Iranian oil minister Bijan Zanganeh must be looking forward to retirement after 16 years in the hot seat. The country’s presidential elections are colliding with crunch time in the nuclear talks, determining whether and when Iranian oil returns to the world market. In the tradition of bullish pronouncements, Mr Zanganeh goes out with a few parting shots.
Last week's Opec+ meeting ended exceptionally quickly and smoothly, with an agreement to continue with plans to steadily ease production cuts. The group will add 2 million barrels per day by July, with 700,000 bpd of this coming this month. Ministers will have been encouraged by strong prices, with Brent crude trading at about $72 per barrel on Friday, the highest level in two years.
The market is set to be about 2 million bpd in deficit for the rest of this year, with swollen stocks from last year drawn down to almost normal levels. Opec forecasts a 6 million bpd gain in demand this year, mostly concentrated in the second half, even as rising Covid-19 infections in parts of Asia keep the picture cloudy.
Iran's return would quickly bring back between 1 million bpd to 1.5 million bpd of exports – as was the case after the first lifting of sanctions under Barack Obama, US president at the time – plus a temporary surge from drawing down the remainder of the country's excess stocks.
Opec+ will still have 5.8 million bpd of cuts in place after July. Accommodating the resurgence of Iran would slow the pace of normalisation, depending on demand and production elsewhere, but there seems to be enough space in the market. Iran, alongside troubled Venezuela and Libya, has been exempt from quotas. It is not expected to discuss joining the framework of production limits until it has had at least a few months to operate at full output.
So, what happens then? Mr Zanganeh told journalists last week that Iran could and should raise output to 6.5 million bpd, exceeding record levels reached in the 1970s. It would be emulating its neighbours – the UAE, Saudi Arabia and Iraq, which all have plans for production growth.
As with them, Iran may be increasingly mindful of the need to be ahead of a threatened decline in global oil demand highlighted in the International Energy Agency’s latest report.
Contracts were awarded last month to local companies for the further development of the new West Karoun fields on the Iraqi border amid plans to add about 200,000 bpd over the next couple of years. But gaining 2.5 million bpd or more beyond pre-sanctions levels while mitigating declines in the mature fields might cost in the order of $100 billion.
Iran has suffered a string of fires and explosions in recent months, several of which have affected the petroleum industry. They include a blaze at a refinery near Tehran last Wednesday that was sparked by a leaking pipeline, a blast that hit an oxygen pipeline serving petrochemical plants in the southern industrial centre of Assaluyeh the week before and a blaze last month at the Kangan refinery, which was inaugurated by President Rouhani a few months earlier.
While some of these, especially an explosion that damaged the Natanz uranium enrichment plant in April, are suspected to be acts of sabotage, others could be the result of hot weather, poor safety policies and the use of sub-standard parts because of sanctions. Whatever the cause, Iran needs both cash and international equipment.
One big mistake Iran made after the nuclear deal – called the Joint Comprehensive Plan of Agreement – came into effect in January 2016 was moving too slowly to attract foreign investment. It dawdled on drawing up its new “Iran Petroleum Contract”, which in the end was not that appealing to international oil companies, and laid out an over-ambitious scope of projects with too small a team of negotiators.
This was the fault of hardline parliamentary opponents of President Hassan Rouhani's government, institutional atrophy after eight years of the maverick Mahmoud Ahmadinejad and residual political and sanctions risk. In the end, Tehran signed numerous preliminary agreements but the most substantial deal – with Total and the China National Petroleum Corporation for the development of liquefied natural gas exports, after the deal was abandoned by Donald Trump, Mr Obama's successor, and sanctions were reimposed.
A string of major investments by European, Chinese, Japanese and Russian companies, and expanded gas exports to neighbours would have given their governments more incentive to resist Mr Trump’s torching of the nuclear deal. The window for Iran to use its hydrocarbon resources strategically closed then, and may soon close again, possibly forever.
Mr Rouhani's administration only has until early August to seal any revival of the nuclear deal with the US. With the election on June 18, Opec+ will know the next Iranian president by its next meeting on June 24, unless the election goes to a run-off the day after. The tiny slate of candidates who passed the vetting process includes two uninspiring moderates, four conservatives or hardliners and the hand-picked and probable winner, Ebrahim Raisi.
Mr Raisi, a hardline judiciary chief who lost to Mr Rouhani in 2017, could be declared the winner this time on a low turn-out. However, he will be problematic for western countries and Iran’s regional rivals to deal with. He or another hardliner may well return to the JCPOA and bring Iran’s oil back to the market but it will not be a friendly place for international investment.
Subsidiaries of supreme leader Ali Khamenei’s organisation were awarded two of the West Karoun contracts. Despite attempts to maintain the power of the clergy, he and an unpopular president will need the support of the Revolutionary Guard, whose engineering arm already plays a major role in the domestic oil industry.
The course of Iranian politics rarely runs smooth. Despite Mr Zanganeh’s long efforts, he is unlikely to see his country’s petroleum industry ever reach its potential.
Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis