After more than 10 years of diplomatic wrangling, the global oil and gas industry is ready to welcome Iran back to the market.
The nuclear deal announced on Tuesday will eventually reopen Iran’s huge oil and gas reserves to the western companies, and bring Tehran closer to achieving its goals of rebuilding its economy, emerging from isolation and restoring crucial production and exports of its natural resources.
Iran has the world’s fourth-largest proven crude oil and the second-biggest natural gas reserves. Expectations of an agreement have already pulled oil prices lower, with ICE August Brent — the international benchmark — falling more than 10 per cent since the start of the month and trading below $57 a barrel on Tuesday.
While the exact timing of the end of sanctions is still unclear, traders and analysts said the end result for the oil market was significant enough to overshadow short-term uncertainties.
“Iran’s return is set to keep oil prices lower for longer, alongside ever-cheaper shale oil and peaking western world oil demand,” said Norbert Ruecker, head of commodities research at Julius Baer.
“There is no resource scarcity . . . the pendulum has swung back in favour of oil companies and investments.”
Iran’s return to the international oil market will also ratchet up tensions with Opec, the oil production cartel, which has been pumping above its 30m barrel target for many months.
“If Saudi Arabia does not reduce output to accommodate the return of Iran then we will move deeper into fights for market share and that will remain a negative input for oil prices,” said Olivier Jakob, analyst at Petromatrix, a Swiss-based consultancy.
The lifting of sanctions has been one of Iran’s main objectives as its economy is hugely dependent on its energy sector. Wide-ranging sanctions, targeting everything from shipping and banking to foreign investment and exports, have limited revenues and stymied the industry.
Once the second-largest producer in Opec after Saudi Arabia, Iran’s crude output has been reduced to about 2.8m barrels a day, from 3.6m b/d in 2011, by EU and US sanctions aimed at reining in the country’s nuclear activities and bringing Tehran to the negotiating table.
Exports stand at about 1.1m b/d, half their pre-sanctions level, according to data from the US energy department.
How much and how quickly more Iranian oil could return to market has been up for debate. Iran has around 40m barrels in storage on tankers which could be released on to the market immediately, however a sustained pick-up in production and exports would take longer.
“Additional supply [in the short term] can result in some downward pressure [on prices], especially if Iranian crude arrives in the autumn when many refiners undergo maintenance,” said Ehsan Ul Haq at consultants KBC.
While Iran is capable of accelerating production and exports by about 500,000 b/d to 800,000 b/d within six to 12 months of any sanctions being lifted, it is unlikely to achieve pre-sanctions levels any time soon, says Robin Mills of Manaar Energy Consulting. But Iran has more ambitious goals and says it could increase its oil production capacity to 5m b/d by the end of the decade.
This will hinge on foreign investment that will depend not only on sanctions relief but the terms under which western companies will be permitted to invest.
Richard Nephew, of Columbia University’s Center On Global Energy Policy, said ahead of the deal energy sector participants would be looking at the scope of sanctions relief; which of the intricate web of restrictions would be removed first and in what order they would be lifted; and the potential for the snapback of sanctions.
“What kinds of activities will be permitted in Iran, and with Iran, and by whom, are among questions being asked by the industry,” said Mr Nephew, who is former deputy co-ordinator for sanctions policy at the US State Department.
Tehran is finalising a contract system to secure about $100bn of new oil and gas deals with western companies if sanctions are lifted. Executives at European oil majors Shell and Eni and commodities trader Glencore are among companies that have visited Tehran this year in anticipation of being able to access Iran’s vast resources.
“Iran’s oil and gas industry is in need of significant external investment — a golden opportunity for international oil companies,” said analysts at Wood Mackenzie.
But before Iran can begin to significantly add to world supplies, the US and its allies will seek to ensure Tehran is sticking to any commitments made under the tentative agreement. Verification of its nuclear equipment and detailed inspections will pre-empt any lifting of sanctions and ramp up of production and exports.
Senior figures in the Iranian oil industry argue this process could be over within a few months. But some western commentators are more cautious.
Amrita Sen at Energy Aspects, a London-based consultancy, said the first easing of sanctions on the oil sector would only come in early to mid-2016 once Iran has scaled back its nuclear facilities.
“Projects are unlikely to start before 2017 at the earliest,” she said,- reported http://www.ft.com.