is likely to have more of an impact on the Brent
curve structure than prompt Brent prices. If the parties reach an agreement, we expect
any deal to narrow the Brent 1-12 spread, which is currently trading at $6/bbl.
• Slow ramp-up in oil exports and production is assumed. In Q2, Iran produced 3.5
mb/d of crude and condensates (c&c). It exported almost 1.5 mb/d, of which
around 70 kb/d was condensate in May. We assess that Iran is likely to be
producing 3.7 mb/d c&c in our base case scenario in 4Q15 and 4.1 mb/d in 4Q16,
with potential upside for December 2015. Exports, excluding from oil stored in
tankers (~40 mb), are likely to be around 200 kb/d higher in 4Q15 than 2Q and 500
kb/d higher by 4Q16, in our view. Assuming compliance with an agreement, we
think Iran could be producing 4.7 mb/d by 2020, which would be above the level it
reached before sanctions took hold.
• Growing domestic gas demand will likely curb Iran’s export aspirations in the next
couple years. In our view, Iran’s primary goal is not only unprocessed oil exports, rather
it is to export value-added products using cheap primary hydrocarbons. This implies
that it will prioritise exports of electricity, steel, and cement, which could also prepare
the country in the potential event that sanctions might be reapplied. Moreover, to the
extent that Iran seeks to export its gas, not likely until after 2020, major gas consuming
regions are likely to have a surplus of LNG and other pipeline options, which implies that
Iran’s main opportunity will be to supply its gas short neighbours.
• If Iran hopes to develop its gas resources for domestic use while IOCs want to use it to
maximise oil exports, we think the latter might find it difficult to agree on a development
path that pleases all parties.
What sanctions relief will mean for Iran and the oil market
There are three key questions most people ask about Iran and its likely impact on the energy
and, more specifically, oil markets: (1) What does energy related sanctions relief mean? (2)
What are the barriers to Iran’s return to the oil market? (3) After 2015, what is the path to
higher Iranian oil sales?
(1) What does energy related sanctions relief mean?
First, it remains unclear at this point how and at what pace the nuclear related sanctions
will be removed. Initial relief is only likely to begin by the end of 2015 at the earliest.
Negotiators are now indicating that there will be a joint removal of EU and US sanctions
once the US approves the lifting of secondary sanctions on Iran’s oil, trade, and banking
10
Barclays | Iran Primer
A mismatch between timing of
implementation, and pricing
the outcome
3 July 2015
sectors. The EU will likely quickly follow suit by lifting the majority of sanctions on Iran,
including its Iranian oil import ban and sanctions on Iranian banks’ use of the European
financial payment messaging systems. Iran might also gain increased access to its FX
reserves, which we estimate at around USD30-50bn.19
The hydrocarbon-related sanctions imposed by the US and EU can be grouped into five
main categories. Under the Joint Plan of Action, Iran received limited sanctions relief with
the removal of the EU insurance and transportation restrictions associated with Iranian
crude oil sales. The main sanctions relate to the following five categories:
• Sanctions on persons that are involved in energy trading with Iran.
• Prohibition of transactions with the Central Bank of Iran and asset freezes.
• Specific sanctions on the National Iranian Oil Company and the National Iranian Tanker
Company, and those persons that provide insurance or underwriting to these
companies.
• EU and US sanctions on provision of equipment and technology to Iran’s energy
industry, including to the refining, petrochemical, upstream E&P, and LNG sectors.
• Outright embargoes on oil and gas imports from Iran.
Specifically, of these categories, the latest negotiations are considering the suspension of
those implemented from 201020:
• Energy sanctions under the Iran Sanctions Act (ISA) and amendments to it made under
the Comprehensive Iranian Sanctions Act (CISADA). Some of these sanctions were also
mandated with Presidential Executive Orders.
• The National Defense Authorization Act (NDAA) requiring that existing consumers of
Iranian oil ‘significantly reduce’ their purchases.
• CISADA provisions that sanctioned foreign banks doing business with the Central Bank
of Iran and other Iran-linked banks.
• The EU’s prohibition on Iranian imports of oil and gas.
• The ban on Iran’s use of the SWIFT electronic payments system.
A likely scenario that could lead to an uptick in Iranian oil exports would be the EU lifting the
embargo on imports, which went into effect in June 2012. It takes nothing more than the
political will of the EU-28 to reverse a Council decision, but the EU is unlikely to move in this
direction without being in lockstep with US sanctions removal.
(2) What are the barriers to Iran’s return to the oil market?
The timing of sanctions relief is one of the biggest points of contention. Even though full
implementation might occur as early as the end of 2015, we think the market may price this
outcome in earlier. The bottom line is that the US President has the broad authority to waive
sanctions, and it is unlikely that there would be sufficient opposition in Congress to veto
such a decision. Any lifting of the most severe sanctions would require: (a) a determination
that Iran is no longer a state sponsor of terrorism; (b) that it has ceased its pursuit of
weapons of mass destruction; and (c) a notice to Congress. Meeting these requirements, in
addition to new requirements under the Iran Nuclear Agreement Review Act, will likely delay
19
Rosenberg, Elizabeth and Sara Vakhshouri. Iran’s Economic Reintegration. CNAS, June 2015.
20
Katzman, Kenneth. Iran Sanctions. Congressional Research Service, April 2015.
11
Barclays | Iran Primer

full implementation of any sanctions relief. The specifics of sanctions removal are discussed
in detail in a February 2015 Congressional Research Service report. 21

Hurdles in logistical and We believe that logistical and marketing hurdles will keep Iran’s crude and condensate
marketing exports around 1.5-1.7 mb/d for the balance of the year, only slightly higher than
current levels. Even if a deal is not concluded, Iran continues to uncover new ways of
skirting sanctions and, in our view, US officials are unlikely to lobby existing customers as
forcefully to keep “significantly reducing” their Iranian imports as required by the 2012 law.
So, some further slippage of the ban on Iran’s oil exports is likely.

• According to IEA figures, recent export trends show Iranian crude and condensate
exports reaching 1.5 mb/d in May, the highest level since June 2012, the last month
before the stronger US and EU restrictions took hold. Wellhead production is higher as
well, reaching close to 3 mb/d. Some of this is likely logistical and refinery related. In
China, the Dragon Aromatics plant used to take around 100 kb/d of Iranian condensate,
but is now offline indefinitely due to a fire in late April. The 40 mb of oil in storage in the
Gulf reportedly includes some of this condensate, according to Iranian energy experts.
Also, the MRPL and Essar refineries in India stopped importing Iranian oil after Obama’s
visit to that country in 1Q15, but now look likely to ramp-up throughput over the
summer. Indeed, Essar bought around 120 kb/d of Iranian crude in April and May,
compared with virtually zero purchases in the prior months, according to Reuters data.

Around 200 kb/d from floating storage. Following the ending of sanctions, we think Iran
will first attempt to clear the 40 mb of storage it has built up offshore by selling to existing
buyers in Japan, South Korea, India, and China. If 20 mb of this storage were sold over 90
days, that would equate to around 200 kb/d of new oil on the market. Iran is also ramping
up output at its Azadegan and South Pars condensate fields. As exports of condensate are
not strictly prohibited, Iranian energy experts think that Iran will be able to raise condensate
output by around 200 kb/d by the end of 2016 irrespective of any sanctions relief. Iran is
unable to market this condensate now because its traditional buyer, Dragon Aromatics,
suffered a fire at its splitter plant in April. Therefore, one of the Pars platforms has been shut
in and exports are down (-60 kb/d m/m in May 2015).

Iran’s likely return is at a time A potential return of Iranian oil to the market could not have come at a worse time. As we
when markets are already in discussed in the most recent oil market monthly, The Blue Drum: Setting cruise control to 60,
surplus 26 June 2015, the market looks set to remain in a situation of oversupply through the

FIGURE 1
Iranian production could exceed 4.5 mb/d by 2020
Iran Oil Production (mb/d)
5.0
4.5
4.0
3.5
3.0 Net oil exports
2.5
2.0
1.5
1.0
0.5
0.0
1Q09 2Q10 3Q11 4Q12 1Q14 2Q15 3Q16 4Q17 1Q19 2Q20
Base case relief Sanctions removal delayed Consumption
Source: IEA, WoodMackenzie, Barclays Research

21
Rennack, Dianne. CRS. February 2014. US Economic Sanctions and the Authority to Lift Sanctions.

3 July 2015 12
Barclays | Iran Primer
Competition within OPEC
members on market share
would increase
There could be reluctance to
sign long-term deals
Restarting of mothballed fields
and reopening the sector to
foreign investment faces many
obstacles
3 July 2015
remainder of the year. OPEC’s policy of letting the market determine the price is starting to
work its way through the fundamental oil balance, with demand sharply higher in Europe,
Americas, and Asia, while non-OPEC supply appears on the verge of a correction as drilling
activity is declining. This opens the door for OPEC to fill the gap, reclaiming the market share it
has lost in the past couple of years. The problem is that of timing. Cyclical and structural
demand side factors point to a less robust picture for the remainder of this year. Moreover,
despite a decline in drilling activity, US supplies have remained resilient. Therefore, potential
supply from Iran at this juncture is likely to influence the perceptions of the degree to which
prices might rebound.
Iran’s return will likely have a narrowing impact on the Brent time spread and create even
more competition among OPEC members. The loss of Iranian and Libyan barrels led to
higher price levels and spurred production from non-OPEC producers over the past 2-3
years. But with Iran’s possible return, OPEC is caught without a functioning methodology in
place to allocate individual quotas to keep the group’s output below 30 mb/d, its stated
target production level. At the OPEC meeting in June, Saudi Arabia’s energy minister did not
directly answer the question about whether they would make way for incremental Iranian
oil: He said, “Have we ever blocked anybody?” Reportedly, the Saudi position is that Iran, for
example, should produce what it can, when it can, and then OPEC will decide what to do 22.
The weight of possible new oil from Iran is likely to have more of an impact on the Brent
curve structure than prompt Brent prices, in our view. If an agreement on sanctions is
reached, we think this could lead to a narrowing in the Brent 1-12 spread, which is currently
trading at $6/bbl. If a deal is signed and the agreement proceeds as planned, the market will
likely price in that reality beforehand, even if the incremental barrels are months away.
An increase in Iranian exports beyond 300-400 kb/d would be difficult for the market to
absorb. Post a deal, Iran should be able to increase its exports to European, South African,
and Turkish customers, even without any relaxation of the insurance and underwriting
prohibitions. But if Iran tried to increase its exports beyond this level, we think such a move
would be met with increased competition, especially if the incremental barrels targeted
South Korea, Japan, or China, which are taking more exports from Russia, Saudi Arabia, and
Iraq. Given continued statements from the Obama administration that sanctions can be
snapped back at any time, we would expect refiners to be reluctant to conclude long term
procurement arrangements with Iran during 2015. This implies that shorter-term deals are
likely and possibly terms with discounts.
3) After 2015, what is the path to further Iranian oil sales?
The outlook for 2016-2020
Some of what might happen in the next six months is tied to the amount of oil that Iran has
in storage and the political bottlenecks. By the end of the year, we estimate that the
reinjection of natural gas to increase oil output could see production begin to increase by
200-300 kb/d. But restarting mothballed fields and reopening the sector to foreign
investment is an entirely different question and is subject to different considerations.
Iran’s has three main priorities for developing its energy sector in the medium term:
• Restore exports to pre-sanctions levels of around 2.5 mb/d, from 1.5 mb/d.
• Attract foreign investment to expand gas production to serve domestic demand.
• Like Saudi Arabia, Iran hopes to mitigate its dependency on crude oil exports by
expanding its refining and petrochemical sectors to serve export markets in Asia.
22
Petroleum Intelligence Weekly. “OPEC Supply stance causes concern for Iran. Energy Intelligence, 22 June 2015
13
Barclays | Iran Primer
Sanctions severely squeezed
Iranian oil exports
3 July 2015
In light of these priorities, our base case scenario sees 500 kb/d of incremental exports as
production starts to rise from 2Q15 to 4Q16. By end-2020, we estimate that Iran could be
producing around 4.7 mb/d, around 200 kb/d higher than levels it achieved in 2007 before
the most stringent sanctions took hold (see Figure 2). We model two cases for Iranian oil
supply: a base case where sanctions relief begins by the end of this year, and a delayed
sanctions relief case where it takes at least until early 2017 for trade embargoes and
financial sanctions to be lifted.
• Base case sanctions relief – Iran reaches 4.7 mb/d of crude and condensate output in
2020: In our base case assumption, sanctions relief (relaxation of insurance restrictions,
then lifting of EU oil embargo) is implemented once initial verification is complete. New
fiscal terms and investments are offered, leading to increased production via previously
shut in fields, mostly onshore first. Soroush and Nowruz increase very gradually, but the
biggest increase in our production scenario comes from rebounding output at Ahwaz.
Over the 2017-2020 period, Iran would begin to see the impact of additional investment
flows on mature fields including Gachsaran, Marun, and Ahwaz. Increased production
from greenfields including Yaran, Yadavaran, Azadegan, and South Zagros comes
gradually beginning in 2017.
Sanctions relief delayed case – Iran reaches 3.7 mb/d in 2020: In this case, greenfield
production opportunities and Pars projects mostly proceed as investments are already in
place, but the substantial amounts of investment to begin redevelopment of mature
fields are delayed at least a year as Iran proves compliance. Brownfield production
rebounds are slower in this case due to both marketing hurdles and investment
requirements.
Iranian oil trade
On 1 July 2012, with the EU embargo on Iran’s oil exports put in place, volumes started to
fall. Europe’s imports of Iranian oil fell from 778 kb/d in 2011 to 280 kb/d in 2012, and so
far this year have averaged roughly 100 kb/d. Other main customers for Iranian crude,
South Korea, Japan, India and China also reduced their imports in accordance with the
National Defense Authorization Act, which provided waiver authority to these consumers,
though required that they ”significantly reduced” their purchases.
Japan and South Korea, which received waivers, have reduced their share of Iranian imports
relative to 2013. China’s crude imports from Iran have remained close to 10% of its total oil
imports since 2013. India’s imports from Iran have been variable on a month by month basis.
Latest data for January-May 2015, shows volumes from Iran were lower by 31% relative to the
same period last year. If sanctions are lifted, we think Indian purchases of Iranian crude could
pick up strongly. India has already extended approval to two Iranian insurers to cover container
and tanker vessels calling at Indian ports (Reuters, 29 June 2015).
14
Barclays | Iran Primer

FIGURE 2 FIGURE 3
Europe’s imports of Iranian oil dropped precipitously as … forcing Iran to find alternative customers in China and
sanctions took hold… India which grew from 40% to >60% of export mix by 2014
1.4 mb/d
EXPORTS 2,530 1,592 1,109 1,270
1.2 100% Other
Other Other
Other Turkey
Turkey
1.0 EU S. Korea
80% S. Korea
EU Turkey
Japan
0.8 S. Korea Japan
60% Turkey
0.6 S. Korea Japan India
India
40% Japan
0.4 India
India
0.2 20% China China
China
China
0.0
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2011 2012 2013 2014

Source: IEA MODS, Barclays Research Source: IEA, Official customs data, MEES, Barclays Research

FIGURE 4
Iran’s share within China’s total crude imports has remained close to 10% since 2013
25%
IRAN IRAQ SAUDI RUSSIA

20%

15%

10%

5%

0%
2009

2010

2011

2012

2013

2014

2015
2000-

2005-
2005

2008

Source: China Customs, Barclays Research

FIGURE 5
Iran’s exports have fallen by 1mb/d to 1.5 mb/d

Iranian Crude and Condensate Exports (kb/d)

