With the end of negotiations with Iran in sight, the effect of lifting oil export restrictions could lead to any number of scenarios for an already rattled oil industry.
The repercussions for the oil industry could be dramatic. Iran has an estimated 157 billion barrels of proved crude oil reserves, representing nearly 10% of the world's crude oil reserves. The country’s potential production is unclear, but it once reached as much as 6 million barrels of oil per day (MMbbl/d).
Equally conceivable is that Iran doesn’t or cannot do much rapidly.
Still, if negotiations lead to a lifting of sanctions, a quick ramp-up in production within the next six months seems farfetched, analysts said.
“For the doomsayers who say we could go into the $20 range I think it takes something like that to occur,” Keith Barnett of Asset Risk Management said during a recent forum in Houston. He added that oil prices have probably not reached the bottom yet.
Uncertainty lingered on Iran’s future as diplomats from the U.S., Britain, France, Germany, China and Russia continued to negotiate a framework agreement with Iranian officials on March 31. News agencies reported negotiations may stretch into April 1. Officials are struggling to reach an agreement that would allow all sides to claim success, Bloomberg reported March 31. Still unresolved are sanctions, R&D and issues related to uranium enrichment.
A final agreement could be reached by the end of June. The potential for oil-rich Iran to cash in on its hydrocarbon resources has been especially fettered in the past few years after the country’s illicit nuclear activity led to sanctions.
The sanctions have curtailed Iran’s ability to sell oil, which has impacted production and investment and resulted in a 1 MMbbl/d drop in crude oil and condensate exports in 2013, compared to 2012, according to the U.S. Energy Information Administration (EIA).
A partial easing of sanctions approved in 2013 allowed Iran to export up to 1 MMbbl/d. Iran sells most of its crude and condensate to China, India, Japan, South Korea and Turkey. The country’s oil and gas export revenue fell to $56 billion in fiscal year 2013-14 from $118 billion in 2011-12.
Iran’s Oil Minister Bijan Namdar Zanganeh said the country is capable of boosting its production to 3.8 MMbbl/d within a few months, Bloomberg reported. That would place the country behind Saudi Arabia, the top oil producing member of the Organization of Petroleum Exporting Countries (OPEC).
However, the unknowns, including just how much oil Iran can produce, have added to skepticism in an already shaky oil sector.
It seems farfetched to think that 1 MMbbl/d could come online in Iran over the next six months, said Brandon Blossman, managing director of research for Tudor, Pickering, Holt & Co. (TPH). While he acknowledged in a phone interview March 31 with E&P that Iran once produced at least that much oil, there is little known about how much capital has been spent on those fields in the last four years.
“It is possible on the other end of the spectrum that what we are seeing as far as production today may reflect a natural decline in those fields,” Blossman said. “If a field was starved for capex, you could easily see a 5-6% decline rate and get to current production levels. It would be a multiyear process to deploy capital and ramp production up to a level higher than what it is today.”
Chris Ross, an executive professor of finance for the University of Houston’s Bauer College of Business, shared similar thoughts. He said Iran has lost about 800,000 bbl/d of production since about 2010-2011, which could be restored. “But a number of their fields are very old and in natural decline. They have to work quite hard to hold them steady; otherwise, the fields will lose pressure and you’ll end up with less production.”
It is more likely that increased production would be phased in, if an agreement to end the sanctions is reached, he said. Ross added that even if that happened he is not sure whether it is realistic to expect any deal would actually be respected by Iran’s revolutionary guards.
The International Energy Agency reported that Iranian crude production reached 2.84 MMbl/d in February 2015, up 20,000 bbl/d. That’s far less than what Iran produced in its pre-sanction days.
EIA statistics show that production was more than 5.5 MMbbl/d in the mid-1970s. Sanctions—in addition to war, slowed investment, high natural decline rate of mature oil fields and low recovery rates—sent total oil production down to about 1 MMbbl/d in 2013, according to the EIA.
TPH estimates that about 500,000 bbl/d could come online in Iran over the last six months this year, if sanctions are lifted. This would have “little” impact on oil prices, Blossman added.
“Assuming a generous 50% chance of success adds 125 Mbbl/d to our 2015 OPEC supply forecast and 250 Mbbl/d to 2016,” TPH said in an analyst note. “However, for those focused on OPEC supply shocks we’d argue that focus better spent on Libya, Iraq/Kurdistan and Nigeria.”
Developments in these areas could have a greater impact on the oil sector within the next 12 months, he said, highlighting Nigeria’s presidential election, the ongoing Kurdistan-Iraqi dispute and volatile Libyan production. “The force majeure on some of the Libyan ports was lifted and some of incremental barrels are flowing there. Just that one change may be more than the Iranian change, if the sanctions are lifted, for the next six months.”
Even if a nuclear deal is struck soon, it’s unclear whether Iran will boost production and rush to claim market share. Other OPEC nations would also have a say given current oil surpluses and record high production from U.S. shale plays.
It’s unlikely that Arab producers would make way for Iran, Ross said. On the contrary, they are more likely to resist increased Iranian oil or compete very strongly against Iran’s efforts to increase revenue.
Iran's economy relies heavily on oil, a major source of government revenues.
“Iran will probably argue that it is in its interest to increase production, even if it does drive oil prices down because they don’t have anyone else they can gang up with who would let them increase production by relinquishing market share,” Ross continued. Iran’s oil would go “wherever they can find a market.”
Chances are that these more politically volatile countries, such as Iran, Iraq and Nigeria, are not trying to maximize the net present value of their reserves, Blossman continued, adding they are probably thinking about increasing their near-term revenue three to six months from now.
“So you would be producing as much oil as possible even if it is detrimental to the price globally,” Blossman said.
Contact the author, Velda Addison, at firstname.lastname@example.org.
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