Nuclear programme talks mask cold reality of Iran’s oil dilemma

Iran may boast that an oil production ramp-up is around the corner. But the likelihood is it will be an uphill struggle to get its ageing industry up to speed even if sanctions are lifted.

Iran’s oil and gas industry’s ability to recover depends on how it deals with global oil firms. Above, a petrochemical complex in Assalouyeh. Hasan Sarbakhshian / AP Photo

Iran’s oil export capabilities fall short of its rhetoric.

Iranian oil officials have been making bullish noises about the prospects for raising the country's oil exports as progress on talks over its controversial nuclear programme raises the possibility that sanctions could be eased this year.

Additional Iranian supply would be unwelcome for oil producers still trying to cope with a chronically oversupplied market.

But despite spare production capacity estimated by the International Energy Agency to be more than 700,000 barrels per day (bpd), industry experts are sceptical about Iran’s scope to quickly ramp up, and especially about the country’s ability to attract the kind of foreign investment it needs to lift the oil and gas sector out of its current “desperate straits”, as Paul Stevens of Chatham House, a think tank in London, describes it.

Iranian officials have, in any case, been talking up export plans, whether sanctions are lifted or not.

On Friday, Iran’s oil minister, Bijan Namdar Zanganeh, said at a press conference in Tehran that the country planned to “considerably increase” oil derivatives exports in the new Iranian year, which starts this month, to 20 million tonnes.

He was referring to refined oil products, such as petrol, diesel and jet fuel, and that volume would represent about 360,000 bpd of product. He appeared to be referring to the new capacity being added by the Persian Gulf Star Refinery in Assalouyeh, which is part of a refinery building programme centred on the southern Iranian port of Bandar Abbas, aimed at boosting exports of product such as European-compliant petrol, using condensate from the country's enormous gasfields.

Mr Zanganeh did not say what the current year’s export volume was, but another Iranian oil official said the country earned more than US$2.3 billion from sales of oil products in the first 10 months of the Iranian year, according to the official Fars News Agency.

Also last week, the National Iranian Oil Company (NIOC) managing director, Rokneddin Javadi, said the company had taken steps to purchase a floating production, storage and offloading unit for delivery to the South Pars field, a giant gasfield that also produces condensate. He said delivery was expected within 14 months and liquids production is targeted to increase by 35,000 bpd.

All that is trifling when compared to what Iran has lost under sanctions. Crude oil revenue, the country’s main source of foreign earnings, has suffered severely since the United States, the European Union and others put in place comprehensive sanctions in 2011.

The IMF estimates that Iran earned $118bn in the fiscal year ended March 20, 2012, from exports of oil and a small amount of natural gas. That had dropped to $63bn by the following year and to $56bn in the fiscal year ended last March.

Oil revenue would have eroded even more sharply in the past year as crude prices halved since last June.

Still, Mohsen Qamsari, the head of the NIOC’s international affairs, said last week that the Islamic Republic planned to raise market share. “When sanctions are lifted, it is our natural and legal right to increase our oil sales,” he said. But Iran has been struggling just to hang on to its current market share. “Iran discounts its crude quite heavily to entice Asian buyers, and that trend is likely to continue,” says Amrita Sen, an oil market analyst at Energy Aspects.

Iran has managed to export between 1 million bpd and 1.3 million bpd over the past year, but the average mostly has been about 1 million bpd, and sales are heavily reliant on India and particularly China.

Exports reached an eight-month high of 1.34 million bpd in December, boosted by Chinese opportunistic buying, but then fell sharply in the past two months, according to Energy Aspects data.

The Iranian oil and gas industry's longer-term ability to recover is dependent not just on a lifting of sanctions but on the reform of its process for dealing with international oil companies.

“Iran is in severe need of the technology and capital that would be available from [international oil companies] for its oil and gas sector,” says Mr Stevens. “Yet while there has been much hype from the Iranian side about the high level of interest, the international oil companies are only likely to be interested if the terms are advantageous.”

Iran last month postponed – for the third time – a planned oil and gas summit in London, where it was expected to detail the terms of proposed new 25-year contracts for international oil and gas companies, referred to as the Iran Petroleum Contract. That summit is now rescheduled for November of this year, contingent on a nuclear deal being reached by the June deadline negotiators have set, or at least a partial deal that would allow companies to again do business with Iran.

Even before sanctions, it has been a long way down for Iran’s oil industry since the late 1970s, when natural field decline was compounded by the long Iran-Iraq war in the 1980s. With oil reserves of 157 billion barrels, the fourth largest in the world, Iran’s production peak in the mid-1970s came in at 6.1 million bpd, when it exported 5.5 million bpd. It now produces about 2.7 million bpd and its rising domestic consumption means exports have fallen to just above 1 million bpd. Iran is an old oil province and rehabilitating its aged fields will be an enormous task. Mr Zanganeh has said he hopes to attract $100bn in investment over three years once sanctions are lifted, from the likes of ExxonMobil, BP, Total, Statoil and Eni.

But supergiant oilfields including Gachsaran, Agha Jari, Ahwaz, Marun, and Parsi are in poor condition, with rapidly dropping pressures and rising water cuts, said Mansour Kashfi, the president of Kashex International Petroleum Consulting in Texas. Achieving pre-revolution production levels “is a dream”, he says, and even “attaining pre-sanction production levels with the current system of operation would be difficult”.

The Iranian oil establishment is well aware of how much it needs international oil companies to revive production of its decrepit fields, but to attract them it will have to overcome a litany of missteps over the last two decades, if sanctions are even eased, says Mr Stevens.

The Iranians not only offered poor terms when they previously tried to lure industry heavyweights back in the 1990s, but they compounded the problems through bureaucratic incompetence and political interference, he says.

Iran will not only have to come up with attractive terms for the supermajors, but it will have to do so at a time when those companies are lowering the investments and being more selective, with options elsewhere including Mexico, Iraq and various smaller but promising provinces in Africa.

The Iranian oil minister seems to be aware of the need to sharpen up terms and offer assurances, even if sanctions are lifted, that Iranian domestic politics will not tarnish investment prospects. As Mr Stevens notes, Iran’s oil ministry has created a special committee to revise and improve terms for international oil companies, which seem to be heading towards some form of a production sharing agreement (even if this would be downplayed to overcome internal political objections).

Mr Zanganeh’s boast more than a year ago that Iran’s production would be back to 4 million bpd by the end of last year proved to be empty, and the latest rhetoric also is likely to be over-optimistic.

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