Moody’s: Iran’s return to global oil markets may be stymied by production hurdles

Business Materials 23 February 2016 14:25 (UTC +04:00)

Tehran, Iran, Feb. 22

By Emil Ilgar - Trend:

Iran's return to the global oil market will add supply to an oversaturated market, but the country faces challenges in ramping up its production, said Moody's Investors Service on Feb. 22.

Despite that Russia and Saudi Arabia agreed on Feb. 16 to freeze their oil output in an attempt to stabilize prices, that agreement doesn't yet include Iran.

Moody's forecasts that Iran's adding more than 500,000 barrels a day to the global oil market in 2016 will put more pressure on prices.

"However, Iran still faces significant hurdles to boosting its oil production meaningfully beyond those levels. Iran's ability to boost oil production faces technical and political hurdles. To raise production, Iran needs to regain its customer base, attract investment to upgrade its oil fields and successfully navigate a range of political risks," according to the report.

"Iran will try to increase exports to China, but regional rivalries could hinder this effort, with Saudi Arabia currently being China's largest crude supplier," said Waheed Sheikh, a Moody's associate analyst.

He added that China will likely maintain its crude import policies rather than risk damaging ties with either country.

"Another hurdle for Iran is its ageing oil infrastructure, which industry experts say requires $150 billion to $200 billion in capital investment to modernize. Many integrated oil companies are simply unable to invest right now because low oil prices have weakened their earnings and pushed their cash flow deeper in the red," said Sheikh.

He added that integrated oil companies will need to cut capital spending through at least 2016.

"In addition, oil companies in the US are prohibited from investing in Iran as the US maintains primary sanctions on the country related to terrorism and ballistic missile development. Iran's failure to comply with these sanctions or with the P5+1 nuclear agreement, signed by China, France, Germany, Russia, the UK, and the US, represents a political risk, as do parliamentary elections set to take place in Iran this month. These elections will decide whether hardline conservatives or reformists come to power, which could influence whether Iran pursues rapprochement with the US," he further said.

Decades of investment shortage have stymied Iran's oil and gas sector, where the production has fallen substantially to 2.8 million barrels per day in 2015, down from 3.8 million barrels per day in 2010, according to EIA.