3,500
Jan 2012: First full month of NDAA
3,000 implementation
Exports of 2.3 mb/d
2,500 Jan. 2014: P5+1 Joint Plan of Action goes in to
Jul 2012: EU P&I Club effect
2,000 grace period expires Exports of 1.2 mb/d

1,500

1,000

500

0
Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15
OECD Non-OECD
Source: IEA, Barclays Research

3 July 2015 15
Barclays | Iran Primer
Most of Iran’s oil reserves are
located onshore
A promising oil and gas
resource base, but IOCs likely
to be cautious about re-
entering the country
3 July 2015
Fundamentals: Iran’s energy sector
Much of Iran’s potential impact on the international energy market from 2016 will depend
on its ability to develop its oil and gas sector.
• At 157.8 billion barrels, Iran has 10.5% of the world’s crude oil reserves and 13.1% of
OPEC reserves (OPEC Annual Statistical Bulletin, 2014).
• Iran’s liquids production has fallen from the 6 mb/d averaged in 1974 to an average of
3.6 mb/d in 2014.
• Limited investments, sanctions, conflicts and a high rate of natural decline of Iran’s
mature oil fields have prevented a return to such production levels.
• The state-owned entity, National Iranian Oil Company (NIOC), is responsible for all
upstream oil and natural gas projects within the country.
Around 70% of Iran’s oil reserves are located in the south of the country, with the remainder
mostly located offshore in the Persian Gulf (Figure 3). Iran's largest producing oil fields are
the onshore Ahwaz-Asmari, Marun, and Gachsaran fields, all of which are located in
Khuzestan Province. The Abuzar field is Iran's largest offshore field, with a production
capacity of 175 kb/d. Iran also has proven reserves in the Caspian Sea, although exploration
is at a standstill due to sanctions.
Developing Iranian crude
IOCs will likely proceed cautiously despite Iran’s promising oil and gas resource base.
The reapplication of secondary recovery techniques to fields and drilling in already known
deposits at F&D costs of $10-20/b could raise output beyond pre-2007 levels by 2020.
International oil companies (IOCs) are already positioning themselves for an opening since
they do not want to miss out on the opportunity in this age where there are very few new oil
provinces available. We think the IOCs that do go in will focus first on understanding the
subsurface resources; they will deal with the above-ground risks after the resource base is
better understood. A corporate board would only likely greenlight a new investment after
taking into account the above ground risks, including the possibility of a “snap back” in
sanctions, and the comparative economics. Some companies will be willing to take that risk,
others will not. Iran, too, will face challenges in ensuring that the country balances this
foreign interest with its domestic capacity and political demands. (see also equities section)
FIGURE 6
Top ten crude oil proved reserves in 2015. Iran has the fourth largest
bn barrels
300
250
200
150
100
50
0
UAE
Arabia
Russia
Canada
Kuwait
Iran
Libya
Iraq
Nigeria
Venezuela
Saudi
Source: BP Statistical Review, Barclays Research
16
Barclays | Iran Primer
Continued limitations on US
companies
Two key crude grades: Iran
Heavy and Iran Light
Most of the Iran Light fields are
decades old
Buyback contracts required the
IOC to bring its own capital
and expertise
3 July 2015
US companies will remain subject to the primary sanctions, which means that no US
company (and possibly even subsidiary companies operating abroad) can do business in
Iran without a license. Also, US sanctions on the Iranian Revolutionary Guard Corps and the
Quds Force (as well as their associated companies) will remain active, which would severely
limit US companies’ ability to work with Iranian manufacturing companies, such as Khatam
al-Anbya. Finally, international banks, the gateway to a rapid increase in FDI in Iran, will also
likely be reticent about wading into Iran-related transactions, given the likely need to pay
steep legal costs for fear of violating any of the multiple US sanctions that remain in place
irrespective of a deal.23
Marketing Iranian crude
Around 80% of Iran’s oil output capacity is used to produce two key crude streams, Iran
Heavy (29.5° API, 1.99% Sulphur) and Iran Light (33.4° API, 1.36% Sulphur). Roughly 45%
of the country’s total crude oil production is classified as the Iran Heavy crude stream. One
third of the production of this grade is diverted to the domestic refining system, with the
remaining +1 mb/d being exported, making it Iran’s main export grade. The Iranian Heavy
grade has traditionally been imported by Asian buyers. But sales to the region slipped in
both 2009, and 2010 due to Iran’s pricing policy, while the tightening of the sanctions at the
tail end of 2010 trimmed demand further.
Iran Light is the country’s second largest export grade, similar in quality to Arab Light, Dubai
and other light Mideast grades, with the crude oil increasingly becoming heavier and higher
in sulphur content in recent years. This grade had traditionally been exported to a wider
variety of markets, with shipments to both Europe and Asia-Pacific. Many of the Iran Light
fields are decades old with some such as Agha Jari having been in production for almost 70
years – and are declining by up to 8% y/y (source: EIG). The NIOC has been working for
some time to offset this trend and maintain output via secondary oil recovery programs,
mainly using associated gas injection techniques.
Upstream activities
The state-owned entity, NIOC, is responsible for all upstream oil and natural gas projects
within Iran. This is because the Iranian constitution prohibits foreign or private ownership of
natural resources. That said, international oil companies can participate in the exploration
and development phases through buyback contracts. However, changes are on the horizon,
in anticipation of the lifting of the sanctions. Since 2013, the Iranian petroleum ministry has
been attempting to make terms more attractive than those offered under ‘buyback’
contracts. These contracts require the contractor (IOC) to bring in its own capital and
expertise for the development of an oil field. Once the field is developed and production has
started, the project’s operatorship reverts back to NIOC or the relevant subsidiary. Although
the terms of these contracts have been revised twice since inception, they remain
unpopular with IOCs due to their inflexibility (limited option to put a cap on costs) and
limitations on returns.
23
See Elizabeth Rosenberg and Sara Vakhshouri. “Iran’s economic reintegration”, CNAS, June 2015
17
Barclays | Iran Primer

FIGURE 7 FIGURE 8
Iran’s oil fields Iran’s oil infrastructure
Arm. Azerbaijan Turkmenistan

Caspian Sea
Kermanshah Qom Turkey
Babriz
Arak Bandar Anzali

Qazvin
Teheran Mashhad
Kermanshah
Azar Isfahan Arak Qom

Isfahan
Afghanistan
Parsi
Iraq
Azadegar Abradan Kerman
Yadavaran
Kwt. Bushehr Shiraz
Gach Saran
Saudi Arabia
Shiraz Persian Bandar-e-Abbas Pakistan
Gulf
Nowruz
Port Strait of
Qatar Sirri Island
Oil field Refinery Hormuz
Natural gas field Esfandiar Crude oil pipeline
Esfandiar
Refinery Capital U.A.E.
Foroozan City Oman
Crude oil pipeline Foroozan

Source: EIA, Barclays Research Source: EIA, Barclays Research

The Iran Petroleum Contract A new upstream contract, called the Iran Petroleum Contract (IPC), is currently being
(IPC) is being drafted… reviewed by the office of the Vice President for Legal Affairs, after which the associated
legislation will be submitted to parliament for final approval. To start the process, in May
2015 the oil ministry listed 49 upstream projects (28 oil, 21 gas) that it had identified to
receive priority investment by international and domestic companies. Further, Iran
announced in June 2015 that it would put contracts for 17 new oil and gas exploration
blocks on offer during its London roadshow in September 2015, where the new IPC would
also be unveiled.

… it has to strike the right As the final terms of the IPC will have to strike the right balance between the expectations of
balance between the the NIOC, the ministry and the international oil companies, as well as have to be approved
expectations of the NIOC, by parliament, this is unlikely to be an easy process, in our view. Discussions around the
Ministry and IOCs proposed framework of the new IPC include the ability for partnerships between IOCs and
the NIOC on crude output ownership. The relationship between the NIOC and IOCs is
expected to be more of a joint venture nature, rather than just the role of a pure contractor.
Contract duration is expected to be longer as well.

FIGURE 9 FIGURE 10
Iranian crude production and OPEC market share Significant recent variability in Iran’s exports to its Indian
customers
7 mb/d Iranian liquids production (LHS) 21% Essar's crude oil imports from Iran (kb/d)
160
Irans market share in OPEC (RHS) 19%
6
140 129
17% 121
5 120 113
108
15% 92
4 100
81
13%
80
3
11% 60
2
9% 40
22
1 7% 20
0
0 5% 0
1974 1979 1984 1989 1994 1999 2004 2009 2011 2012 2013 2014 Jan-15 Feb-15 Mar-15 Apr-15
Source: BP Statistical review, Barclays Research Source: Reuters, Barclays Research

3 July 2015 18
Barclays | Iran Primer

Consumption patterns
Second biggest consumer in At 1.5 mb/d, Iran is the second biggest consumer of oil in the Middle East, after Saudi
the Middle East Arabia (2.1 mb/d). Growth rates have been on divergent tracks, with Saudi oil consumption
increasing by 9.4% last year, while Iran’s declined by 10.2%. In the past, Iran had limited
domestic oil refining capacity and was largely dependent on importing refined products.
Sanctions have impacted Iran’s gasoline importing ability, and local refineries are not well
placed to fully meet domestic requirements.
Local refineries not well placed
to fully meet domestic Iran has been removing subsidies and expanding domestic gasoline production capacity to
requirements try and restrain growth in oil consumption. In May, Iran increased its gasoline price by 40%
to $0.35/litre. This was the second hike this year, and followed a 75% price increase
implemented overnight in April 2014. The dual price scheme for rationed and non-rationed
gasoline, in place since 2014, has also been removed. Iranian motorists used to get a
monthly allotment of 60 litres of subsidised gasoline using a smart card. As a lot of this
subsidised gasoline used to be smuggled into neighbouring countries in the past, this move
should reduce this type of activity.

Natural gas vehicles have Iran has also promoted the use of natural gas vehicles as a means of reducing its
gained traction dependence on imported refined products. They have incentivized this substitution in the
local market by providing subsidies for conversion kits. In 2012, Iran consumed about 7% of
its natural gas production in road use.

Less use of crude oil for power
generation compared to Saudi
Arabia
Unlike Saudi Arabia, which burns on average 700 kb/d for power generation (2009-2013),
Iran uses only around 4 kb/d for the same purpose, which means the swing in its usage of
fuel oil and crude oil for direct power generation in the summer months is far less. The
rationing system of fuel in Iran has also helped to cap oil consumption. These factors, along
with a robust subsidy led consumption of gasoline in Saudi Arabia, explain the divergence in
demand growth between Saudi Arabia and Iran (Figure 10). Per capita usage of oil in Iran is
also one quarter the level it is in Saudi Arabia (Figure 11).

Iran’s downstream efforts. Iran’s current downstream CDU (crude distillation unit) capacity
is roughly 1.9 mb/d, according to the EIA. Recent statements from Iran’s oil ministry
suggest that it plans to expand its downstream operations further. This is in line with the
ambitions of other Middle Eastern producers (ie, Saudi Arabia, UAE), which have been
ramping up refining capacity to meet domestic requirements as well as to focus on more
value added, refined product exports.

FIGURE 11 FIGURE 12
During 2004-2014, Saudi oil demand growth was double … while in the same period, Iran’s per capita usage of oil
that of Iran’s… increased at close to half the rate of Saudi Arabia’s
4 mb/d 120 barrels per
capita Saudi oil demand per capita
100 Iranian oil demand per capita
Saudi oil demand
3
Iranian oil demand
80

2 60

40
1
20

0 0

1966 1972 1978 1984 1990 1996 2002 2008 2014 1966 1972 1978 1984 1990 1996 2002 2008 2014
Source: BP Statistical Review 2015, Barclays Research Source: BP Statistical Review 2015, Barclays Research

3 July 2015 19
Barclays | Iran Primer
The Siraf refinery project will
help expand downstream
capacity
Iran also plans to build
refineries abroad through joint
ventures
Iran’s petrochemical sector
would be another beneficiary
and brings in a large share of
revenue
The assets behind Iran’s
petrochemical sector are in
poor shape
Growing domestic demand will
limit Iran’s natural gas export
aspirations
Oil will be the major prize, gas
a secondary consideration
3 July 2015
Iran aims to reduce its condensate exports to zero in the future, and instead process all of its
output in domestic condensate splitters.
Among its downstream plans, the Siraf refinery project is expected to have a processing
capacity of 480 kb/d, with completion taking around 38 months. The refinery is planned to
have the capacity to produce more than 270 kb/d of naphtha, 140 kb/d of gasoil, 30 kb/d
of LPG and 40 kb/d of kerosene. Part of the plan is to export the naphtha output to Asia. A
Reuters report (8 June 2015) quoted an Iranian official as indicating that eight western
European companies are eyeing investment in Iran’s refinery sector, and that the Siraf
project would be divided into eight parts.
Iran also plans to build refineries abroad through joint ventures with foreign partners, to
lock in a captive source for its crude exports. This is similar to the strategies already in
place among other Middle Eastern producers. Saudi Arabia has a JV with Shell in the US
(Motiva) and projects in China and South Korea. Similarly, a recent announcement by the
Iran Oil Exporters Union stated, that Iran, China and Indonesia are planning to build a
refinery on an East Java island that would process 150 kb/d of heavy crude oil. The JV
envisages Iran supplying feedstock and partially financing the project, and China
providing 85% of the funds.
The importance of the petrochemical sector
Iran’s petrochemical industry brings in the most revenues to the country’s economy after
crude oil exports and stands to gain from any sanctions relief. Iran generated revenue of
$14bn exporting petrochemical products in 2011, according to FACTS Energy, but these
revenues have fallen by $1-2bn since sanctions came into effect. Persian Gulf Holding,
which accounts for around 40% of Iran’s annual petrochemical revenue, saw its export
volumes shrink by 23% due to sanctions. Assuming the company shared a similar burden
as the rest of the industry, we estimate that Iran could see incremental revenues of $3.3bn
annually from sanctions relief. Iran now sells most of its petrochemicals, specifically
polyethylene, BTX, and methanol, to Asia, but, could look to increase sales to Europe back
to the $2.0-2.5bn level it enjoyed in the past.
Iran’s petrochemical industry remains in poor shape, however. Ethylene exports have been
constrained but, on any easing in sanctions, we think Iran is likely to divert exports away
from China to the higher return European markets. Sanctions have cut into petrochemical
production for the domestic market, too, as many assets are not running and others are
short of spare parts.
Iran and the global gas market: The 34 Tcm gorilla in the room
Most estimates place Iran’s reserve base at around 34 Tcm, or around 18% of the world’s
natural gas reserve base. That means that Iran has enough gas to meet 2014 global natural
gas demand for around 10 years.
Despite this massive reserve base, years of sanctions have made the natural gas story in
Iran one of missed opportunities. Recent political developments are creating a greater
sense of optimism around Iran’s future as a natural gas producer and exporter. However,
with domestic demand for natural gas growing quickly, we think Iran may struggle to ramp
up exports to the extent it has previously announced. Although Iran may be able to increase
exports regionally, we do not foresee the country developing into a major pipeline supplier
to Europe or global LNG player until late next decade at the earliest.
It’s all about the oil...
Despite Iran’s large natural gas reserves the real prize will continue to be the country’s oil
reserves. This preference is likely to be held by both Iran’s decision makers and foreign
investors, as oil will offer an easier and quicker monetization option compared with natural
20
Barclays | Iran Primer

gas. Increasing exports of natural gas will not only require significant E&P work but also the
development of expensive pipelines and/or LNG facilities. With the traditional pricing of
natural gas coming under pressure as global supplies expand, this also weighs against
investing in this area in Iran. Estimates from the EIA point to gas exports accounting for less
than 4% of Iran’s total export earnings, compared with the 78% from crude and
condensates. This skewed ratio will likely continue to influence the Iranian government
when setting its investment priorities.

