Tehran hikes oil sales to East but needs West
London - Still concerned over insurance issues, would-be European buyers of Iranian crude remain cautious ten months after the easing on international sanctions following Tehran’s July 2015 nuclear agreement with world powers.
Undaunted, Iran has expanded exports to Asian countries, which continued to purchase Iranian crude — albeit at reduced levels — despite stringent US and European Union financial and energy restrictions introduced in 2012.
There is disagreement over the extent of Iran’s oil production. Most analysts put it somewhat less than the 4 million barrels per day (bpd) claimed by Iranian Oil Minister Bijan Namdar Zanganeh. That figure is near the pre-2012 peak and, for Iran, this is a step towards output of 5.7 million bpd in 2021.
Even in the short run, it seems likely the ceiling of 33 million bpd agreed by the Organisation of the Petroleum Exporting Countries (OPEC) in September will be crossed.
According to the International Energy Agency, OPEC pumped a record 33.64 million bpd of oil in September. That was despite cuts by some producers, including Saudi Arabia, which reduced output by 20,000 bpd to 10.58 million bpd. Iran, Libya and Nigeria were exempted from cutbacks.
Where is Iran’s oil going? Europe is taking less than 500,000 bpd but India’s imports in August were 576,000 bpd, three times the level of August 2015. China’s were up 48% to 749,000 bpd. South Korea’s imports doubled and Japan’s rose 45% over the same period.
Overall, Asia is taking 62% of Iran’s crude exports, according to Mohsen Ghamsari, director for international affairs at the National Iranian Oil Company (NIOC), who put oil and condensate exports at 2.5 million bpd during the current Iranian year (which began in March).
To some extent this reflects Iran’s commitment to countries that maintained trade with it during sanctions — a point often made by Iranian officials — and so suggests a pattern that will persist.
There are also wider trends at work: Iran’s realignment to the East reflects economic growth in Asia and China’s growing global role.
The picture is further complicated by Russia. The $13 billion deal by Rosneft, Russia’s largest oil producer, to buy Essar Oil’s Vadinar refinery, India’s second largest, along with 2,700 Essar petrol stations, beat interest from both Iran and Saudi Arabia in securing a strategic stake in a market of 1.3 billion people.
Some analysts portray Rosneft’s move as, in part, a means to secure greater influence over the Asian market in response to Saudi Arabia’s attempts to expand European sales at Russia’s expense.
However, the global economy is far from a zero-sum game. Iran has signed a third memorandum of understanding in energy with a Russian firm, Tatneft, after earlier agreements with Zarubezhneft and Lukoil, this time for developmental studies in the Dehloran oil field, 120km west of Dezful in the south-west province of Khuzestan.
Two of China’s largest state-owned companies, China National Petroleum Corporation and China Petroleum and Chemical Corporation (Sinopec), are also — says NIOC — in the latter stages of discussions over developing two major oil fields in western Iran.
Meanwhile, a consortium led by India’s state-run Oil and Natural Gas Corporation (ONGC) has signed a preliminary agreement for a $10 billion project to co-develop Iran’s Farzad-B offshore gas field, after earlier discussions were halted in 2012 by sanctions.
Iran’s crying need is for investment. Amir Hossein Zamaninia, a deputy Iranian Oil minister, has spoken of attracting $185 billion by 2020. Crucial to Tehran’s approach is the integrated petroleum contract (IPC), designed to lure foreign contractors by extending contract length and removing the previous cap on profits.
The IPC — although passed by all relevant bodies, including the Resistance Economy Headquarters established in 2015 by Supreme Leader Ayatollah Ali Khamenei — is viewed with suspicion as a means to foreign “interference”.
Hence the award of the first IPC to Setad, a business conglomerate operating outside normal rules as a quasi-religious foundation supervised by Khamenei, may be designed to demonstrate the new scheme’s acceptability to vested interests.
Deadlines for the award of new IPC deals with foreign companies have been postponed several times. The latest, according to Zanganeh, is November 19th for companies to submit credentials as potential bidders before the first agreements are signed by March 2017.
While Iran focuses on Asia as a market for oil, its long-term energy strategy depends on Europe, both as a market for gas and because it needs partners to develop its oil and gas reserves.
Iran needs not just outside investment but access to the advanced technology held by the Western majors, which is particularly important in converting natural gas into liquid natural gas (LNG), the most practical and flexible form for export.
And with reserves of 34 trillion cubic metres, 18.2% of the world total and the largest of any country, it is gas that will, over time, be even more important for Iran than oil.