Baku, Azerbaijan, Aug. 20
By Fatih Karimov - Trend:
A macro-economic research company estimates that Iran should be able to regain its pre-sanctions level of around 4m bpd relatively quickly.
Capital Economics released a report on Aug. 20, saying that resuming oil output for Iran is possible in six to 12 months, but it will take a considerably longer period of time to reinvigorate Iran's ageing infrastructure.
"Admittedly, Iran's terms for Western oil companies are reportedly significantly less generous than other countries," the report, obtained by Trend says.
"But it is reviewing them and companies are unlikely to pass up on the chance to develop one of the last remaining reserves of easily accessible oil, especially as Iran should be a relatively stable environment to invest in Iran".
Iranian oil production has fallen by over 1m bpd since the imposition of the latest round of sanctions at the start of 2012.
Coming to resuming Iranian oil output and export's affect on oil prices, the report says that precise timing of the resumption of Iranian exports is less important than the fact that they will be coming. "After all, the market has already priced in some increase in Iranian exports and will react further if the US Congress approves the deal, even if it were months or years before any physical supplies actually reach the market. It seems likely that Iran has already begun preparing its nuclear sites to comply with the deal, but it could be at least six months, and probably longer, before Iran would be able to comply with its side of the agreement and for sanctions to be lifted".
Admittedly, some countries may begin to import more oil from Iran before sanctions are officially removed, reasoning that the authorities are unlikely to punish them when sanctions are so close to being withdrawn. "Indeed, Iran has already dispatched oil tankers to East Asia and India, although it is unclear when these will unload. In any case, we suspect that such sales will not be large enough to have a major impact on prices".
Once sanctions have been lifted, the Iranian authorities assert that the country could double exports within two months. This would be an increase of over 1m bpd to an already oversupplied market.
"Iran does have considerable quantities of crude oil in storage, both on land and at sea which could be sold as soon as sanctions are lifted. But little is known about how large these stockpiles actually are. Estimates range from 10m to 40m barrels, which would allow Iran to double exports for between and week and a month before increased production would need to take over".
The authorities have also claimed they would increase production to pre-2009 levels of around 4m barrels per day (bpd) within about three months. "Three months may prove to be a bit too ambitious, given that many of the country's oil fields are ageing and will require a significant amount of time and money to bring back into full production. However, Tehran is already in talks with major oil companies about exploiting its remaining reserves".
There is also the question of how the rest of OPEC, in particular Saudi Arabia, will react to an increase in crude exports from Iran. Indeed, the cartel is meeting with Russia at the end of this month to discuss what the impact of higher Iranian oil exports may be.
"The Gulf members of the cartel have so far been adamant that they will not cut production to support prices, despite calls from other members, especially Iran. There is no reason for them to change this stance once Iran resumes higher oil exports. Indeed, the return of Iranian exports may actually reinforce OPEC's "no output cuts" stance, putting even more pressure on US shale producers".
What's more, Saudi Arabia and its Gulf allies will probably have little sympathy for their regional rival making them even less likely to cut production, Capital Economics estimated. However, the group is already producing well above its 30 million barrel per day target. And even when the group did have individual quotas, these were largely seen as a floor rather than a ceiling.
"We doubt that Saudi Arabia is going to cut its oil production to make room for Iran. Therefore, if and when Iranian oil exports begin to come back to the market, they should put further downward pressure on prices".
Moreover, the return of Western oil firms and technology to the country should ensure that output continues to grow even after production has recovered from the most recent set of sanctions.
"Indeed, we expect the price of Brent to fall slightly by the end of the year to $55 per barrel as this oversupply continues to weigh on the market. Increased supply from Iran and Iraq should help to cap the price of Brent at $70 over the next few years, even as demand from China and the US increases".
Edited by CN