Iran’s domestic market needs natural gas now

Any increase in Iran’s natural gas production is likely headed for the domestic market, not
overseas. Of the 173 Bcm produced in 2014, 98% was consumed domestically. Iran
depended on natural gas for around 61% of its total energy consumption in 2014, a
relatively high percentage compared with its peers. The country has even struggled with
natural gas shortages during the winter months and has looked to imports from
Turkmenistan to balance the market during peak periods (see Figure 20). Indeed, without
imports of 6.5 Bcm from Turkmenistan in 2014, Iran would have struggled to meet its
export commitments to Turkey.

Low domestic gas prices and lagging energy efficiency have driven gas demand growth of
7% annually over 2000-2013. Current estimates point to the country being able to reduce
annual domestic consumption by 5 Bcm through efficiency improvements. Similar to many
Middle Eastern countries, Iran continues to see its demand for power increase. Electricity
generation reached 271 Twh in 2014, up almost 7% from the previous year. Natural gas is
used for around 70% of total power generation and is the major driver of Iran’s increasing
gas demand (see Figure 19).

As Iran’s GDP grows so too will Clearly, Iran will have to manage its aspirations to be a major gas exporter within its overall
its domestic demand for goal of growing its economy. After the removal of sanctions, the conventional wisdom is
natural gas that the country’s GDP will grow, which, in turn, will drive domestic gas demand higher. The
country’s industrial sector is the most sensitive part of the economy to trend changes in
GDP, both in terms of gas industrial usage and usage in the power sector. Iran would also
like to evolve into a large exporter of steel and cement, both energy intensive industries that
would likely limit the availability of gas for exports. Of course, rising exports and a growing
economy are not mutually exclusive, but to achieve this will depend on Iran’s ability to
further ramp up gas production volumes.

FIGURE 13 FIGURE 14
Top 10 global gas producers (Bcm) Top 10 proven gas reserves (Tcm)

Production % of global % of global proved

Proved Reserves
reserves
US 728 21%
Iran 34 18%
Russia 579 17%
Russia 33 18%
Qatar 177 5%
Qatar 25 13%
Iran 173 5%
Turkmenistan 18 10%
Canada 162 5%
US 10 5%
China 135 4%
Saudi Arabia 8 4%
Norway 109 3%
UAE 6 3%
Saudi Arabia 108 3%
Venezuela 6 3%
Algeria 83 2%
Nigeria 5 3%
Indonesia 73 2%
Algeria 5 3%
Source: BP Statistical Review 2015, Barclays Research Source: BP Statistical Review 2015, Barclays Research

3 July 2015 21
Barclays | Iran Primer

FIGURE 15 FIGURE 16
Iranian natural gas balance 2014 (Bcm) Iranian gas demand by sector

Other
Domestic demand 170.2 Transport 8%
5%
Turkey exports 8.9 Res/Com
Armenia/Azerbaijan exports 0.7 34%

Total Demand 179.8 Industrial

25%
Domestic Production 173.0
Turkmenistan Imports 6.5
Azerbaijan Imports 0.3

Total Supply 179.8 Power

28%
Source: BP Statistical review 2015, Barclays Research Source: EIA, Barclays Research

The country also uses a large amount of natural gas for secondary oil recovery. According
to EIA estimates from 2012, Iran used more than 1 Tcf of gas in its oil fields to boost
recovery. As noted above, increasing oil production is likely to be a major goal for Iran,
which means this trend is likely to continue.

FIGURE 17
Iranian gas infrastructure

Azerbaijan
Armenia
Jolfa
Capsian Turkmenistan
Nordouz Astara Sea

North & North

East Pipeline
Rasht
Sari
Gorgan Khangiran
Qazvin Neka
Second North
Tehran East Pipeline
Mashhad
Arak

Iran Afghanistan

Isfahan
Birjand
Iraq
Kerman
Basra Zahedan
Dalan
Kuwait Aghar

Kuwait City
Pakistan

Nar
North Pars
Iranshahr
Assaluyah
South Pars Bandar Abbas
Proposed route
Bahrain Persian
For exporting
Manama Gulf
gas to Pakistan
Qatar Abu Dhabi
Doha Gulf of Oman
Saudi Arabia
UAE Oman
Source: Barclays Research

3 July 2015 22
Barclays | Iran Primer
Iran and Qatar share the South
Pars/North field, the largest
gas field in the world
Iranian gas developments
increase risks over South
Pars/North Field dispute with
Qatar
Increases in Iran’s gas exports
are likely to stay in the region
3 July 2015
Foreign investors may have to develop gas to get access to oil
Although Iran’s natural gas reserves may not be overly attractive to foreign investors, Iran
could require these companies to develop the country’s natural gas resources as part of any
deal to access to its oil reserves. Politically speaking, it will be very important that Iran’s
leadership can prevent gas shortages. A sanction-free economy will likely send gas demand
higher as GDP grows and shortages would be difficult for politicians to explain. If Iran is
going to meet that demand, more gas production will be needed.
Around 40% of Iran’s gas reserves are located in the giant South Pars field, the largest
gas field in the world. The state-owned National Iranian Oil Company (NIOC) is responsible
for all of the country’s oil and gas development and is undertaking a 24-phase development
of South Pars. Phases 1-10 and 12 are complete and, in most instances, were done with the
involvement of western companies in the pre-sanctions era. Phases 15-18 are currently
under development but have struggled to come online with sanctions in place. Authorities
expect annual production to reach 270 Bcm when all phases are online. Recent delays at
South Pars have been the major reason for domestic gas shortages. Iran’s gas master plan
had originally envisioned phases 1-10 of South Pars being used for the domestic market
and the other phases for exports.
Iran shares the giant South Pars field with Qatar, where it is known as the North Field.
The Qatari’s development of the North Field has helped propel it to become the number one
exporter of LNG in the world, with an annual export capacity of 77 MMt, or around 30% of
the entire global LNG market in 2014. The shared offshore field is considered the largest in
the world and the two countries concluded a delimitation agreement with each other in
1969. There has been little to no cooperation between Qatar and Iran in developing the joint
field and for the most part each country has developed the resource as they have seen fit. In
2005, Qatar declared a moratorium on further development of the North Field, to give the
country more time to understand the structure of the field’s reservoir. That moratorium
remains in place.
We see very little upside for Qatar in agreeing to some sort of cooperation with Iran,
especially when it comes to LNG. There is probably greater potential for a deterioration of
relations between the two countries as Iran looks to further develop its South Pars field and
the probability of a territorial dispute over reserve rights is likely to increase.
Other major gas fields in Iran include the Kish, North Pars, Tabnak, Forouz and Kangan. The
development of these fields is largely being handled by domestic entities and actual
production from them is unlikely until after 2020. Nearly two thirds of Iran’s gas reserves are
located in non-associated fields that still need developing.
Any short term increase in pipeline exports will likely go to Turkey
If Iran does want to quickly ramp up its gas exports, its only real option given current
upstream and midstream constraints is Turkey. Iran has been exporting natural gas to
Turkey since 2001 under a long-term take or pay deal of 10 Bcm/y. Iran sends around 90%
of its total annual exports to Turkey (small amounts are sent to Armenia and Azerbaijan).
Small volumes may also start flowing to Iraq this year (see export summaries below).
Iran has been trying to convince Turkey to increase its import volumes to 20 Bcm/y, but
price has been a sticking point. Iranian gas prices to Turkey are already higher than pipeline
imports from Russia and Azerbaijan. Iran’s ambassador to Turkey recently stated a
preliminary agreement between the two countries had been reached that offered to lower
the price if Turkey agrees to take 20 Bcm/y gas. 24 However, meeting that kind of
commitment may prove difficult for Iran. During times of peak domestic demand and/or a
failure of Turkmenistan to deliver, Iran has been forced to curtail its exports to Turkey,
24
Okumus, Olgu.. “Why is Turkey buying more gas than it needs from Iran?” Al-Monitor. Feb. 2014.
23
Barclays | Iran Primer
Iranian gas could supplement
TANAP project but is not
necessary for it to go ahead
3 July 2015
delivering below its contractual quantities. With the addition of new compression
technology, another 2 Bcm/y of gas could flow from Iran to Turkey on the Tabriz Ankara
pipeline. However, any further ramp up in exports would require a further pipeline
expansion or a new pipeline all together.
Potential of Iranian gas to Europe – still more questions than answers
From a volume and pricing standpoint, the market the Iranians would most like to break into is
Europe. The Iranians have for some time been looking to export gas through the Nabbuco
pipeline, a project led by Austria’s OMV. The planners of this pipeline project originally
envisioned sending Azeri gas and, later, Iranian gas through Turkey and into Austria. However,
the Nabucco pipeline was abandoned in 2013 when the developers of the Azerbaijani gas field
(Shah Deniz) decided to use the competing Trans-Adriatic pipeline instead.
Under current plans, gas from Azerbaijan will be sent via the Trans-Anatolian Pipeline
(TANAP) from Baku through Turkey then to the Balkans where it would connect with the
Trans-Adriatic Pipeline to deliver gas to Italy and onto the rest of Europe. Iran could in
theory connect with the TANAP in Turkey. The pipeline could eventually be a corridor for
Iranian, Turkmen, Iraqi, Israeli and Cypriote gas to reach Europe. The 1,100 mile TANAP is
expected to begin delivering gas by 2020 at a rate of 16 Bcm/y, which could potentially
increase to 31 Bcm/y according to company announcements. At the moment, Azeri firm
SOCAR holds a 58% stake and Turkey’s Botash holding 30%, and in April BP completed the
purchase of the remaining 12%.
Given Europe’s dependence on Russian gas and the currently strained relations between the
West and Russia over Ukraine, the political backdrop does support new gas corridors to
Europe. However, TANAP is not dependent on Iranian gas and the country will likely play a
back seat role in its development.
Where could Iranian gas exports flow?
In the near term, any increase of Iranian exports is more likely to occur in trade with its
regional neighbours. A number of Middle Eastern economies are currently seeing a steep
increase in gas demand, specifically for power generation, at a time when domestic
production is either just keeping pace with demand increases or stagnating. Add to this the
fact that some countries such as Oman and Abu Dhabi in the UAE have major export
commitments in the form of LNG and some gas balances are looking increasingly short (see
Figure 23). This could present an opportunity for the Iranians to ramp up gas exports to its
neighbours, which has the attraction of being a considerably cheaper and shorter lead time
option compared with LNG exports. Below is a list of countries to which Iran could
potentially increase or start exports.
Iraq
• The Iranians signed a gas supply deal with Iraq in 2013. The original contract has Iran
delivering 9 Bcm/y in the first phase of the agreement, eventually growing to 14 Bcm/y
in the second phase.
• At a minimum, we think Iran could send at least 7 MMcm/d using existing gas
infrastructure to the Basra power plant, which is close to the Iranian border. These
volumes could start sometime in the second half of 2015. However, reaching the 9-14
Bcm/y level will be dependent on the successful completion of the planned South
Pars projects.
• Despite the agreements between the two countries, pricing continues to be an area of
disagreement, which could prove a major hurdle.
24
Barclays | Iran Primer

Oman
• The two countries signed a Memorandum of Understanding last year for Iran to supply
Oman with 20 MMcm/d of gas. However, no infrastructure yet exists between the two
countries to transport the gas.

• According to Iranian officials, a pipeline would take at least 2.5 years to complete at a
cost of around $1bn. The two countries also continue to disagree on the gas price.

• Omani domestic production has been static in recent years as domestic demand has
grown. This has limited the amount of feedgas available to Oman’s two LNG export
facilities and exports have fallen in recent years.

• Oman presents a possible opportunity for Iran’s aspirations of seeing its gas enter the
global market. Omani officials have said publically that 50% of any gas imported from
Iran could be liquefied and sent on to global markets.

FIGURE 18
Existing and potential regional importers of Iranian gas volumes (BCM)

Imports Exports

5 Yr 5 Yr Import
Demand CAGR Production CAGR P/L LNG P/L LNG Dependent
Oman 20.5 3% 29 1% 2.1 - - 10.6 Yes
Armenia 2.4* 3% - - 2.4 - - - Yes
UAE 69.3 3% 57.8 2% 18 1.9 - 8 Yes
Turkey 45.6 5% - - 41.1 7.3 - - Yes
Iraq 0.6** -14% 1.3 2% - - - -
Kuwait 20.1 7% 16.4 7% - 3.8 - - Yes
Pakistan 42 0% 42 0% - - - -
Qatar 44.8 8% 177.2 7% - - 20.1 103.4
Source: BP Statistical review 2015, EIA, GIGNL, Barclays Research. Note: Armenia import data is for 2012, Iraq demand
assumes 50% flaring, UAE LNG imports are to Dubai and exports from Abu Dhabi. Import dependency includes export
commitments. P/L refers to pipeline

United Arab Emirates (UAE)

• In 2001, Iran signed a 25-year deal to supply gas from its Salman field to the UAE-based
Crescent Petroleum at Sharjah in the UAE.

• The deal required Iran to send 5.2 Bcm/y of unrefined sour gas to UAE at a price linked
to oil. However, deliveries were delayed as oil prices rose and Iran sought a revision in
the gas pricing formula.

• The project was supposed to have been completed in 2005 but there have been
significant delays in the development of the Salman field. Crescent Petroleum eventually
took NIOC to arbitration in 2009 for the four year delay in supplying gas.

• There has still not been any gas production from Salman, and at this point any eventual
production is more likely to be used for domestic market use.

Kuwait
• The two countries have been in conversations for the construction of a 350-mile
pipeline that would carry Iranian gas to Kuwait.

• An agreement on a volume of 2.5 Bcm/y was tentatively been agreed in 2004 but not on
price.

3 July 2015 25
Barclays | Iran Primer

• Kuwait started importing LNG in 2009 to meet its growing domestic demand, which
peaks during the summer. The country has paid top dollar for its LNG cargoes and could
potentially source cheaper gas from Iran. However, the seasonality of Kuwait’s demand
may continue to support LNG over large gas volume deliveries via a pipeline.

Pakistan
• Originally dubbed the “peace pipeline”, the project envisioned a 2,800 km 40 Bcm/y
pipeline that would transport Iranian gas to Pakistan and onto India.

• However, the complexities of the project, both technical and political, have stalled
development. India has since dropped out of the project but talks between Iran and
Pakistan continue.

• The construction of a 900km pipeline in Iran to the Pakistan border has been completed.
However, Pakistan has struggled to find funding to build its 750km section of pipeline.

• The Iranians were able to negotiate a rich pricing structure with Pakistan, with pricing
linked to Japan’s Crude Cocktail, the landed price of oil into Japan. Given the recent fall in
oil prices, a deal may be more likely to move ahead. However, at $100/bbl oil, the landed
gas price from Iran to Pakistan would $14.50-16/MMBtu, according to the Oxford
Institute For Energy Studies, a price Pakistan may be unwilling to pay.

LNG
• Although Iran has long held aspirations of becoming a major LNG exporter similar to its
neighbor Qatar, development in this area will likely be slow.

• The country largely gave up on its aspirations in 2010 when a fourth round of sanctions
from the UN made it nearly impossible for western companies to provide the required
technology to build liquefaction trains.

• At the time, only the 11 MMt/y Iran LNG plant was under construction. Although
Iranian officials claim the project is 50% complete, it is unlikely that any work has been
done on the liquefaction trains. The project was supposed to come on market in 2014.

• LNG developments are multi-billion dollar investments and Iran will likely need the
support of international oil companies. If sanctions are removed, this could pave the
way for Western expertise to come in and help Iran develop its LNG capabilities.

• However, given that the current oversupply in the LNG market that is expected to persist
at least to 2020, we think international companies may struggle to justify the risk
involved in such a large investment.

• From the commercial side of things, Iranian projects are also likely to struggle finding
offtakers, especially from traditional buyers in Asia where a security of supply is of the
utmost importance.

• A better option for Iran might be using existing liquefaction capacity in neighbouring
countries such as Qatar or Oman. However, such agreements could be difficult to strike
from a pricing standpoint.

3 July 2015 26
Barclays | Iran Primer

Appendix
FIGURE 19 FIGURE 20
Iran - Crude oil demand Iran - Total refined products demand
2.0 mb/d 2.0 mb/d

1.8
1.8
1.6

1.6 1.4

1.2
1.4
1.0

1.2 0.8
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
FIGURE 21 FIGURE 22
With new refineries in place and higher natural gas use in Iran - Jet fuel demand
transport, Iran now imports little gasoline
0.20 mb/d
Iranian Gasoline Consumption
600
2007 rationing program begins
500 0.18

400

0.15
300

200
0.13
100

0
0.10
02 03 04 05 06 07 08 09 10 11 12 13 14 15
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015
Imported Domestic Refinery Output

FIGURE 23 FIGURE 24
Iran – Gasoil demand Iran – Residual fuel oil demand
0.7 mb/d 0.6 mb/d

0.5
0.6

0.4
0.5
0.3
0.4
0.2

0.3
0.1

0.2 0.0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Source for all charts: JODI, Barclays Research

3 July 2015 27
Barclays | Iran Primer
EQUITY RESEARCH
European Oil Services &
Drilling
Mick Pickup
+44 (0)20 3134 6695
mick.pickup@barclays.com
Barclays, UK
Haley Mayers
+44 (0)20 7773 4457
haley.mayers@barclays.com
Barclays, UK
European Integrated Oil
Lydia Rainforth, CFA
+44 (0)20 3134 6669
lydia.rainforth@barclays.com
Barclays, UK
Joshua Stone
+44 (0)20 3134 6694
joshua.stone@barclays.com
Barclays, UK
European Oil & Gas: E&P
James Hosie
+44(0)20 7773 1682
james.hosie@barclays.com
Barclays, UK
Christopher Gordon
+44 (0)20 3134 2676
christopher.gordon@barclays.
com
Barclays, UK
3 July 2015
Equity implications
• Significant investment required
• Terms likely to be more attractive than Iraq
• BP, TOTAL likely to be key beneficiaries
• Impact on European refining should not be overlooked
Iran needs $200 billion of investment in its oil industry according to quotes attributed to
Iranian Oil Minister Bijan Namdar Zanganeh recently (Bloomberg ,2 June). We see it as
unlikely that all of this can come from domestic financing and a significant part could come
from the International Oil Companies (IOCs) over the next decade. The relationship between
the international operators and Iran has not always been easy with asset development being
restricted at different times by nationalisation and sanctions. Given this we expect the IOCs
to require better terms than were offered by Iran previously and we think they are likely to
need better terms than were offered in neighbouring Iraq following the second Gulf War. In
particular we expect the focus to be less on fixed fees and include more exploration
incentives than under the Iraqi terms.
There are currently relatively few details about what the potential contract, known as the
Iran Petroleum Contract (IPC), will look like but the Ministry of Petroleum has set up an
expert team headed by Mehdi Hosseini to revise the current format of Iran’s oil contracts.
According to Mr Hosseini, the committee has “spent more than 19,000 man hours to study
the oil contracts of 33 different countries.” The biggest challenge will be that Iran’s
constitution bans foreign ownership of oil, reflecting the principle that the reservoirs belong
to the people of Iran and so can never be transferred, making traditional production sharing
contracts (PSCs) impossible. However, the ownership of produced oil can be negotiated and
if, as is likely, a key feature of the new IPC is longer terms than the previous buyback
contracts it may be possible that the IOCs will be allowed under accounting rules to book
reserves, although this remains far from certain.
Overall it does appear that the Iran Oil Contracts Revision Committee is working towards
finding an attractive solution for both Iran and the IOCs, which we see as a positive step.
According to the Oil Industry Contracts Revision Forum website:
“The current contracts are based on a combination of principles and rules derived from the
country’s constitution and statute of National Iranian Oil Company. The new system for oil
contracts has been modified and optimized in a way that all the legal obligations will be
considered regarding the national interests, but at the same time the new contracts will be
attractive enough for international companies and contractors.”
The website also quotes Mr Hosseini as saying that the Iran Oil Contracts Revision
Committee has tried to create incentives for giant contractors to come and start
exploration. In the past the contractors who did exploration were generally not allowed to
take part in the production and development phase and given the comments by Mr
Hosseini this looks set to change – another attraction for the IOCs.
The initial plan is to present the contract format in September 2015 at a conference in
London, but this will clearly be heavily dependent on the outcome of the P5+1 discussions
and the removal of sanctions.
The following table shows the contrast between the Buyback contract previously used by
Iran compared to the details that we know for the IPC.
28
Barclays | Iran Primer
FIGURE 1
Comparison of IPC and Previous Buyback Contract
Field Ownership
Crude Output Ownership
Operation
IOC Cost Recovery
Contract length
Contract return structure
Source: Barclays Research, Bloomberg, Reuters, MEES
European refiners are most
likely to see an immediate
impact from any lifting of
sanctions
Mediterranean refiners
Hellenic, Motor Oil and Saras
are set to most benefit from
Iranian crude coming back on
the market
The extent of the benefit will
depend upon how sanctions
are lifted as well as the price
and quality of crude
Refiners may also owe money
to Iran which will test balance
sheets should sanctions be
lifted
3 July 2015
Buyback IPC IPC
NIOC NIOC, but the terms are likely to be set to enable the
companies to book reserves under the SEC rules
NIOC IOC/NIOC partnership
IOC in exploration & development Exploration by IOC
Transfers to NIOC on completion of development Development & production by IOC, NIOC partnership.
Fixed capex ceiling No capex ceiling, includes recovery of exploration
Cost recovery limited to 50% of production
5-7 years (1st generation) 20-30 years
8-12 years (2nd generation)
Flat fee based on % of production and fixed rate of return Likely to closely resemble a production sharing contract
with remuneration based on a R-factor, implying a sliding
scale depending on phase of development and prices
Below we go on to summarise the history and positioning of the European companies – the
ones we see as most likely to go back to work in Iran. What is clear is that the benefit for the
IOCs will not be immediate and for now the materiality is likely to be low. However, where
we see a more immediate impact is on the European refining sector, a sector that has
struggled for feedstock options given the outages in Iran and North Africa in recent years.
European refining may be key beneficiary
Iranian oil sales have suffered under the sanctions, down close to 1mb/d since they were
put in place. In a ‘blue sky’ scenario our commodities team see 500kb/d of additional
Iranian oil on the market as possible by the end of 4Q16 with an increase of 1mb/d closer to
five years away. It is possible, depending on the agreement eventually made, that oil
production from Iran comes onto the market quicker than the market perceives, which is
likely to have a negative impact on the crude price and corresponding positive benefit for
refining margins given a lower cost of own consumption. It will also increase the available
choices of feedstock. Typically Iranian crude tends to be heavier than average and so is
likely to allow better upgrading margins for the European refiners to capture.
FIGURE 2
Estimated proportion of crude slate from Iran pre sanctions by company, %
Iran feedstock slate pre sanction
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Neste Repsol Saras Hellenic Motor Oil
Source: Company data based on 2011 feedstock data, Barclays Research.
The lifting of sanctions is unlikely to be unilaterally positive for the refiners though, as some
will still have payments due to Iran that were unable to be made ahead of the sanctions
29
Barclays | Iran Primer
The International Oil
Companies (IOCs) will be
actively looking to return to
Iran, but in a capex
constrained world, only if the
terms are deemed attractive
BP
Overweight
PT 560p
Royal Dutch Shell A
Royal Dutch Shell B
Overweight
PT 2850p
3 July 2015
being introduced. PressTV in April attributed a statement to the Minister of Economic
Affairs and Finance, Ali Tayyebnia that $7bn of money from crude oil sales had not been
paid. It also highlighted that the head of NIOC, Mohsen Qamsari, suggested that the Greek
Refiners and Royal Dutch Shell owed Iran close to $4bn with the Mehr news agency quoting
the Minister of Petroleum Zandeneh as saying that Royal Dutch Shell’s pending payments
amounted to $2.8bn. Shell itself has said as of end 2014 that it had $2.2bn of payables that
it is unable to settle because of sanctions. We also note that Repsol has said it is unlikely to
pursue its small discovery in Iran but with pre-sanction crude slate making up 10% it is
likely be a greater beneficiary than other IOCs.
IOCS – set to take a tentative approach
In press comments as far back as 2013 (Reuters, 4 Dec 2013) Iranian Oil Minister Bijan
Zanganeh named seven international companies that the country would like to return to
work in the country. These were given as Total, Royal Dutch Shell, ENI, Statoil, BP and U.S.
companies Exxon Mobil and Conoco. Below we outline the history of the companies in Iran
along with our assessment of the likelihood of the groups returning.
BP – long but difficult history in Iran
BP has a long history with Iran and so it should be no surprise that BP CEO Bob Dudley said
the company would be “very much” interested in investing in Iran when sanctions are lifted
at a recent meeting in Vienna, according to Press TV. There will however be some historical
obstacles to overcome. A company named the Anglo-Persian Oil Company (APOC) was
founded in 1908, which in 1935 became the Anglo Iranian Oil Company (AIOC). The leases
under which the AIOC operated appeared, at least to the Iranian Government, unfavourable
and after the assassination of Prime Minister Haj Ali Razmara, and without his opposition,
the government nationalised the oil industry by unanimous vote in April 1951, forming the
National Iranian Oil Company (NIOC), displacing the AIOC. This led to what was known as
the Abadan Crisis, which saw the closure of the Abadan refinery and AIOC’s withdrawal
from Iran. BP was created in 1954 when the AIOC changed its name.
After the 1953 coup, a new pro-Western Prime minister, Fazlollah Zahedi, took control with
the expectation that BP would return to Iran. However, public opinion appears to have been
against BP and a consortium was formed – Iranian Oil Participants (IOP) which was made
up of British Petroleum (40%), Royal Dutch Shell (14%), Gulf Oil (8%), Standard Oil of
California (SoCal, later Chevron), Standard Oil of New Jersey (later Exxon), Standard Oil of
New York (later Mobil), and Texaco. Each held an 8% stake with Compagnie Française des
Petroles (Total) owning 6%. IOP operated and managed oil facilities in Iran on behalf of
NIOC. The consortium agreed to share profits on a 50:50 basis with Iran and this status quo
continuing to operate until the Islamic Revolution in 1979, when all of the company's assets
were “confiscated” without compensation.
This chequered history with Iran and the potential for public opinion to be hostile may
appear to put BP at a disadvantage relative to other IOCs, but there are two potential
reasons it may not. First BP and Iran have worked together on the Rhum field in the UK,
discovered in 1977, which they own 50/50; secondly, we believe the rehabilitation work
that BP has done on the Rumailah field in Iraq is likely to be an attractive example of the
work that BP can do.
Royal Dutch Shell – money to repay
“Iran is a wonderful country with a fantastic resource base, As soon as there is legitimate
opportunity, we will be looking at Iran” Ben van Beurden, CEO (Bloomberg, 4 June)
We expect Shell’s interest in Iran will be primarily, but not exclusively, focused on the natural
gas resources, particularly given its current ambitions. Recently Chris Breeze, Shell’s Oman
30
Barclays | Iran Primer

Country Chairman, was quoted by Gulf News as saying that if sanctions are removed
against Iran next month, there was “potential scope” to do business in Iran, where Shell
could be a “catalyst” for the proposed Iran-Oman gas pipeline project that the two
governments signed an agreement for last year.

The largest near-term impact of lifting the sanctions, however, will be the $2.2bn of
payables. Although the company records these on its balance sheet, they will have a
significant impact on working capital.

Shell stopped all upstream commercial operations in 2010 as a result of the international
sanctions and in 2013 closed the group’s office. Prior to that Shell participated in a number
of projects in the country including the Soroosh-Nowruz oil field which it developed under a
buy-back contract with production starting in 2001, and we believe all costs were recovered
by 2010.

One of the key assets that will likely be of interest to Shell will be Iran’s gas assets. In
November 2004, Shell and Repsol agreed to take on the Persian LNG project with the
National Iranian Gas Export Company (NIGEC) to develop a LNG plant in Iran with an aim to
cater for European and Indian markets. Given the sanctions the project never got off the
ground and it appears that Iran will be able to find alternative uses for the gas and that an
LNG plant is no longer on the horizon. However, there are likely to be significant further
opportunities given Iran’s resource base.

Total – a successful track record

Total "We have a long history of working in Iran, we have developed some projects together. We
Overweight have history with Iran. I know that Total will be favourably received. But first, let's see what
PT EUR56.5 will happen on the political scene." Patrick Pouyanne – Total CEO, World Gas Conference –
June 2015.

Critically Total had previously entered into a $2 billion buyback contract with Iran to develop
phases 2 and 3 of the South Pars oil field in 1997. As the operator, Total held a 40% stake in
the project. The development of phases 2 and 3 of South Pars was completed as far as we
can see without issue and, importantly for Total’s reputation in Iran, came on stream a year
earlier than South Pars 1 despite starting work a year later.

Although the group has worked on oil projects – such as the Sirri and Dorood oil field – in
the past, like Shell, we expect Total’s focus to be on the gas resource base. Prior to
sanctions Total was set to develop phase 11 of the South Pars gas field alongside Petronas,
although this was later awarded to CNPC when work failed to progress because of the
sanctions. Given the experience on South Pars 2 and 3 we see the reaction to Total as likely
to be extremely favourable.

Statoil – Iranian access may be less of a priority

Statoil Statoil was the offshore operator for the development of phases 6, 7 and 8 of the South Pars
Equal Weight gas and condensate field in the Persian Gulf until its completion in 2009, after which the
PT: NOK 180 National Iranian Oil Company (NIOC) took over as formal operator. The group has
previously taken part in exploration and drilling activities in the country on the Anaran block
and also holds a licence for exploration of the Khorramabad block.

In 2004 Statoil was found guilty of corruption by the Norwegian courts in relation to paying
$15.2 million to Horton Investments to influence important political figures in Iran to get oil
contracts in 2002-03 and ordered to pay NOK20m in fines. In October 2006 Statoil reached
a settlement with US authorities for its involvement in the case and agreed that it had paid
bribes to an Iranian public servant in June 2002 and January 2003. A US court ordered the
company to pay $21m in fines.

3 July 2015 31
Barclays | Iran Primer

Although we would not rule out a return to Iran for Statoil, we expect it to be a lower
priority than for some of the other companies mentioned here, particularly given the
development programme in Norway that the company already has.

Eni
Eni “I think by year-end Tehran could propose a new type of contract, more similar to
Underweight international standards and less penalizing for operators,” Eni CEO Claudio Descalzi - Italian
PT, EUR19 newspaper La Repubblica, 4 May 2015.

Eni has operated in Iran for several years as part of four service contracts: South Pars,
Darquain, Dorood and Balal. Given this history and the view that the contract terms may be
more attractive than in the past, we would expect Eni to look to renew activities in the
country once sanctions are lifted.

The group is also likely to benefit in its refining and marketing division – according to its
annual report of 2012 Eni purchased 976kt of crude oil in 2011. As a result, it is likely that
the removal of sanctions would help underlying profitability but there may be some small
contractual arrears outstanding.

