Iranian oil exports after the deal: How much and when?

Friday 28/08/2015
Tehran oil refinery, south of the capital Tehran, Iran.

Beirut - The nuclear agreement signed between Iran and the P5+1 will boost the Iranian oil industry and exports after years of sanctions.

The sanctions capped Iranian oil production at around 3.2 mil­lion barrels per day (bpd), while exports averaged 1 million bpd. It is projected that, post sanctions, Iranian crude oil production could increase by about 600,000 bpd and exports will rise to their pre-sanctions level of 2.5 million bpd.

The lifting of oil sanctions is to start after the International Atom­ic Energy Agency (IAEA) submits reports in December on its inspec­tion of Iranian nuclear facilities. If the IAEA confirms that Tehran has implemented its obligations, and if the members do not raise objec­tions or question the conclusions, oil sanctions will be lifted. This means the increase of Iranian oil exports will not start before early 2016.

The lifting of sanctions will co­incide with the increase in global oil supplies, which has led to the second oil price crash in 2014-15. Brent oil prices are around $40- $45 per barrel.

The rise of supply is due mainly to the increase in non-convention­al oil extraction — US shale oil, Ca­nadian tar sands and deep-water offshore drilling — as well as the Organisation of the Petroleum Ex­porting Countries’ (OPEC) policy not to cut production to protect market share.

It is estimated that initial Iranian oil supplies will consist of the ap­proximately 30 million barrels of crude oil stored in Iranian oil tankers near Iran and in waters near main Asian consuming states, such as Japan, China, India and South Korea.

The floating supply consists mainly of con­densates and medium crude oil.

It could provide, under an optimum scenario, around 100,000 bpd.

Iran will en­counter difficul­ties marketing all that supply in a short pe­riod, as Asian markets are over-supplied with condensates. To cir­cumvent this hurdle, Tehran may offer price discounts or agree to ease terms and periods of payment. Accord­ingly, the sale of the stored supply could be delayed until spring 2016.

The experience of lifting inter­national oil sanc­tions on Iraq and Libya has demon­strated that pro­cedures to trade oil freely again face hur­dles and delays. In several cases, the lifting of sanctions requires legislative approval, often a long process depending on a parlia­ment’s agenda, or the striking of compromises.

In this case, is it unknown whether the US Congress would approve the Vienna accord. The Israeli lobby has been active trying to block US approval of the agree­ment. US President Barack Obama may require time to reach a com­promise with Congress.

If it is difficult to reach a speedy agreement between the White House and Congress, then Iran’s post-sanctions oil exports could be delayed until the second half of 2016.

The lifting of sanctions in mid- January would trigger much spec­ulation in global oil markets. Pric­es would likely decline quickly and steeply anticipating flood of the markets with new large supplies.

Low oil prices through 2016 would increase global oil con­sumption, which would lead to higher prices. A low oil price for a long period would dampen profits of non-conventional oil projects. Non-conventional oil supply may decrease.

The cost of the conventional oil produced by OPEC is estimated at around $5-$25 per barrel, com­pared to the cost of non-conven­tional oil of around $40-$70 per barrel. International oil companies will need to decrease investment in non-conventional oil, which will lead in turn to fewer oil supplies in the markets following 2016.

The global oil industry is un­dergoing a transition with much uncertainty in oil supply and de­mand. The crash of crude oil prices from an average of $100 per barrel to an average of less than $50 per barrel has left the market with­out guidelines of what average oil price to expect.

It is not clear whether prices will continue to decline.

It is also not clear, as OPEC ex­pects, for prices to rise again in the foreseeable future due to an increase in demand.

Iran is planning to develop 50 oil and gas projects at a cost of $185 billion by 2020. Iran has the sec­ond largest natural gas reserves and has among the world’s five largest oil reserves.

The Iranian oil industry is ex­pected to undergo many changes after the lifting of sanctions. Talks have started with international oil companies to return to Iran’s upstream sector to discover and develop new fields. Since those companies left due to the sanc­tions, domestic firms owned and operated by the Islamic Revolu­tionary Guards Corps (IRGC) have taken over.

Much time will be needed to negotiate agreements with inter­national oil firms and more time will be needed to ensure a smooth transfer of the fields’ develop­ments from the IRGC to interna­tional firms. The IRGC would lose a major source of revenue and re­sponsibility.

It will take time for the industry to settle down and stabilise to see Iranian oil production averages at the projected 4 million bpd.