Iran could reshape global oil markets with its imminent return, following an agreement to curb the country’s nuclear program. The July 14 agreement, between Iran and the P5+1 countries (China, France, Russia, the UK and the U.S., plus Germany) seeks to resolve the impasse between the parties, lifting economic sanctions in exchange for constraining Iran’s nuclear program. The potential impacts on oil could affect producers, consumers and governments, worldwide.
The economic and financial sanctions imposed on Iran since the 1979 revolution did not exclude it from world oil markets until mid-2012. Some exceptions were allowed or tolerated, permitting Iran to continue selling about 1.0 MMbopd to several countries. However, historical production and export levels show how profoundly sanctions affected Iran in the global market, Fig. 1.
In 2011, the last full year before sanctions hit exports, Iranian production averaged about 3.7 MMbopd, with exports estimated at 2.2–2.3 MMbopd. For 2014, Iranian output averaged about 2.8 MMbopd, and exports averaged close to 1.0 MMbopd (remaining production refined domestically). In the early-to-mid-1970s, prior to the revolution and the devastating Iran-Iraq war, Iran produced 5.5–6.0 MMbopd, a level not achieved since.
The world is anxious to see and assess the ramifications of Iran’s unfettered exports. Formal lifting of sanctions will take effect after the International Atomic Energy Agency issues, in December, an initial assessment of Iran’s early compliance with the deal’s conditions. This means that resumption of Iranian oil exports will principally affect oil markets in 2016. However, anticipation of greater supply could influence prices toward the end of 2015.
Iranian production/exports. Once sanctions are lifted, Iran may increase exports fairly rapidly, by several hundred thousand barrels per day, over several months. Iranian Oil Minister Bijan Zanganeh expects to export 500,000 bopd initially, ramping up to 1.0 MMbopd in six months. More conservative estimates put initial exports at 120,000 bopd, rising to 380,000 bopd after 12 months.
Higher exports from Iran, at least initially, do not depend only on increasing flows from existing producing fields or reactivating idle ones. The country also has stored 30 MMbbl to 40 MMbbl that could supplement additional production.
Thus, Iranian oil production in 2016 could average 3.0–3.7 MMbpd, compared with 2014 and 2015 levels of about 2.8 MMbpd. The remaining, more sustainable portion of Iranian production and export increases must come from using gas injection in existing fields and fast-tracking development of new onshore fields. The success of this work, which can begin ahead of lifting sanctions, will determine how quickly Iran accelerates production.
Long-term, Iran must continue its field development through ongoing investment by the National Iranian Oil Company (NIOC) and new capital from foreign operators. Such investment will likely result in gradually increased production through at least 2020.
Market impact. OPEC is unlikely to adjust production to accommodate Iran’s return, given Saudi Arabia’s dominance and its rivalry with Iran. If Iranian exports delay or weaken the expected oil price recovery, U.S. unconventional oil would be the most vulnerable to a slowdown in growth prospects. Yet, a small price adjustment is unlikely to affect the production trajectory significantly. Shale producers will be much less impacted than they were from mid-2014 to mid-2015.
Investment implications. Unlike other major oil-producing countries, Iran historically has relied on foreign investment for field development, which should make attracting capital and technology from foreign companies easier. In the late 1990s, Iran concluded “buy-back” development contracts with foreign oil companies that tied rates of return to crude oil liftings of an equivalent value. However, companies could not book reserves. These terms became onerous over time.
Given this history, Iran must offer better terms this time around. Competition for capital has increased with the emergence of unconventional and deepwater plays globally.
Foreign operators should return to Iran gradually. While their investment may accelerate development, NIOC has a long history of successful field projects. It has highly qualified and experienced engineers and managers, adequate technology, and direct work experience in Iran. Either way, Iranian oil production has good prospects for a revival during the next decade.
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