3 July 2015 32
Barclays | Iran Primer

ECONOMICS

Sanctions and the economy

Alia Moubayed* The potential removal of sanctions will likely not reverse Iran’s economic fortunes
+44 (0)20 3134 1120 immediately. Supportive factors notwithstanding, political and economic considerations,
alia.moubayed@barclays.com state dominance, a weak business environment and encumbered banks’ balance sheets
Barclays, UK are likely to constrain growth in the short to medium term ahead of critical legislative
and presidential elections in 2016-17.

With a population of around 80mn people, Iran is the 18th-largest economy in the world and
* This author is a member of the
the 10th-largest emerging market (2014, GDP, PPP). But sanctions have weakened growth
Fixed Income, Currencies and
and undermined macroeconomic stability, altered Iran’s trade profile considerably and
Commodities Research
created the conditions for the emergence of a “resistance economy”.

Sanctions crippled Iran’s economy, exacerbated its problems

Sanctions led to contraction of The sanctions imposed since 2010 have isolated and taken a significant toll on Iran’s economy
output and a sharp fall in and led to a sharp contraction in output, soaring unemployment and spiralling inflation25
export proceeds (Figures 1-8). As explained in previous sections, these have restricted the sale of Iran’s
energy exports, leading approximately to a halving of its oil exports proceeds since between
2011 and 2013. They constrained domestic and international financial transactions through
Iran’s banking system, negatively affecting a wide range of export and import activities and
production processes in key manufacturing sectors (notably its car industry). The sanctions
also made it difficult to repatriate much of Iran’s oil export revenues from Asian countries to
which it could still sell its crude. Many foreign firms that were involved in joint ventures with
Iranian firms in manufacturing and construction projects had to withdraw from the Iranian
market. Accordingly, GDP growth slowed in FY 11-12, to 3.8% y/y from an average of 5.4%
GDP contracted by 6.6% in during the previous decade, and the economy contracted 6.6% y/y in FY 12-13 (Figure 1
FY 12-13 and Figure 3) as oil the oil sector shrank by 37.4% y/y, causing oil export proceeds to fall by
43% and investment to shrink 24% y/y in FY 11-12. Despite the diversified economy
(services (52%), oil (18%), manufacturing and mining (13%), agriculture (12%), GDP per
capita fell from USD7511.1 in 2010 to USD4941 in 2013 (Figure 2).

FIGURE 1 FIGURE 2
Years of sanctions have led to a severe contraction of Iran’s Iran’s GDP per capita growth ($PPP) fell sharply in 2012
economy, putting it at a disadvantage compared to its peers
10 % Average GDP growth 12% % y/y

8 10%
8%
6 6%
4 4%
2%
2
0%
0 -2%
-4%
-2
-6%
Mexico
Iran

Korea

Turkey

SA
Nigeria
Egypt

Pakistan

Vietnam
Indonesia

Philippines

-8%
00 02 04 06 08 10 12 14
Avg(2005-10) Avg(2011-14) Iran MENA EM
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

25
Is Iran’s economic isolation on the way out?, Economy Watch, April 9, 2015

3 July 2015 33
Barclays | Iran Primer

FIGURE 3 FIGURE 4
The sanctions took a toll on the Iranian economy, as they hit Car production fell sharply but has been gradually
its hydrocarbon sector hard recovering since sanctions relief at end-2013
% y/y Hydrocarbon GDP % y/y 1.6
10 Non-hydrocarbon GDP 6
1.4
5 Real GDP (RHS)
4 1.2
0
-5 2 1.0
-10 0.8
0
-15 0.6
-2
-20
0.4
-25 -4
0.2
-30
-6
-35 0.0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
-40 -8
2011 2012 2013 2014 Automobiles (in millions)
Source: Haver Analytics, Barclays Research Source: OICA, Barclays Research

FIGURE 5 FIGURE 6
The sharp depreciation of the currency and shortages of FX The severe sanctions brought inflation to historic highs, but
liquidity have been less acute since the JPOA at end-2013 the unification of the exchange rate eased pressures recently
IRR/USD % CPI (General)
40,000
(Avg.) Housing, Water, Electricity, Gas & Other Fuels
60
35,000 Food and Beverages
50 Services
30,000

25,000 40

20,000 30
15,000
20
10,000
10
5,000
Parallel exchange Rate Official
0 0
Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 09 10 11 12 13 14 15
Source: Haver Analytics, Barclays Research, Central Bank of Iran Source: Haver Analytics, Barclays Research

FIGURE 7 FIGURE 8
While unemployment stabilized, youth unemployment has Iran’s youth unemployment is among the highest of its EM
been rising since 2004 and regional peers
% 45 %
30 Total Youth
40
35
25
30
25
20 20
15
10
15
5
0
Iran
Korea

SA
Mexico

Nigeria

MENA

Egypt
Pakistan
Vietnam

10
Indonesia
Turkey
Philippines

04 05 06 07 08 09 10 11 12 13
Total Youth
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 34
Barclays | Iran Primer
The collapse of the IRR eroded
purchasing power as inflation
spiralled and unemployment
rose
The current account surplus
was eroded while the fiscal
surplus turned into deficit
despite fiscal reforms
Sanctions exacerbated
weaknesses from populist
measures under President
Ahmadinejad
Since the JPOA, limited
sanctions relief led to a
rebound in growth which
registered 3% in FY14/15
FIGURE 9
Private consumption, investment drove GDP growth rebound
10%
5%
0%
-5%
-10%
-15%
Mar-11 Dec-11
Private consumption (ppt)
Investment (ppt)
Real GDP (%, y/y)
Source: Haver Analytics, Barclays Research
3 July 2015
The sharp and rapid depreciation of the rial (IRR) contributed to this erosion of purchasing
power and compounded the problem of persistently elevated inflation. The IRR collapse in
2011 also gave rise to a parallel market over the past four years (Figure 5). Inflation
accelerated from its low of 10.8% y/y in FY 09-10 to an average of 34%.8% y/y in FY 13-14,
severely disrupting supply chains and imposing higher operating costs on businesses, while
weighing heavily on private consumption (Figure 6). In parallel, official unemployment rates
rose to 13.2% in FY 12-13, from their low of 10.5% in FY 07-8, while youth unemployment
increased to almost 30% (Figure 7 and Figure 8).
The rapid fall in oil and other non-hydrocarbon-related exports led to a weakening of Iran’s
external and fiscal position. On the external front, exports contracted 33.3% y/y and 4.4%
y/y, respectively, in FY12-13 and FY13-14, bringing Iran’s current account deficit to 3.8%
GDP in FY 14-15, from its high of 10% y/y in FY11-12. Oil exports, thus, had their share of
total exports decline from about 77% in 2005 to around 53% during the same period
(Figure 11). In parallel, and notwithstanding some of the fiscal reforms undertaken to
diversify revenue sources, and the subsidy reforms overall fiscal surpluses were eroded and
the budget swung into deficit in FY12-13, reaching about -1.4% of GDP in FY14-5 down
from 2.8% of GDP in FY11-12 (Figure 13).
The sanctions exacerbated existing problems too, namely the deteriorating monetary and
financial conditions resulting from the widespread extension of liquidity through subsidized
credits and policies that encouraged imports during President Ahmadinejad’s mandate, and
which benefited large conglomerates associated with the military, among other issues.
The Joint Plan of Action: A breather
The relaxation of sanctions after the Joint Plan of Action (JPOA) in November 2013, though
“limited, temporary, targeted, and reversible,”26 had a positive effect on the economy,
notably when the initial six months’ of relief was extended in July and November 2014, and
another seven days until July 7, 2015. The suspension of sanctions on the auto and
petrochemical sector and allowing airlines to buy needed parts led to an increase in
production and exports and gave a small boost to the aviation industry (Figure 10).
Loosened restrictions on insurance also facilitated the increase in oil exports. This slowed
the rate of GDP contraction to 1.9% y/y in FY13-14 and pushed growth into positive
territory, 3% y/y, in FY14-15, according to the Central Bank of Iran.
FIGURE 10
Services and construction contributed to growth of GVA
6
4
2
0
-2
-4
Services (ppt)
-6 Industry & mines (ppt)
Agriculture (ppt)
Sep-12 Jun-13 Mar-14 Dec-14 -8 Hydrocarbon (ppt)
Public consumption (ppt) Real GVA, % y/y
-10
Net exports (ppt)
Mar-12 Dec-12 Sep-13 Jun-14
Source: Haver Analytics, Barclays Research
26
Guidance relating to the Provision of Certain Temporary sanctions relief in order to implement the JPOA reached on
November 24, 2013, between the P5+1 and the Islamic Republic of Iran, State Department.
35
Barclays | Iran Primer

FIGURE 11 FIGURE 12
Iran’s current account surplus shrank following imposition Iran’s CA remains dependent on oil revenues
of sanctions
Hydrocarbon export as % of total % of GDP Non-hydrocarbon exports
100 CAB (% GDP, RHS) 12 (% of total)
67.5
70
90
10 60
80
70 50 43.8
8
60 40 36.8 33.9
50 6 29.4
30 25.1
40 21.7
4 20 14.3 17.2
30
8.5 7.8 10.7 9.3
20 10 6.2
2 0.3
10 0
0 0 SA UAE Kuwait Qatar Bahrain Oman Iraq Iran
05 06 07 08 09 10 11 12 13 14 2000 2013
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 13 FIGURE 14
Iran’s fiscal surplus turned into deficit following imposition …but Iran managed to diversify fiscal resources away from oil
of sanctions…
16 % Gross public debt (% GDP) Non-hydrocarbon fiscal revenues
60 55.9
14 Fiscal balance (% GDP) (% of total)

12 50
43.0
43.7
10 36.1
40
8
30 27.0
6
21.4
19.4 19.5
4 20 16.9
13.9
2 11.7
10.5 8.8 6.7
0 10
0.6 0.8
-2 0
-4 SA UAE Kuwait Qatar Bahrain Oman Iraq Iran
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2000 2013
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 15 FIGURE 16
Despite declining reserves, the slowdown in imports kept Iran’s total and external public debt is comparatively low
reserve coverage elevated
60 months 100 %
months of imports 90
Public debt % GDP Eternal debt % GDP
50 80
2010 Latest
70
40
60
30 50
40
20 30
20
10 10
0
0
Mexico
Iran

Korea

Turkey
SA
Nigeria

MENA
Egypt

Pakistan

Vietnam
Indonesia
Philippines

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 36
Barclays | Iran Primer

Growth was broad based As highlighted in Figure 10, growth in the oil and gas sector shifted from negative to
positive territory as Iran raised its production an average of 100,000 bpd over the past 18
months. The same pattern of output expansion occurred in agriculture, manufacturing,
Return of flows and construction and services. While much of the rebound could be explained by base effects
repatriation of funds helped after a period of contraction, most sectors are now growing at modest levels of 2-5% y/y,
strengthen the IRR and tame except for the construction sector, which is averaging 10% y/y. The gradual return of flows
inflation and the repatriation of about USD7bn of frozen assets after the JPOA signature helped
strengthen the IRR and bring inflation down from its peak of 45% in June 2013 to 16.3% y/y
in May 2015 (Figure 6), a major achievement for the Rouhani administration.

Sanctions altered Iran’s trade profile and patterns

Sanctions led to significant
trade re-direction
Trade and financial sanctions affected Iran’s trade profile drastically. In addition to reducing
significantly the absolute volume of trade with the rest of the world and Iran (Figure 17-Figure
18), they led to major shifts in the country’s import sources and export destinations. Euro area
countries have lost the most, with their share of total Iranian exports shrinking from 25% to
1% in 13 years, while their share of total Iranian imports shrank from 31% to 8%.

China the UAE and Turkey On the export side, the euro area countries were Iran’s largest markets in 2000, while Japan
gained the most accounted for 18% of Iran’s exports, followed by Korea (8%), and China (6%) (Figure 19).
The imposition of sanctions and the system of waiver granted to some countries, including
China, made the latter Iran’s largest export partner, accounting for 27% of the total,
followed by Turkey (11%), India (11%), Japan (7%), and Korea (6%) (Figure 20). Mineral
products, notably oil and gas, top Iran’s exports to China (83 % of total) (Figure 23).
On the imports side (Figure 21 and Figure 22), China also became Iran’s second-largest
import partner with a share of 19%, compared with only 4% in 2000 and 9% in 2010. It was
overtaken by the UAE, which increased its share of Iranian imports to 36% in 2013, from
8% in 2010. Other countries becoming important import partners were India (6%), Korea
(6%), and Turkey (6%). This was in contrast to the pre-sanction era, when Germany topped
Iran’s importers (10%), followed by the UAE (8%), Russia (6%), Italy (6%), and Korea (5%).

Reversal of trade re-direction is The prospects of easing sanctions is unlikely to lead to an immediate reversal of the
unlikely to be immediate as direction of trade, but should go hand in hand with the normalization of trade and financial
Iran turns eastwards transactions, notably given Iran’s strategy of looking eastwards and anchoring its energy
and trade ties with Asia, as recently reconfirmed by the Supreme Leader on July 1. 27

FIGURE 17 FIGURE 18
Exports to GDP remains on a downward path Years of sanctions have reduced Iran’s trade openness
35 % GDP 180 Trade openess (as a % of GDP)
Exports Imports
160 2000 2013
30 140
120
25
100
80
20
60
40
15
20

10 0
Mexico
Iran

Korea
Turkey

SA
Nigeria

Egypt
Pakistan

Vietnam
Indonesia

Philippines

5
93 96 99 02 05 08 11 14
Source: Haver Analytics: Barclays Research Source: Haver Analytics: Barclays Research
27
Iran’s Leader sets growth target at 8%, the Iran Project, July 1, 2015.

3 July 2015 37
Barclays | Iran Primer

FIGURE 19 FIGURE 20
EU was the largest export market for Iranian goods in 2000… … now it is China

2000 2013 Euro

EMEurope
Euro others 1%
11%
25% 20%
others Middle East
34% 5%

EMEurope Turkey
3% 11%
Middle East
2%
Turkey Korea
China 3% China 6%
6% Korea 27% Japan
India 8% 8%
1% Japan India
18% 11%
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 21 FIGURE 22
The EU was the largest import partner for Iran in 2000… …now, China and the Middle East are ahead

2000 others Euro

2013 8%
12% EMEurope
others Euro 6%
31% 31%

China
19%
Middle East
38%
China
EMEurope India
4%
India 2% 7%
2% Middle East
Japan Japan
5% Korea CIS & 9% Korea CIS &
0%
5% Mongolia 6% Mongolia
11% 4%

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 23 FIGURE 24
Iran’s exports to China (2013) are mainly about oil Iran’s imports from China (2013) are diversified
Chemicals others
Others Machinery
and Allied Stone & 12%
1% & Electrical
Industries Glass
Equipment
8% 6%
Plastics and 27%
Rubbers Plastics &
8% Rubbers
7%
Chemicals
Mineral and allied
Products Industries Basic Metals
83% 8% 15%
Manufactur
ed Articles
8% Textiles & Transpor-
Textile tation
Articles equipment
8% 9%
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 38
Barclays | Iran Primer
Reducing vulnerability to
internationally imposed
sanctions became the focus
In 2012, the Supreme Leader
became more involved in
economic policy direction
Increasing domestic
production, focusing on
knowledge-based exports and
reducing the size of
government
President Rouhani’s camp
leans towards more outward-
oriented growth policies
FIGURE 25
Sanctions on the oil and gas sector led its share of total GDP
to shrink to 16%, to the benefit of other sectors
30 % of total
25
20
15
10
5 20
0 10
Source: Haver Analytics: Barclays Research
3 July 2015
Sanctions led to the emergence of the “resistance economy”
The successive rounds of sanctions prompted Supreme Leader Ali Khameni to revive the
notion of a “resistance economy” during summer 2010. In his mind, strengthening Iran's
domestic capabilities by increasing domestic production and knowledge-based exports
could make Iran less vulnerable to international sanctions by relying less on crude oil
exports. This aspiration goes back to Prime Minister Mohammad Mosaddeq, who advanced
the same idea during the 1951-53 British embargo of Iran’s newly nationalized oil company.
Until then, the Supreme Leader had remained at arm’s length, avoiding taking responsibility
for weak economic performance for many years, while he maintained his grip on the state’s
military and security policies and bureaucracy. However, the severe and widespread
deterioration of economic fortunes of the Iranian population as of 2012, due to the
sanctions and legacy of the Ahmadinejad administration, raised a red flag: economic
malaise was becoming a threat to national security and the stability of the regime.
The formalization of the resistance economy doctrine came in a decree issued in February
19, 2014, by the Supreme Leader. The provisions included developing a strong knowledge-
based economy by expanding the Information and Communications Technologies (ICT)
sector; encouraging foreign direct investment for exports (Article 10); reducing domestic
energy consumption (Article 4) including through the implementation of targeted subsidies;
reforming the financial sectors to support private sector growth (Article 9); reducing the size
of the government; increasing tax revenues; and protecting domestic production, notably of
strategic products.28
President’s Rouhani and his team embraced the “Resistance economy doctrine,” but still
chose to put the negotiations with the P5+1 at the heart of their strategy to revive Iran’s
economy, showing a rather more liberal stance that sees growth revival through anchoring
Iran in the world trading system and reducing further the size of government. As legislative
elections loom in February 2016, delivering on better economic outcomes becomes
increasingly more pressing, and clinching a deal that could provide greater confidence in
Iran’s investment outlook is critical for consolidating Rouhani’s political capital, by reversing
financial flows and raising investment levels.
FIGURE 26
Iran economy is more diversified than any of its MENA oil
exporters’ neighbours'
%
Hydrocarbon output (% GDP)
2007/08 2012/13 70
60
50
40
30
0
Iran Bahrain SA Iraq Oman Qatar Kuwait UAE
2000 2013
Source: Haver Analytics: Barclays Research
28
Iran’s economy of resistance: Implications for future sanctions, American Enterprise Institute, November 17, 2014.
39
Barclays | Iran Primer

Sanctions removal would be no panacea

Growth revival will be only Prospects for lifting trade and financial sanctions should in principle lead to a reversal of
gradual Iran’s economic fortunes. Yet we expect this revival to be only gradual, as the dismantling of
sanctions, namely by the US, is unlikely before Q4 15 as explained in previous sections.
Moreover, lower oil prices, constrained fiscal space, and structural bottlenecks (the financial
sector, business climate, etc.) will likely dampen the extent of the anticipated rebound.
Given this high level of uncertainty and the upcoming domestic elections, which could
complicate economic policy decision-making further, we expect the current leadership
under President Rouhani to continue focusing on four levers which, in our view, will
determine the speed at which the economy will react to a lifting of sanctions:

1- Unlocking resource flows

Returns of flows will be gradual
Crude exports to likely increase
The repatriation of frozen
assets would pose a policy
dilemma
The reinstatement of resource flows to the Iranian economy is most critical for the
authorities. It will likely be slow, however, in line with the gradual phase-out of sanctions, as
will, consequently, the country’s ability to ramp up its oil production and exports. We expect
crude oil production and condensates to increase as outlined in our energy section (Figure
27). This should help raise Iran’s hydrocarbon growth from 4.75% y/y in FY14-15 to 5.3%
y/y and 9.4 % y/y in FY 15-16 and 2016-17, respectively. At an average oil price of USD60-
70pb during this period, export revenues should not exceed USD65bn. In parallel, we expect
a gradual shift towards more value-added, refined product exports, similarly to what has
occurred in other Middle East oil exporters (Saudi Arabia and the UAE). The disbursement of
the frozen assets could also add USD30-50bn in FY 16-17 of the estimated USD120bn
stock. The uncertainty about the snapback sanctions mechanism will likely make officials
wary of keeping these funds abroad and might prompt them to expand their strategic
investment abroad or claw back some of it into in the oil and gas sector. However, the
repatriation of these funds could undermine the long-time efforts of Iran’s central bank to
tame inflation and cause an appreciation of IRR that could harm efforts to encourage
export-oriented industries.

Reversing the sharp decline in
investment is a policy priority
2- Reviving investment
Reversing the sharp decline in investment over the past years will be also essential to
meeting Iran’s unemployment challenge (Figure 28). This has been a major focus of
President Rouhani’s administration since he took office, through the pursuit of an
aggressive diversification and growth strategy aimed at expanding investment in high value

FIGURE 27 FIGURE 28
Iran’s gradual increase in oil production and exports Reviving investment will be the focus of the authorities
4.5 10 % y/y % GDP 41
4.0
5 39
3.5
0 37
3.0
-5 35
2.5
-10 33
2.0
-15 31
1.5
-20 29
1.0
-25 27
Q315f

Q117f
Q102

Q303

Q105

Q306

Q108

Q309

Q111

Q312

Q114

GFCF (% y/y) Investment/GDP (%, RHS)

-30 25
Crude production (mbpd) Crude exports (mbpd) 2010 2011 2012 2013 2014
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 40
Barclays | Iran Primer
Two laws are setting the
framework for expanding
private investment and
removing obstacles to
investing
Iran compares well to other
EM peers on human
development indicators
The leadership focus is on
raising productivity
3 July 2015
chain production, aimed at reducing the reliance on the oil sector and the size of
government. The latter, as discussed below, remains a major impediment to growth, due
largely to state dominance in key sectors that have undermined the efficiency of
government-led stimulus packages. Recent legislative and regulatory initiatives have been
taken to that effect, and we expect them to bear fruit in a more effective manner as
sanctions are gradually lifted.
Among these, the Law for the Continuous Improvement of the Business Climate calls for the
complete overhaul of all business-related regulations. The law, which had already been
passed by the Iranian Parliament (The Majles), was not implemented by the outgoing
administration and has more chances of being implemented more effectively over the
coming years. In April, the Majles also adopted The Law on Removing Obstacles to
Competitive Production, which reconfirms the commitment to privatizing the mining industry
through public auctions; allows public-sector entities to source their electricity, water and
other utility services from private companies; and introduces tax and other incentives to
companies operating in export-oriented sectors such as automotive, petrochemicals and
foodstuffs, as well as international shipping lines, tour operators and hotels. More recently,
the president mandated the relevant authorities to simplify procedures for customs and
licenses, with the aim of moving Iran up the World Bank’s Ease of Doing Business Index
where Iran currently ranks 130th place out of 189 in 2015 (Figure 35).
3- Harnessing Iran’s strong fundamentals
President Rouhani’s administration will also focus on leveraging Iran’s greatest strengths, its
natural resources and its human capital. Here, we discuss the latter only as natural
resources are covered in the energy section of the report. Iran is the second-largest and
most populous economy in the world. Despite its falling population growth rates (see
Appendix 2 for a snapshot of key demographic indicators), its population according to UN
population projections, is expected to reach around 90mn people in 2030 and 100mn by
2050, and will likely be similar in size to Turkey in 15 years (Figure 29). However, note that
Iran is facing falling fertility rates which will likely remain below replacement rates for the
next decade, according to the United Nations. Compared with its neighbours in the MENA
region, Iran’s population growth is projected to remain close to 1.0% per annum until 2020,
lower than the projected average of 2% for the Middle East29.
Besides the size and dynamics of its population, the quality of human development in Iran
compares well to its other EM peers (Figure 30), including in terms of literacy (Figure 32),
Secondary and tertiary enrolment (Figure 33 and 34). Iran’s education system, also
provides a solid foundation in Mathematics and Sciences and a network of research and
development (Figure 31). These contribute to the ongoing diversification and
industrialisation efforts the country and its leadership will be increasingly focused on, as the
drive to implement the “resistance economy” paradigm intensifies, notably ahead of critical
legislative and parliamentary elections..
The administration’s emphasis on expanding investment in the Information and
Communication Technologies discussed above is driven by the need to achieve
improvements in productivity (where Iran has lagged behind) to reverse the fall in per capita
income witnessed recently, including via the adoption of new technologies, and gains from
trade, by re-integrating Iran into the global economy. Investments in education and training
are also a key priority, as labour force participation remains relatively low compared with
other EM peers (see Appendix 2, Figure 5); this investment should also help the productivity
of the workforce.
29
Iran’s political, demographic and economic vulnerabilities, Rand corporation, 2008
41
Barclays | Iran Primer

FIGURE 29 FIGURE 30
Iran’s population could reach almost 100mn by 2050, similar Iran’s human development indicators compare well to its EM
to Turkey’s and Vietnam’s peers
6 % Population growth rates(%) 8
Vietnam
5 Avg. 80s
Nigeria

(2005-2013)
Avg. since 2010 7
Indonesia
4 2030
6
Korea Philippines
3
Turkey
5

GDP PPP growth

2 SA Egypt
4 Pakistan
1
Iran
0 3 Mexico
Mexico
Iran

Iraq
Korea

Turkey

SA

Nigeria
Egypt

Pakistan
Vietnam

Indonesia

Philippines 2
0 50 100 150
HDI rank
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 31 FIGURE 32
Iran ranks relatively well compared with its peers on education Literacy rates in Iran have improved
Quality of the
education 120 Adult literacy rate (% of people ages 15 & Above)
system
5 100 Earliest (1975-92)
4 Quality of
Latest (2005-13)
Extent of staff 3 math and 80
training science
2
education 60
1
0 40
Availability of
Quality of 20
research and
management
training
schools
services 0
Egypt

Iran

SA
MENA (avg)

Vietnam
Pakistan

Indonesia

Philippines

Korea
Turkey
Nigeria

Internet
Iran Mexico
access in SA
schools Turkey
Source: World Economic Forum, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 33 FIGURE 34
Secondary enrollment ratios are elevated .. and tertiary school enrolment is moderately high
100 Secondary school enrollment (% gross) 100 Tertiary school enrollment (% gross)
Earliest (1970-79)
90 90 Earliest (1970-79) Latest (2011-13)
Latest (2011-13)
80 80
70 70
60 60
50 50
40
40
30
30
20
20
10
10
0
0
MENA…

Egypt
Mexico

Indonesia

Nigeria

Korea
Pakistan

Philippines

Iran
Tunisia

SA

Turkey
Vietnam

MENA (avg)
Philippines

Egypt
Nigeria

Indonesia

Mexico

Korea
Pakistan

Turkey

Iran

Tunisia

SA

Vietnam

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 42
Barclays | Iran Primer

4- Addressing key structural impediments to growth

Beyond the potential effect from boosting oil production and exports, and using the freed
assets for an investment stimulus, private investment (whether domestic or foreign) will
likely remain constrained, in the short to medium term. Besides the uncertainty surrounding
sanctions removal, there are structural factors that for long have been barriers to private
investment and, consequently, a major drag on competitiveness, and have put Iran in a less
favourable position than other EM peers (Figure 35 and Figure 36).

Generally weak business environment

Doing business and Iran’s business environment scores have lagged many of its regional and other EM peers. Iran
competitiveness indicator lags ranks just between Pakistan and Yemen in the latest 2015 Doing Business indicators (Figure 35),
behind EM peers while it ranks almost equal to Algeria in terms of the WEF Global Competitiveness Index (Figure
36). While improvements have been registered over the past four year in terms of reducing the
time for starting a new business (Figure 37) and other aspects (trading across borders,
protecting minorities…), accessing credit remains a major concern for businesses (Figure 38 and
Figure 40). As discussed, the administration will press on with the implementation of the law on
removing obstacles to competitive production.

An oversized public (and semi-public) sector

Past efforts at downsizing
government were ineffective
Boundaries between private
and public are blurred
Government ineffectiveness and poor regulatory quality is another major impediment to
doing business, as a result of the large size of government and the dominance of parastatal
institutions closely connected with higher political spheres. Despite past efforts aimed at
downsizing the government, the public sector remains dominant in Iran’s economy, which
has created challenges for private (notably foreign) companies operating there. This was the
case even before sanctions were ramped up in 2010 and reflects the institutional
transformations in Iran over the past few decades that allowed for a gradual shift of
economic ownership away from the state. This happened for a variety of parastatal
organizations, including banks, cooperatives, pension funds, foundations, and military-
linked contractors, as well as fast-growing conglomerates, the Bonyads (charitable trusts),
and other organizations such as the Iranian Revolutionary Guard Corps (IRGC) and religious
foundations. As such, the line between the private and the public sector in many major
industries is blurred, as is the case in several infrastructure-related sectors.

FIGURE 35 FIGURE 36
Iran scores poorly compared with EM peer on the Ease of … and lags EM peers in terms of the Global Competitiveness
Doing Business… Indicators
Doing business score (2015) GCI score (2015)
Libya Yemen
Nigeria Pakistan
Iraq Nigeria
Algeria Libya
Yemen Egypt
Iran Iran
Pakistan Algeria
Indonesia Vietnam
Egypt Mexico
Philippines Philippines
Kuwait
Vietnam Oman
Oman Turkey
Turkey Bahrain
Bahrain Kuwait
Qatar Indonesia
SA Korea
Mexico SA
UAE Qatar
Korea UAE
0 20 40 60 80 0 1 2 3 4 5 6
Source: Haver Analytics, Barclays Research Source: World Economic Forum, Barclays Research

3 July 2015 43
Barclays | Iran Primer

FIGURE 37 FIGURE 38
Recent gains have been made to reduce the time needed to Improvements have been registered on all aspects of doing
start a business business, except for accessing credit
days Time to start a new business (days) 100 Iran: Score by components
80
80
2007 2014
70 2007 2014
60
60
50 40
40 20
30
0
20

Trading Across Borders

Getting Credit

Registering Property

Construction Permits

Paying Taxes

Starting a Business
Protecting Minority
Resolving Insolvency

Enforcing Contracts

Getting Electricity
10

Dealing with
Investors
0
Mexico

Yemen
UAE
Oman

Iran

Iraq
Korea
Turkey

Algeria
SA

Nigeria
Kuwait
Egypt

Bahrain

Pakistan
Qatar

Vietnam

Indonesia
Philippines
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 39 FIGURE 40
Iran’s competitive environment is the weakest among its Access to finance tops the problematic issues for doing
regional peers on almost all fronts business in Iran
Starting a Access to financing
Business Policy instability
100 Dealing with
Resolving Inflation
80 Construction
Insolvency Inefficient government bureaucracy
Permits
60 Inadequate supply of infrastructure
Corruption
Enforcing 40 Getting
Contracts Electricity
Foreign currency regulations
20 Restrictive labor regulations
0 Poor work ethic in national labor…
Trading Inadequately educated workforce
Registering
Across Tax rates
Property
Borders Tax regulations
Insufficient capacity to innovate
Getting Iran Crime and theft
Paying Taxes
Credit Turkey Government instability/coups
Protecting SA Poor public health % of responses
Minority UAE
I
0 5 10 15 20
Source: World Bank, Haver Analytics, World Economic Forum, Barclays Research Source: World Economic Forum, Haver Analytics, Barclays Research

FIGURE 41 FIGURE 42
The effectiveness of government remains very low and has The burden of government regulations and quality of the
worsened over the past 15 years regulatory framework are the weakest compared with peers
90 Government effectiveness (% tile) 80 Regulatory quality (% tile)
80 1996 2013 70 1996 2013
70
60
60
50
50
40
40
30 30

20 20
10 10
0 0
SA
Indonesia
Iran

Tunisia

Malaysia

UAE
Egypt

Turkey
Morocco

SA
Indonesia
Iran

Tunisia

Malaysia

UAE
Egypt

Turkey
Morocco

Source: World Bank, Haver Analytics, Barclays Research Source: World Bank, Haver Analytics, Barclays Research

3 July 2015 44
Barclays | Iran Primer

Financial system remains dominated by the state, poor asset quality

Iran has the largest Islamic
banking system in the world
Directed credit policies
undermined banks’ asset
quality
Iran has the largest Islamic banking sector in the world, with assets around USD482bn
according to Dubai government data from 2014. That is more than in Saudi Arabia,
Malaysia and the UAE combined. The sector remains, however, heavily influenced by the
government. During the president Ahmadinejad years, government policies led big state-
owned banks to diversify on a large scale into non-banking activities such as real estate at
the expense of lending to businesses, aggravating the funding shortage. Moreover, a large
number of “credit and financial institutions” sprung up, forming a shadow banking system
that operated outside the supervision of the CBI, with many of its members affiliated with
the IRGC. CBI Governor Valiollah Seif has committed himself to bringing them under the
bank’s purview or shutting them down. 30 Slower growth and loose credit policies led to
deteriorating asset quality. Reported nonperforming loans (NPLs) peaked at 17% of total
loans in 2012-13, largely mirroring external trade and cash flow problems in the corporate
sector, particularly state-owned enterprises.

