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Iran needs time and favorable conditions to boost oil output: Kemp

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON – Iran has big ambitions to increase oil and gas production once sanctions are lifted but a substantial increase in exports is probably years away.

The country has the world’s fourth-largest proved reserves of crude oil (behind Venezuela, Saudi Arabia and Canada) and the largest proved reserves of natural gas (ahead of Qatar and Russia), according to BP.

It is the oldest major oil producer in the Middle East and output peaked at more than 6 million barrels per day (bpd) in 1974.

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But decades of revolution, war and sanctions have cut production of crude and condensates to just 3.6 million bpd in 2014 (“BP Statistical Review of World Energy” 2015).

In contrast, Saudi Arabia, Iran’s main rival, has raised liquids output from 8.6 million bpd in 1974 to 11.5 million bpd in 2014.

RECOVERY HOPES

Sanctions imposed by the United States and the European Union amid concerns about Iran’s nuclear program have hit Iran’s production and exports particularly hard.

Exports of crude and condensates have been cut from 2.6 million bpd in 2011 to 1.4 million bpd in 2014, according to the U.S. Energy Information Administration (“Under sanctions, Iran’s crude oil exports have nearly halved in three years” June 24).

Following the conclusion of the nuclear negotiations with the major powers, Iran hopes to raise oil production and exports significantly.

Oil Minister Bijan Zanganeh has stated the country will reclaim its former market share and could raise exports by 500,000 bpd immediately after sanctions are lifted and boost production to 4 million bpd in less than three months.

“We want to reach our pre-sanctions capacity,” the managing director of the National Iranian Oil Company (NIOC) said in a newspaper interview published on Wednesday.

“Iran’s oil production capacity was 4 million barrels a day before the sanctions. We can reach that if there is demand in the market,” he said.

Iranian officials have spoken of raising production to 5 million bpd or more over the longer term by attracting foreign investment and have opened preliminary discussions with international majors.

Even a small addition to production and exports could have a big impact on prices given the oversupplied state of the global oil market.

But it is likely to be some years before significant amounts of extra crude are made available to the market on a sustained basis.

In related news, Iran deal reached, Obama hails step towards “more hopeful world”

FOUR STAGES

Iran’s oil production and exports are likely to rise in four stages, with timescales ranging from a few weeks to five years or more.

First, the country will probably release the crude and condensates currently stored on tankers it has not been able to sell as a result of sanctions.

Most estimates put crude and condensates in floating storage at 30-40 million barrels, enough to boost exports by around 200,000-250,000 bpd for up to six months.

In theory, Iran could unwind floating storage faster, in just a month or two, but it would have to accept large discounts. Policymakers will probably want to raise the best price possible by releasing the oil gradually.

In the second stage, Iran will re-open existing wells it has been forced to shut in or choke back during the sanctions period because it could not sell the output.

Reactivating newly shut in or choked wells is fairly straightforward and explains why Iran’s oil minister predicted that it could raise output to pre-sanctions levels within “a short time.”

In the third stage, Iran will attempt to counter natural declines and boost production from existing fields by injecting more natural gas and repressurising them.

Iran’s oil fields, many of them in the naturally fractured Asmari limestone, have been excellent producers. The best wells have produced at rates of up to 80,000 barrels per day for years at a time.

However, many of the fields have been producing for more than 50 years and are now very mature.

Fractured carbonate reservoirs such as Iran’s require gas injection to maintain field pressure and enhance oil recovery.

Existing reservoirs have suffered from decades of neglect and need substantial investment to maximize their production potential.

It will take at least two to three years to reinvigorate existing fields with more gas injection and new wells, and probably requires foreign technology and expertise.

In the fourth stage, Iran will attempt to develop new fields which have already been identified but not put into production and explore for new ones.

There has been relatively little exploration and development work since the revolution so the country has high hopes of finding and developing much more oil using modern technology.

But the fourth stage, where Iran hopes to attract investment from foreign oil firms, will take at least five years to come to fruition.

TIMELINE

Under the deal finalized between Iran and the major powers in Vienna on July 14, Iran will not receive any sanctions relief until the International Atomic Energy Agency verifies the country has complied with transparency measures related to its nuclear program.

In practice, under the timeline set out in Annex V of the deal, sanctions will not be lifted until January 2016 at the earliest, and possibly some months later.

If that proves to be the case, oil from floating storage could be released adding 250,000 bpd to the market in the first half of 2016.

The re-opening of shut-in wells under stage two could then boost output by up to 800,000 or even 1 million bpd by the end of 2016.

Repressurisation of existing fields would then sustain and perhaps grow output from existing fields during 2017 and 2018.

New field developments and fresh discoveries are unlikely to occur any time before 2019 or 2020 at the earliest.

This is the most optimistic scenario. In practice, disagreements over compliance with the nuclear accord, disputes over the terms of foreign investment, and a range of field engineering problems could easily delay plans to boost output at every stage.

Then there are questions about the conditions of the reservoirs. No one knows how much damage has been done to the fields during the years of revolution, war and sanctions. Fields can suffer various forms of damage, some of which is irreversible, if they are not carefully managed.

FOREIGN RELATIONS

Iran’s oil resources are attractive to foreign oil companies because the geology is reasonably well understood, the fields are conventional and they are located onshore.

There are significant above-ground risks from corruption and political relations between Iran and the Western powers. But there is much less below-ground risk than frontier projects in the Arctic or ultra-deepwater.

Iran has achieved large increases in output over relatively short periods of time in the past.

Production increased by almost 1 million bpd between 1954 and 1960 after the country settled disputes stemming from nationalization of the assets of the Anglo-Iranian Oil Company (forerunner of BP).

In the aftermath of the revolution and the outbreak of war with Iraq, output rose by 1.2 million bpd from a low of just 1.3 million bpd in 1981 to 2.5 million bpd in 1983.

Between 2002 and 2008, production rose by almost 800,000 bpd before the country’s international isolation began to deepen again.

Large increases in output are possible over a 2-5 year time frame but only if international conditions remain favorable and foreign investors are confident enough to supply capital, technology and expertise.

(Editing by David Evans)

This article was from Reuters and was legally licensed through the NewsCred publisher network.

8 comments

  1. And the price at the pump will keep on getting higher even though the price of oil is dropping…….

    • Ron what were you paying this month last yr –=?

    • You are right about that but today the price of gas where I live is up a few cents per gallon even though the price of oil is dropping. I am glad it is the 272+/- that we are paying now as that is better than a year ago but I do have to admit that I sort of feel screwed when the price of oil drops and the price of gas stays the same or rises slightly but when the price of oil goes up a bunch the price of gas at the pump goes up that same day.

  2. Iran is ready to export now and have a massive stockpile.

  3. So glad the U.S. Is bending over for Iran. Like they would do the same. Can’t believe we r even dealing with them. This is one of the worst things our illusturious admin has done !!! Sure hope they have to answer for some of these things!!!

  4. In a glutted market does not matter how little Iran exports it still increases the glut and drops the price– how much depends on how much Iran does export– it is all academic as of now global prices is $12-15 / bbl le than US break even price

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