Baku, Azerbaijan, Dec. 12
By Azer Ahmadbayli – Trend:
On December 10, Iranian President Hassan Rouhani introduced the government’s draft budget for the next fiscal year (starting March 20, 2018).
The government’s general budget is estimated at about $105 billion.
The draft budget has projected the government’s oil income at about $28.8 billion, a drop of 10.5 percent compared to the current year’s budget.
By missing a bit more than $3 billion of the oil money, Iranian cash box will not get depleted. Nevertheless, crude is the major source of Iran’s income, and the missing sum is not so small to ignore likely causes, which could be:
Natural drop of production
About 80 percent of Iran’s active fields are in their second half life and lose 8-12 percent of productivity every year. Iran says its old oil fields would lose 0.3 mb/d of productivity during 2017.
However, the country tries to compensate production decline in ageing reservoirs by drilling new wells and increasing gas re-injection. About 0.35 mb/d would be added from new fields, like Azar, oil layer of South Pars, West Karoon block, etc.
Iran’s oil output registered a fall in October by 11,300 barrels per day month-on-month, and stood at 3.823 million barrels per day (mb/d), OPEC said in its latest November report.
Anyway, this reason separately doesn’t look real and decisive in an expected reduction of oil revenues.
Reducing oil output within OPEC+ Agreement
In December of 2016 in Vienna, OPEC together with 11 non-OPEC countries agreed to curtail oil output jointly by 558,000 barrels per day to boost the prices.
Iran was temporarily exempted from the agreement until its oil production would reach pre-sanction levels.
At its last meeting in late November, where it was concluded to extend the cut of oil production to 2018, OPEC decided to cancel special preferences for Iran. However, Iran has not officially confirmed it’s joining the OPEC+ deal.
Increase of production cost
By the end of 2016, on average, Iran's production cost (conventional onshore) was around $10 per barrel. It is a bit more than that of Saudi Arabia, but well lower than the majority of its oil rivals. In comparison with 2014-2015 the country’s cash cost per barrel has even decreased.
Fall of oil prices
Each year international oil organizations and experts usually provide forecasts of prices for the next year. This year the majority have been unanimous that in 2018 oil prices will remain in their current range that is $55-60 per barrel. There are those who predict $50-55. There are also optimists who believe prices could rise to $70. But in general, major price shocks are not expected.
It should be noted that Iran’s budgeted price per barrel is $55.
Fall of export
Iran's oil supply to world market is up to 2.5 million barrels a day. More than 60% of Iran’s crude is shipped to Asian countries and about 40% to Europe. Fall of supply could be caused by several sub-reasons.
For instance, beginning from April, India, Iran’s top oil client after China, sharply reduced oil imports from Iran as a result of a sudden standoff around awarding Farzad B gas field to Indian companies. Such contingencies should be taken into consideration.
Also, it is worthy to note a lack of spare reserves that were available last year. By the time when the nuclear agreement was signed, there were a number of Iranian oil tankers anchored close to its oil terminals storing large amounts of crude. Since sanctions were lifted Iran sharply increased exports. Currently, Iran has no such stocks and is selling oil extracted directly from the fields.
The increase of domestic consumption and plans to export oil products also can relatively affect possible reduce of crude exports. Iran has been a gasoline importer for years but recently the country’s domestic gasoline production has almost reached the consumption level. Iran also plans to build four new refineries and become gasoline exporter in the coming years.
Price dumping
To establish its previously lost positions in the international oil markets, Iran is willing to temporarily give up profits by selling oil at prices cheaper than its competitors.