Infrastructure underperforms in logistics, dominated by parastatals

Quality of infrastructure lags
regional peers, notably in ports
and logistics
Lack of competition and
regulatory quality in telecoms
and aviation
Another element that could be constraining growth in the short term is the state of Iran’s
infrastructure and the quality of governance there. According to the World Economic Forum,
Iran’s quality of overall infrastructure scores only 4, poorer than Turkey and Saudi Arabia and
any other of its neighbours (Figure 45). While it has a relatively developed system of railroads
and electricity networks, it lags in terms of transport, road and port infrastructure. This is
corroborated by Iran’s very low ranking in the logistics performance index (Figure 46), as it
ranked 112 in 2012 with an overall LPI score of 2.5 ranks, poorer than any of its EM peers. As
for information and telecommunication technologies, while Iran’s connectivity has improved
over the past decade, much more is needed to bring it to the level of its peers (Figure 49-
Figure 50). However, in many infrastructure sectors, the lack of competition and poor
regulatory quality is likely to hamper the pace of growth and modernisation. Despite
attempts at reducing state dominance in many of those sectors, the privatizations held
during recent administrations, notably during President Ahmedinajjad’s, benefited mainly
state-affiliated companies.

FIGURE 43 FIGURE 44
Iran scores poorly on the quality of its financial sector Directed credit policies raised credit to GDP levels
considerably
Availability of
financial % Credit to GDP (%)
services
6 200
5
2010 2013
Regulation of 4 Affordability 150
securities 3 of financial
exchanges 2 services
1 100
0

50
Financing
Soundness of
through local
banks
equity market 0
Philippines

Kuwait
SA
Indonesia
Pakistan

Bahrain

Iran
UAE

Korea
Egypt

Turkey
Oman

Qatar

Vietnam
Mexico
Nigeria

Iran
Ease of
access to
SA
loans Turkey
Source: World Economic Forum, Barclays Research Source: Haver Analytics, Barclays Research

30
Hope at last for Iranian banks, The National, April 7, 2015

3 July 2015 45
Barclays | Iran Primer

FIGURE 45 FIGURE 46
The quality of Iran’s infrastructure sector lags its peers… … notably on logistics
Quality of
overall 4 Logistics performance index
infrastructure (1=low to 5=high)
8

6 2007 Latest
Quality of
Quality of
electricity 4 roads
supply
2 3
0

Quality of air Quality of

transport railroad
infrastructure infrastructure
2

Iran

Korea
SA
Nigeria

Mexico
Egypt
Pakistan

Vietnam
Indonesia

Turkey
Philippines
Quality of Iran
port SA
infrastructure Turkey
Source: World Economic Forum, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 47 FIGURE 48
Quality of electricity supply has room for improvement Access to improved water resources is in line with peers
40 % Electric power transmission and 120 Access to improved water resources (% of population)
distribution losses (% of output)
35 110 % 2000 Latest
30 2000 Latest 100
25 90
20 80
15 70
10 60
5 50
0 40
Mexico
Iran

Korea
Turkey

SA
Nigeria

Egypt
Pakistan

Vietnam
Indonesia

Philippines

Mexico

Iran

Korea

Turkey
SA
Nigeria

Egypt
Pakistan

Vietnam
Indonesia

Philippines

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 49 FIGURE 50
Telecom penetration in Iran is lower than for its peers… …and so is internet
200 90
Mobile Phone Subscribers Internet Users
180 (per 100 People) (per 100 People)
80
160
2000 Latest 70 2000 Latest
140
60
120
50
100
80 40
60 30
40 20
20 10
0 0
Iran

Korea

SA
Nigeria

Mexico

Egypt
Pakistan

Vietnam
Indonesia
Turkey

Philippines

Mexico
Iran

Korea
Turkey

SA
Nigeria

Egypt
Pakistan

Vietnam
Indonesia

Philippines

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 46
Barclays | Iran Primer

FIGURE 51
Iran: Select macroeconomic indicators
FY 10-11 FY 11-12 FY 12-13 FY 13-14 FY14-15 FY 15-16f FY 16-17f

National Accounts and population

Real GDP (% y/y) 6.6 3.7 -6.6 -1.9 3.0 4.6 5.8
Hydrocarbon GDP (% y/y) 4.2 -1.0 -37.2 -8.9 4.75 5.3 9.4
Non-hydrocarbon GDP (% y/y) 7.1 5,4 -0.7 -1.1 2.78 3,4 5,8
Nominal GDP ($ bn) 463.9 564.4 418.9 380.3 404.1 421.0 451.6
GDP per capita ($ k) 6241.3 7511.1 5512.0 4941.0 5183.3 4982.7 5645.0
Oil production (mbpd)* 3.54 3.62 3.73 3.48 3.45 3.67 4.07
Population (mns) 74.3 75.2 76.0 77.0 78.0 79.0 80.0
Prices and Exchange rates
CPI (% y/y, avge) 10.2 20.6 26.0 39.3 15.5 16.7 17.3
IRR/US$, e.o.p 10353.0 11165.0 12260.0 24774.0 27138.0 25748.6 26234.6
External Sector
CAB (% GDP) 5.9 9.9 4.0 5.5 3.8 0.8 1.2
Exports 112.8 145.8 97.3 93.0 112.5 125.6 132.8
o/w, hydrocarbon export as % of total 78.3 76.8 59.9 56.2 53.4 48.9 52.6
Total external Debt (USD bn) 22.8 19.2 7.7 6.7 6.1 7.3 7.8
Total external Debt (% GDP) 4.9 3.4 1.8 1.7 1.5 1.7 1.7
Gross official reserves (USD bn) 80.0 92.2 104.4 107.7 110.1 123.5 135.6
Public Finance
Overall fiscal balance (% GDP) 2.7 -0.2 -0.3 -0.9 -1.4 -2.7 -2.3
Gross Public debt (% GDP) 11.6 11.4 11.2 11.1 12.2 11.9 11.9
Source: IMF, Central Bank of Iran, Haver Analytics, Barclays Research. * includes both oil and condensates

3 July 2015 47
Barclays | Iran Primer
CREDIT RESEARCH
ECONOMICS RESEARCH
Alia Moubayed*
+44 (0)20 3134 1120
alia.moubayed@barclays.com
Barclays, UK
CREDIT RESEARCH
Andreas Kolbe*
+44 (0)20 3134 3134
andreas.kolbe@barclays.com
Barclays, UK
Walid Bellaha*
+44 (0) 20 7773 0098
walid.bellaha@barclays.com
Barclays, UK
* These authors are members of
the Fixed Income, Currencies and
Commodities Research
The opening of the Iranian
market for business will benefit
trade with the UAE and Turkey
UAE corporates well positioned
to serve the Iranian market
Access to Iranian gas could
help alleviate the import needs
of GCC countries, notably
Oman
Gas exports from Iran could
put pressure on spot prices, a
negative for LNG exporters
3 July 2015
MENA credit: Mixed impact
The implications for MENA credit of a nuclear deal with Iran are mixed. The re-
emergence of Iran as a large oil exporter may limit upside to oil prices and weaken
financial buffers that support local GCC credit demand. However, oil-importers should
benefit. The potential for increased trade with Iran and implications for geopolitical risk
premia will depend on how Iran’s foreign policy stance evolves after a deal. We provide a
framework for analysis of these channels.
A possible nuclear agreement with Iran that leads to the lifting of economic and financial
sanctions could affect the MENA credit space through the oil price, trade and geopolitical risk
premium channels. Below we set out a framework for analysis.
The oil price channel: A potential return of Iranian oil to the market will likely add to the
perceived downward pressures on oil prices, or at least influence expectations of the degree
to which prices might rebound. This could weigh on MENA oil exporters, from the GCC to
Iraq, as the erosion of CA surpluses in the GCC and lower levels of government deposits risk
undermining the strong local support that has anchored GCC credit spreads over the past
few years (see GCC Macro and Credit Update: Reassessing safe havens). We update our oil
price vulnerability heatmap below. Conversely, a sustained period of lower oil prices will only
be beneficial for MENA’s oil importers that are faced with the challenges of containing their
large twin deficits amid a volatile political backdrop (ie, Tunisia, Egypt, Lebanon).
The trade channel: Iran’s trade with its neighbours has expanded significantly over the past
five years, notably with the UAE, Turkey and Iraq. In particular, Dubai’s trade links with
Tehran’s Bazaar date back decades. These ties were solidified over the years through a large
and expanding Iranian expat population resident in the UAE (more than 400-500,000
Iranians live in the UAE) and due to the delocalisation of certain global multinationals to
operate from the UAE (notably Dubai) to cover the Iranian market. With growth prospects in
Iran looking brighter, trade and investment linkages between Iran and the UAE could expand
further, but this is likely to happen only slowly, in line with the gradual phasing out of
sanctions. In addition, several UAE corporates (both private and public) and banks in the
medium term might be considering entry into Iran’s large market, notably in banking,
telecoms and possibly other services. UAE corporates may at the same time benefit from
potential additional demand from Iran in sectors such as real estate and logistics. The latter
seems well positioned to provide Iran businesses with a highly developed infrastructure at
close proximity and access to a global network of trade (eg, DP World’s Jebel Ali port, Dubai
airports and airlines).
The gas trade channel: A number of GCC countries (namely Kuwait, Oman, UAE, but also
Turkey) are currently witnessing a steep increase in gas demand, specifically for power
generation, at a time when domestic production is either not keeping pace or stagnating.
Developing and accessing Iranian gas in the short to medium term should help alleviate
their gas import needs in a more efficient and less costly way. This could also open avenues
for greater regional cooperation on energy security issues. In particular, this could be
positive for Oman if differences on delivery prices of Iranian pipeline gas are resolved,
allowing Oman to increase its LNG exports, which have recently been declining. Conversely,
an emergence of gas exports from Iran (Iran holds one of the world largest gas reserves
fields, shared with Qatar) could place further downward pressure on an increasingly over-
supplied global gas market. In turn, this would put pressure on spot prices and also on new
long-term contract prices, a negative for existing global LNG exporters. The threat, however,
likely remains years from materializing, given Iran’s high gas domestic consumption relative
48
Barclays | Iran Primer

to its production and its limited exporting infrastructure (eg, the absence of LNG facilities
and pipelines limited to regional neighbours).

Lower risk in MENA function of
Iran’s foreign policy stance and
readiness of neighbours to
cooperate
A no deal scenario would raise
risk premiums for MENA
issuers
The geopolitical risk channel: Prospects for further cooperation after a nuclear
agreement with Iran are very uncertain and will depend to a large extent on two things, in
our view: 1) whether Iran will embrace its announced shift in foreign policy and engage
with its regional neighbours and the rest of the international community to address
conflicts spreading across the region (from Iraq to Syria and Yemen); and 2) the readiness
of Iran’s regional rivals – notably Saudi Arabia – to engage in constructive dialogue to
establish a workable security cooperation arrangement for the region through which
differences and conflicts can be managed and resolved. A no-deal scenario would be the
worst case, as it would raise geopolitical risk significantly and could drag the whole region
into a long cycle of violence and conflict. In such a scenario, we think the geopolitical risk
premium could increase for issuers across the MENA region, notwithstanding the likely
rise in geopolitical premium for oil, which could reflect positively on GCC oil producers’
sovereign and banks’ balance sheets.

FIGURE 1
Risk assessment matrix/framework for MENA credit
Nuclear deal agreed Nuclear deal Not agreed

Shift in Iran’s foreign policy No shift in Iran’s foreign policy stance

Trade and Geopolitical Trade and Geopolitical Trade and Geopolitical

Oil effect investment risk Oil effect investment risk Oil effect investment risk
Iraq Negative Positive Positive Negative Negative Negative Negative Negative Negative
Lebanon Positive Positive Positive Negative Negative Negative Negative Negative Negative
UAE Negative Positive Positive Negative Positive Negative Positive Negative Negative
Oman Negative Positive Positive Negative Positive Negative Positive Negative Negative
Qatar Negative Neutral Positive Negative Neutral Negative Positive Negative Negative
Kuwait Negative Positive Positive Negative Neutral Negative Positive Negative Negative
Saudi Arabia Negative Neutral Positive Negative Negative Negative Positive Negative Negative
Bahrain Negative Neutral Positive Negative Negative Negative Positive Negative Negative
Source: Barclays Research

