Iran nuclear deal could pave way to higher output

In a departure from our usual format, this post simply reproduces a part of the August edition of the International Energy Agency (IEA) Oil Market Report (OMR). It provides a time table for the full return of Iran to the oil market and discusses recent action and consequences. The prospect of an additional 1 Mbpd oil coming to the export market is clearly bearish for the oil price. The possibility remains though that OPEC resume their policy of protecting price and cut production to make way for Iranian crude.

Prior to 2008, Iran was pumping at 4 Mbpd with a  production peak of 4.25 Mbpd in July 2006. Since 2008 Iranian production has been in decline. It is unclear to what extent this is due to reserves depletion and how much to imposition of sanctions. With spare capacity now booked at 730,000 bpd, the IEA view is that Iran may have total capacity of about 3.6 Mbpd which seems reasonable. Stretching unused capacity to over 1 Mbpd as suggested by the Iranians seems rather speculative and reminiscent of striking a bargaining position within the OPEC quota system. The excerpt from the OMR is below the fold.

The IEA OMR…”After nearly two years of negotiations, Iran and the P5+1 struck a landmark nuclear deal on 14 July that could pave the way for Tehran to boost production and exports to world markets. It may take at least four to six months to execute the complex agreement that limits Iran’s nuclear work in return for a lifting of sanctions that have cut the country’s exports by more than 1 mb/d since 2012. The US Congress and Iranian parliament are now scrutinising the 159-page document.

Timeline for Iran sanctions relief

  • 14 July – Nuclear accord clinched by Iran and P5+1.
  • 19 July – US President Barack Obama sends the deal to Congress for a 60-day review; vows to  veto any attempt to reject it.
  • 20 July – UN Security Council endorses agreement.
  • 17 Sept – Deadline for US Congress to approve or reject deal.
  • By 15 Oct – Tehran to answer questions from International Atomic Energy Agency (IAEA).
  • 15 Dec/early 2016 – IAEA to verify that Iran is in compliance with the deal and issue report on Tehran’s research programme. EU, US to lift nuclear-related sanctions (non-nuclear sanctions to remain in place).

While significantly higher production is unlikely before next year, oil held in floating storage – at the highest level since sanctions were tightened in mid-2012 – could start to reach international markets before then. The addition of three VLCCs of condensate during July has lifted the total stored at sea to 46 mb from 40 mb at the end of June. Some 60% of the overall volume stored at sea is condensate.

In terms of production capacity, Iranian oil fields that pumped roughly 2.87 mb/d in July – up 50 kb/d on June – are estimated to be capable of ramping up to 3.4 mb/d to 3.6 mb/d within months of sanctions being removed. Iran’s Oil Minister Bijan Zanganeh has said Tehran expects to boost output by 500 kb/d as soon as sanctions are lifted and by 1 mb/d within months.

Since strict financial measures were enforced in mid-2012, Iran’s crude exports have fallen from roughly 2.2 mb/d at the start of 2012 to around 1.1 mb/d. China has emerged as Iran’s top oil buyer, with India ranking second. South Korea, Japan and Turkey are also regular lifters. A nominal 1 mb/d cap was set on Tehran’s crude exports under a November 2013 preliminary deal that partially eased sanctions, with buyers required to hold imports near that level.

According to preliminary data, imports of Iranian crude inched down to around 1.0 mb/d during July versus 1.03 mb/d the previous month. Lower purchases from China, India and Korea offset higher imports from Japan, Turkey and the UAE. Imports of condensate – ultra-light oil from Iran’s South Pars gas project – slipped to about 105 kb/d from roughly 160 kb/d the previous month and well below the 2014 average of 190 kb/d.


Once sanctions are lifted, Iran is expected to seek to raise oil sales swiftly to regular buyers in Asia and try to recapture market share in Europe, which accounted for about 30% of pre-sanctions crude sales. To help shift barrels more quickly post-sanctions, the National Iranian Oil Co (NIOC) may continue to offer competitive pricing and credit terms, as it has under sanctions, industry sources said.

Iran will also strive to reclaim its spot as OPEC’s second biggest producer after Saudi Arabia – a post now occupied by neighbouring Iraq. But with Iraq – OPEC’s main source of capacity growth – now pumping in excess of 4 mb/d, Tehran will have some catching up to do. Once it regains full access to capital markets, it should – under its own steam – be able to bring in more advanced technology and gradually raise production capacity beyond 3.6 mb/d.

That effort will come at considerable cost. Iran’s Industry Minister Mohammad Reza Nematzadeh was quoted as saying it would take around $100 billion to rebuild the country’s oil sector. And with the help of foreign cash and cutting-edge technology, Tehran may be able to push capacity back up to the 4 mb/d mark towards the end of the decade. The country’s oil fields last pumped near that level in 2008.

Iran is meanwhile hoping to woo some of the same companies – such as France’s Total, Royal Dutch Shell, Italy’s Eni and Russia’s Lukoil – that are already at work in the giant oil fields of southern Iraq. To drum up interest, its new integrated petroleum contract (IPC) will have to offer attractive commercial terms, especially in the environment of low oil prices in which companies are cutting capital expenditure.

European and Asian firms are already positioning for a return, with high-ranking officials from Germany, France, Italy and Japan travelling to Tehran in the days and weeks after the accord was struck. At the end of July, Zanganeh spoke of a “new chapter of cooperation” with Total following a meeting with French Foreign Minister Laurent Fabius. Total, Shell and Eni invested heavily in Iran’s oil fields before sanctions.

As for Asian companies, China may also seek to expand its presence in Iran’s energy sector. The country’s state oil giants  China National Petroleum Corp (CNPC) and Sinopec – have maintained a presence in Iran and are reportedly set to bring on new oil in 4Q15 from the fields of Yadavaran and North Azadegan that border Iraq. US companies, however, might find themselves out of the race while Washington’s non-nuclear-related sanctions remain in place.

For its part, Tehran has wasted no time in sketching out a post-sanctions business scenario that would appeal to international investors and revive its ageing oil fields. It hopes by 2020 to secure nearly $200 billion worth of oil and gas projects with foreign partners. The new IPC investment model and 50 oil and gas projects are due to be unveiled at a conference set for 14-16 December in London.”





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2 Responses to Iran nuclear deal could pave way to higher output

  1. Tim Kiser says:

    Thanks for the post. I am expecting prices to bottom in the $30-$35 range next year.

  2. Pingback: Oil Production Vital Statistics August 2015 | Energy Matters

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