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Talk of progress in the nuclear negotiations between Iran and the world powers has had oil traders on edge.
With large amounts of Iranian oil already in storage, an injection of hundreds of thousands of barrels a day into the oil market already struggling with a crude overhang could depress prices further.
The prospect of a wave of Iranian crude exports has already hit internationally traded Brent: after rebounding to $60 a barrel last month, it now hovers around $55 a barrel amid expectations of a deal by March 31.
“There is nothing that cannot be resolved,” Hassan Rouhani, Iran’s president, said on Saturday, according to the Iranian state news agency.
But as negotiators from Iran and the US, UK, France, Russia, China and Germany, the so-called P5+1 group, reconvene this week, questions remain around what any deal, full or partial, could mean for the oil market.
Western sanctions aimed at reining in Tehran’s nuclear activities have reduced crude output to about 2.8m b/d, from 3.6m b/d at the end of 2011. After foreign investment fled, the country’s oilfields, which hold 10 per cent of the world’s crude reserves, have been shut down while others are running at low levels.
Exports from the Opec producer stand at about 1.1m barrels a day, half of their pre-sanctions level. Aside from a handful of countries to which Iran is able to sell crude at a discount, restrictions on shipping, insurance, infrastructure, banking, repatriation of funds and other aspects of the oil trade have hindered foreign sales and severely strained the economy.
It is difficult to determine the extent of progress. But Richard Mallinson, geopolitical analyst at consultancy Energy Aspects, says Iran and the P5+1 are closer to settling on two points: the duration of any deal and enrichment capacity. But “differences remain over the pace and sequence of sanctions relief”.
While Iran wants an immediate lifting, the P5+1 group is holding out for a gradual untangling of the complex layers of sanctions, over several years, that depend on Tehran honouring the terms of any agreement.
President Barack Obama can make temporary suspensions, but only Congress can lift them permanently. Ayatollah Ali Khamenei, Iran’s supreme leader, could also reject any draft agreement.
If early relief is on the table, the weeks or months after technical details are ironed out could see the easing of sanctions on EU shipping and insurance, banking, asset freezes and oil imports, says Mr Mallinson.
He adds: “A partial deal is much more likely . . . We expect official statements to describe this as the first stage in an agreement, but not spell out a clear path to all sanctions eventually being lifted.”
Flood of Iranian crude
It is not just Mr Rouhani who is optimistic.
“In case the international sanctions against Iran are lifted, 1m barrels a day will be added to the country’s crude oil production and exports in several months,” Bijan Zanganeh, Iran’s oil minister and a veteran technocrat, said last week.
Iran is already manoeuvring to recapture its lost market share in Asia and is engaging with European refiners about crude sales, people familiar with the matter said.
The International Energy Agency said in its five-year outlook that Iran “may be in a position to increase production and exports rapidly” if an agreement is reached. In preparation, “much of last year was spent making sure wells and processing units were up to scratch and pipeline systems were tested”.
While Iran is capable of accelerating production and exports by about 800,000 b/d within six to 12 months of any sanctions being lifted, it is unlikely to achieve pre-sanctions levels, says Robin Mills of Manaar Energy Consulting. “They’ll get the initial boost, but they will be back on the treadmill,” he says.
Substantial investment from foreign companies would be needed for further output increases. “If sanctions are lifted in the middle of this year, it’s not like they are going to turn up on July 2,” Mr Mills says. Without a comprehensive agreement Iran is unlikely to lure international energy companies.
Iran plans to produce about 5m b/d, including condensate, by 2020, which oil experts say is an ambitious plan as many fields are deteriorating.
Mr Mills estimates it would cost about $30bn — excluding investments in the gas sector, the downstream business and any additional cash flows needed to sustain underlying production — to the end of the decade to achieve such a target.
Although Mr Zanganeh has met oil groups such as BP, Shell and Total in the past year, challenges await.
“Sanctions have starved Iran’s oil and gas sectors of much needed capital,” says Mahdi Kazemzadeh at Afraz Advisers, an advisory company specialising in Iran. “While the draft contracts are attractive for companies, they are still a draft. They have to be finalised, approved and then implemented. Clarification on all of this is needed to avoid disappointment.”
The Opec conundrum
Iraqi production is trundling higher, while other Opec members are showing no signs of restraint. With the oil market already struggling to place hundreds of thousands of barrels, the arrival of more Iranian crude is not welcomed by many. The cartel has a production ceiling of 30m b/d a day.
Elham Hassanzadeh, a research fellow at the Oxford Institute of Energy Studies, says: “Iran has always argued there has to be room for Iran. Saudi Arabia and others have been producing more. Iran will fight for its market share.”