3 July 2015 49
Barclays | Iran Primer

FIGURE 2
Oil price vulnerability heatmap
Saudi
Iran UAE Qatar Kuwait Bahrain Oman
Arabia
Macroeconomic performance (darker colour= greater impact from lower oil prices)
Real GDP (5 yr average, % y/y) 1.0 5.3 4.0 9.7 3.3 4.0 4.5
Hydrocarbon growth (5 yr average, % y/y) -10.8 3.4 4.6 8.8 6.3 3.1 2.6
Non-hydrocarbon growth (5 yr average, % y/y) 2.8 6.8 3.7 10.4 4.0 4.4 6.6
Hydrocarbon GDP (% of GDP) 33.5 47.0 38.9 54.4 52.9 20.9 39.2
Public Investment (% of total) 27.6 33.8 11.5 n.a. n.a. 27.7 n.a.
Public Investment (% of GDP) 1.5 7.6 2.8 n.a. n.a. 7.4 n.a.
Public Consumption (% of total) 15.2 42.8 12.1 49.8 41.2 29.3 38.3
Public Consumption (% of GDP) 8.7 23.8 7.8 27.1 19.5 17.0 22.2
External vulnerabilities (darker colour= greater impact from lower oil prices)
CAB (% GDP) (average 2010-2014) 6.8 18.1 12.8 27.6 38.9 6.9 8.2
CAB+ net FDI (% of GDP) 7.4 17.3 17.8 26.4 43.5 7.6 6.9
Oil and gas exports (% of total) 69.7 85.7 53.3 80.4 94.3 73.1 66.1
Oil exports (% of total) 45.2 85.6 46.9 23.7 94.3 73.1 58.4
Net export of oil (% of GDP) 12.7 43.2 26.9 16.0 62.1 20.7 42.2
Net export of energy (% of GDP) 13.3 42.5 51.2 62.4 57.1 14.7 42.7
Imports of G&S/Exports of G&S (%) 73.6 59.3 78.9 39.8 39.0 62.8 70.6
Remittances/Exports of G&S (%) 0.3 8.8 4.5 7.5 -13.7 8.9 15.4
External BE oil price (2015f) 42.7 59.2 41.7 56.9 38.7 56.7 86.8
Gross FX reserves ($bn) 126.5 731.9 78.4 42.7 32.1 5.4 16.0
Estiamted size of Sovereign Wealth Funds (SWFs) ($ bn) 120** 0.0 463.1 204.1 449.4 12.8 16.3
External debt (% of GDP) 1.6 11.7 45.3 78.5 19.3 137.8 11.1
Fiscal vulnerabilities (darker colours= greater impact form lower oil prices)
Fiscal balance (% of GDP) (average 2010-2014) 0.1 10.2 11.5 10.7 32.9 -3.4 6.3
Primary fiscal balance (% of GDP) -1.3 4.8 8.6 12.1 17.7 -3.6 1.7
Oil and gas fiscal revenues (% of total) 44.1 89.5 63.9 56.3 92.1 88.3 86.1
Current Spending (% of total spending) 85.6 68.0 78.4 88.5 90.8 85.8 63.1
Change in total spending (pp of GDP, 2014 vs (avge 2000-20 -5.2 6.5 6.8 4.7 7.8 5.5 11.5
Expected increase in spending in 2015 (pp GDP) -0.5 5.5 -0.7 -1.0 2.0 0.0 1.6
Estimated fiscal BE oil price (2015f) (USD/bbl) 107.4 91.2 73.8 64.1 49.4 99.8 95.9
Gross public debt (% of GDP) 10.6 1.6 12.1 30.6 3.4 45.5 5.8
Banking sector vulnerabilities (darker colour= greater impact from lower oil prices)
Loan to Deposit ratio, L/D (%) 107.1 80.2 96.0 104.9 101.9 64.2* 97.4
Liquid assets (% of total assets) n.a. 21.5 12.0 50.9 29.5 24.3* n.a.
Liquid assets to short-term liabilities (%) n.a. 33.1 42.0 33.6 39.5 33.5* n.a.
NPLs (%) 17.0 1.3 7.1 1.9 3.5 3.8* 2.0
Provisions (% NPLs) 39.4 157.4 102.1 96.8 139.4 55.2* 138.0
Capital Adequacy Ratio (CAR , %) 8.6 17.9 18.3 16.0 18.3 18.3* 16.2
Loans to property and construction sectors (% of total) n.a. 6.8 23.0 28.3 30.7 28.6* n.a.
Share of governement and public sector deposits (% of total) 15.1 23.3 28.5 40.8 12.8 12.4 34.1
Claims on private sector (% y/y, average 2013-14) 19.3 13.9 11.1 12.6 6.8 3.9 9.2

Note: * In Bahrain, data is for conventional retail banks only. ** Estimated size of frozen assets abroad.
Source: Haver Analytics, National Central banks, IMF, World Bank, Sovereign Wealth Institute, Barclays Research

3 July 2015 50
Barclays | Iran Primer

APPENDIX 1 – LIST OF KEY SANCTIONS AGAINST IRAN

FIGURE 1
Key US sanctions against Iran

Name Date Description

Executive Orders 12170, 12205, 12211 Nov-79 to • Blocked Iranian property and prohibited some trade, including imports of all goods
Apr-80 from Iran
• Bans lifted under Algiers Accords (1981)
State Sponsor of Terror designation Jan-84 • Banned arms sales and foreign assistance to Iran
Executive Order 12613 Oct-87 • Banned imports of all goods from Iran, including oil
Iran-Iraq Arms Non-Proliferation Act Oct-92 • Sanctioned transfer of goods or technology related to WMD and some conventional
arms
Executive Order 12938 Nov-94 • Imposed export controls on sensitive WMD technology
Executive Orders 12957, 12959 Mar to • Prohibited all US investment in Iran
May-95
• Banned exports of US goods to Iran
Iran and Libya Sanctions Act Aug-96 • Sanctioned companies that invest more than $20 million in Iranian oil sector
Executive Order 13059 Aug-97 • Expanded ban on exports to Iran
Iran Non-proliferation Act Mar-00 • Sanctioned entities providing goods related to WMD or ballistic missiles
Executive Order 13224 Sep-01 • Blocked property of terrorists and their financial supporters
Executive Order 13382 Jun-05 • Blocked property of WMD proliferators
Iran Freedom Support Act Sep-06 • Sanctioned involvement in Iranian development of WMD/advanced conventional
weapons
• Codified US trade ban
Executive Order 13438 Jul-07 • Blocked property of those involved in destabilizing Iraq
Comprehensive Iran Sanctions, Jul-10 • Sanctioned sale to Iran of gasoline or supporting domestic gasoline industry
Accountability & Divestment Act
• Sanctioned foreign financial institutions connected with WMD or terrorism
Executive Order 13553 Sep-10 • Blocked property of those involved in human rights abuses in Iran
Executive Order 13572 Apr-11 • Blocked property of those involved in human rights abuses in Syria, including Iranians
Executive Order 13590 Nov-11 • Sanctioned contributing to maintenance or expansion of Iranian petroleum resources
Sect. 311 Money Laundering Nov-11 • Designated Iranian financial sector as jurisdiction of “primary money laundering
designation: USA PATRIOT Act concern”
Section 1245, NDAA FY 2012 Dec-11 • Restricted exports of Iranian oil
• Codified Section 311 Money Laundering designation
Executive Order 13599 Feb-12 • Blocked all Iranian government property under US jurisdiction
Executive Order 13606 Apr-12 • Blocked property of those involved with human rights abuses perpetrated through
information technology
Executive Order 13608 May-12 • Sanctioned evaders of sanctions
Executive Order 13622 Jul-12 • Sanctioned foreign financial institutions that facilitate petroleum sales
Iran Threat Reduction and Syria Human Aug-12 • Sanctioned support of petroleum sector
Rights Act of 2012
• Mandated that Iran’s oil revenue be “locked up” in special escrow accounts
Executive Order 13628 Oct-12 • Expanded Iran Threat Reduction and Syria Human Rights Act
Iran Freedom and Counter-Proliferation Jan-13 • Sanctioned involvement in Iranian energy, shipping, or provision of insurance to
Act of 2012 shipping firms
• Sanctioned provision of precious metals to Iran
Executive Order 13645 Jun-13 • Sanctioned involvement in Iranian auto industry
• Blocked assets of banks doing business in rials, the currency of Iran
Source: Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2015

3 July 2015 51
Barclays | Iran Primer

FIGURE 2
Key EU sanctions against Iran

Name Date Description

Council Common Position
2007/140/CFSP
Council Decision 2010/413/CFSP
Council Decision 2011/235/CFSP
Council Decision
2012/35/CFSP
Council Decision 2012/152/CFSP
Council Decision 2012/635/CFSP
Source: Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2015
Feb-07 • Banned exports of sensitive nuclear missile technology
• Prohibited financial and technical assistance related to nuclear or missile activities
• Froze assets and denied travel of designated individuals and companies
Jul-10 • Banned exports to Iran of all arms and materiel
• Prohibited financial and technical assistance related to nuclear activities or weapons
acquisition
• Banned exports to Iran of “key equipment and technology” related to oil and natural
gas industry
• Prohibited provision of insurance to Iranian entities
• Expanded list of designated individuals and companies
Apr-11 • Froze assets and denied travel of individuals involved in human rights abuses
Jan-12 • Banned “import, purchase or transport” of Iranian crude oil and petrochemical
products
• Prohibited provision of financing, insurance or reinsurance related to Iranian crude oil
sale of transport
• Prohibited export to Iran of equipment for petrochemical industry and provision of
technical or financial assistance
• Prohibited sale of gold, precious metals, and diamonds to Iran
Mar-12 • Banned provision of financial messaging services to designated Iranian banks (ie,
denied access to SWIFT)
Oct-12 • Banned "purchase, import or transport" of natural gas from Iran
• Banned export of shipbuilding technology

FIGURE 3
Key UN Security Council resolutions against Iran

Resolution Date Description

1696 Jul-06 • Called upon states to “exercise vigilance and prevent the transfer” of material for nuclear and ballistic missile
purposes
1737 Dec-06 • Banned export to Iran of “all items, materials, equipment, goods and technology” related to nuclear activities
or development of nuclear weapon systems
• Banned provision to Iran of technical any assistance related to nuclear activities
• Banned Iranian export of nuclear-related equipment and material
• Froze assets of individuals and companies involved in nuclear and ballistic missile programs
1747 Mar-07 • Banned exports by Iran of “any arms or related material"
• Expanded list of sanctioned individuals and companies
1803 Mar-08 • Expanded prohibitions on trade in sensitive nuclear equipment and materials
• Banned travel by sanctioned individuals
• Expanded list of sanctioned individuals and companies
1835 Sep-08 • Reaffirmed previous resolutions
1929 Jun-10 • Prohibited Iranian investment in foreign nuclear activities
• Banned export to Iran of major weapons systems and banned provision to Iran of technical or financial
assistance related to acquiring these systems
• Called on states to inspect “all cargo to and from Iran” if suspected of transferring illicit materials
• Called on states to prevent the provision of financial services that would facilitate Iranian sanctions evasion
• Expanded list of sanctioned individuals and companies
Source: Sanctions Against Iran: A Guide to Targets, Terms, and Timetables, Belfer Center for Science and International Affairs, Harvard Kennedy School, June 2015

3 July 2015 52
Barclays | Iran Primer

APPENDIX 2- IRAN KEY DEMOGRAPHIC INDICATORS

FIGURE 1 FIGURE 2
Population growth rates continue to fall Fertility rates have declined rapidly
6 % Population growth rates(%) %
8 Avg. 80s Avg. 2010-15 2030

5 Avg. 80s 7
Avg. since 2010 6
4 2030
5
3 4

2 3
2
1
1
0 0
Mexico
Iran

Iraq
Korea

Turkey

SA

Nigeria
Egypt

Pakistan
Vietnam

Indonesia

Philippines

Mexico
S.Korea

Iran

Iraq
Turkey
SA

Nigeria
Egypt

Pakistan
Vietnam

Indonesia

Philippines
Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 3 FIGURE 4
Around 40% of Iran’s population is less than 29 years old Urbanisation levels are high and set to increase rapidly
70 % Share of youth in total population (%) 100 % Urban population (% of total)

60 90 2014 2050

50 80

40 70

30 60

20 50

10 40

0 30
Pakistan
Iran

Turkey

Philippines
SA

Egypt
Mexico

Iraq
Indonesia
Korea

Nigeria
Vietnam

Iran

Korea

SA
Nigeria

Mexico
Egypt

Pakistan

Indonesia

Turkey
Philippines

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

FIGURE 5 FIGURE 6
Labor force participation levels are lower than peers Dependency ratios are rising and higher than MENA average
90 %
Labor Force Participation Rate ( total, %) 100 % Dependency Ratio (%, per 100)
80 90
1990 2013 80 2015 2050
70
60 70
60
50
50
40
40
30
30
20 20
10 10
0 0
Iran

Korea

Mexico
SA
Nigeria

Mexico
Egypt

UAE
UAE

Iran
Pakistan

Vietnam

Korea
Indonesia

Turkey
MENA (avg)

SA
Turkey

Nigeria
Egypt
Pakistan

Vietnam
Philippines

Indonesia

MENA (avg)
Philippines

Source: Haver Analytics, Barclays Research Source: Haver Analytics, Barclays Research

3 July 2015 53
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Materially Mentioned Stocks (Ticker, Date, Price)
BP (BP.L, 04-Jun-2015, GBP 4.40), Overweight/Positive, A/C/D/F/G/J/K/L/M/N
Eni (ENI.MI, 25-May-2015, EUR 16.50), Underweight/Positive, A/D/J/K/L/M/N/T
Hellenic Petroleum (HEPr.AT, 25-May-2015, EUR 4.50), Underweight/Neutral, A/D/J/K/L/M
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Motor Oil (MORr.AT, 25-May-2015, EUR 8.26), Overweight/Neutral, J
Royal Dutch Shell A (RDSa.L, 04-Jun-2015, GBP 19.02), Overweight/Positive, A/C/D/E/J/K/L/M/N
Other Material Conflicts: Barclays Bank PLC and/or an affiliate is acting as agent to Royal Dutch Shell PLC in relation to the replacement of an
existing bridge loan in relation to the announced acquisition of BG Group PLC
Royal Dutch Shell B (RDSb.L, 04-Jun-2015, GBP 19.18), Overweight/Positive, A/C/D/E/J/K/L/M/N
Other Material Conflicts: Barclays Bank PLC and/or an affiliate is acting as agent to Royal Dutch Shell PLC in relation to the replacement of an
existing bridge loan in relation to the announced acquisition of BG Group PLC
Saras (SRS.MI, 25-May-2015, EUR 1.48), Overweight/Neutral, D/J/K/L/N
Statoil ASA (STL.OL, 04-Jun-2015, NOK 143.70), Equal Weight/Positive, A/D/J/K/L/M/N
Total (TOTF.PA, 25-May-2015, EUR 47.55), Overweight/Positive, A/C/D/J/K/L/M/N

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European Integrated Oil
BG Group (BG.L) BP (BP.L) Eni (ENI.MI)
Galp Energia (GALP.LS) MOL (MOLB.BU) OMV (OMVV.VI)
Repsol (REP.MC) Royal Dutch Shell A (RDSa.L) Royal Dutch Shell B (RDSb.L)
Statoil ASA (STL.OL) Total (TOTF.PA)
European Oil & Gas: E&P
Afren Plc. (AFRE.L) Africa Oil Corp. (AOIC.ST) Bowleven Plc. (BLVN.L)
Cairn Energy Plc. (CNE.L) EnQuest Plc. (ENQ.L) Genel Energy Plc. (GENL.L)
Lundin Petroleum AB (LUPE.ST) Ophir Energy Plc. (OPHR.L) Premier Oil Plc. (PMO.L)
Soco International Plc. (SIA.L) Tullow Oil Plc. (TLW.L)
European Oil Services & Drilling
Akastor (AKAS.OL) Aker Solutions (AKSOL.OL) Amec Foster Wheeler Plc. (AMFW.L)
CGG (GEPH.PA) Gulf Marine Services (GMS.L) Hunting (HTG.L)
Maire Tecnimont (MTCM.MI) Petrofac (PFC.L) Petroleum Geo-Services (PGS.OL)
Polarcus (PLCS.OL) Saipem (SPMI.MI) SBM Offshore (SBMO.AS)
Subsea 7 SA (SUBC.OL) Technip (TECF.PA) Tecnicas Reunidas (TRE.MC)
TGS (TGS.OL) Wood Group (WG.L)
European Refining & Marketing
Hellenic Petroleum (HEPr.AT) Motor Oil (MORr.AT) Neste (NES1V.HE)
Saras (SRS.MI)

Distribution of Ratings:
Barclays Equity Research has 2672 companies under coverage.
43% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 54% of
companies with this rating are investment banking clients of the Firm.
41% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 46% of
companies with this rating are investment banking clients of the Firm.
15% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 42% of
companies with this rating are investment banking clients of the Firm.
Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price
target over the same 12-month period.
Top Picks:
Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant
"industry coverage universe"), taken from among the Overweight-rated stocks within that industry. Barclays Equity Research publishes global
and regional "Top Picks" reports every quarter and analysts may also publish intra-quarter changes to their Top Picks, as necessary. While
analysts may highlight other Overweight-rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick"
for each industry. The current list of Top Picks is available on
https://live.barcap.com/go/RSL/servlets/dv.search?pubType=4526&contentType=latest.
To see a list of companies that comprise a particular industry coverage universe, please go to http://publicresearch.barclays.com.
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Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong)
Barclays Capital Canada Inc. (BCCI, Canada)
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Barclays Bank PLC, Australia branch (Barclays Bank, Australia)

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