The impact of the Iran deal on the oil markets
The Iranian nuclear accord provides Tehran with an opportunity to increase oil and natural gas exports while lifting of the economic sanctions would enable Iran to resume work with international oil companies, which are making preliminary contacts with Iranian authorities regarding investment in the country’s huge hydrocarbon resources.
Iranian oil production peaked at approximately 6 million barrels per day (bpd) during the reign of Shah Mohammad Reza Pahlavi in the 1970s. Ayatollah Ruhollah Khomeini, after the 1979 Islamic Revolution, reduced production to 2 million bpd. Average production decreased further during the Iran-Iraq war in the 1980s due to attacks on oil fields and infrastructure.
The stated goal of the Iranian authorities following the conflict was to sustain a production level of 4 million bpd. That goal was achieved for a few years during the first decade of the 21st century.
International sanctions and weakening oil sector, particularly due to the leading role of firms controlled by the Islamic Revolutionary Guards Corps (IRGC), led to a production level of 3.5 million-3.7 million bpd since 2008. It also delayed project developments, such as the giant Pars gas field, the Iranian section of the “northern” Qatari field.
International sanctions reduced Iranian oil exports from approximately 2.3 million bpd to about 1 million bpd. Iran wants to return to pre-sanctions export levels or at least regain its lost market share.
Iranian crude oil exports are expected to be shipped mainly to emerging Asian economies; China, India, South Korea and Japan. Pre-sanction exports to Europe averaged about 600,000 bpd. Fewer exports were destined to Africa.
When can Iran increase its exports substantively and regain its market share?
According to the nuclear deal signed in Vienna, the sanctions will not be lifted before the International Atomic Energy Agency (IAEA) submits a report by mid-December, confirming that Iran is abiding by the agreement. Thus, increased Iranian oil exports are not expected in international markets before early 2016.
The United States also needs legislative ratification of the agreement, which is not assured because of strong scepticism of the Iranian deal mainly by congressional Republicans but also by some Democrats. However, US President Barack Obama is intent on adding to his record the peaceful resolution of the dispute with Iran and promised to veto a negative congressional resolution.The Vienna agreement outlines a strict regime for Iran to implement the accord during a ten-year period. If Iran violates the agreement, sanctions would automatically resume.
The oil trade is not the only factor that affects global crude prices. Other geopolitical concerns include the Greek debt crisis; political/military tension between Russia and the West over Ukraine; the effect of the financial scandals of Brazil’s Petrobras; large storage levels of US shale oil stockpiled while prices are low; expected differences of OPEC members over quota levels and the organisation’s production ceiling along with unending political turmoil and violence in the Middle East.
The oil industry has proved its resilience in dealing with similar challenges, but the situation that exists now includes rising speculation and rumours that could shift prices.
It is expected that Iran will start a new export programme from the approximately 40 million barrels stocked in tankers at sea. Half the stocks are crude oil and the other half are condensates. It is projected that Iran will increase exports by around 500,000 bpd with another 500,000 bpd during a second stage.
The big challenge for Iran is not regaining market share; rather, it is reaching agreements with international oil companies to sign upstream and midstream deals to enhance the country’s production capacity. The return of oil firms to Iran is expected to encounter opposition by the parliament and IRGC-affiliated companies as they stand to lose lucrative, monopolistic contracts awarded during the sanctions period.