Syed Rashid Husain With Iran and the West reaching an understanding on the nuclear issue, questions about impact of the deal on Iran's crude output and the global energy balance continued to confound the pundits. Speculation is rampant, adeal would result in further softening of the crude markets. But the question is if yes, then, to what extent? If oil-related sanctions against Iran are lifted, world oil prices next year could be $5 to $15 a barrel lower than the current forecasts, the US Energy Information Agency is now saying. In its latest short-term energy outlook released last week, the agency left its current price forecasts unchanged, putting Brent at $59 this year and $75 a barrel next year underlining downside risks from Iran's return. “A lifting of sanctions against Iran, should a comprehensive nuclear agreement be concluded, could significantly change the forecast for oil supply, demand, and prices,” EIA Administrator Adam Sieminski said in a statement. It added that Iran is believed to hold at least 30 million barrels of crude in storage, and that the nation could ramp up crude production by at least 700,000 barrels per day (bpd) by the end of 2016. Most analysts too agree that output would likely recover next year if and indeed when the sanctions are eased. Iran, the world's fifth-largest oil producer, is claiming it could nearly double its exports from just over 1 million barrels per day (bpd), in two months once sanctions are lifted. Most analysts though are of the view; doubling the exports would take longer. As per the International Energy Agency estimates, Tehran is currently producing 2.8 million bpd. Unconstrained by sanctions, however, it is of the view that Iran could increase that to 3.6 million bpd, in as few as six to 12 months. However, in order to go beyond 3.6 million bpd, it would need foreign investment. A decade ago, it was able to pump 4.5 million bpd and output peaked at about 6 million bpd in 1974. Consequent to the Washington-led sanction on Iran's oil industry, however, Tehran's oil exports was cut down by more than half to around 1.1 million bpd from a pre-sanctions level of 2.5 million bpd. Now with the possibility of the sanctions being lifted, Iran is looking to ramp-up its exports and rather quickly. Iran's Oil Minister Bijan Zanganeh has been meeting Western oil executives discussing their return into the Iranian oil sector, once sanctions are lifted. The oil majors Zanganeh met in Vienna during his last Opec outing included Italy's Eni, Royal Dutch Shell and Austrian oil and gas group OMV. In order to achieve its immediate objectives, Iran is also seeking to resolve differences with Chinese energy companies. Iranian officials were in China last week to discuss Chinese investments in oil and gas developments in Iran, as well as oil sales. Iran also wanted the Chinese companies to use the latest technology and equipment in any resumption of work to get fields pumping, Amir-Hossein Zamaninia, Iran's deputy oil minister for commerce and international affairs was quoted as saying. The officials were soon followed by a visit to Beijing, the world's largest crude importer, by Iranian Oil Minister Bijan Zanganeh, his first since assuming his post two years ago. This flurry of visits to Beijing from Tehran is to be seen in the backdrop of the fact that some of the enhanced output is expected to come from projects that the Chinese state companies China National Petroleum Company (CNPC) and Sinopec Group have contracted to develop. China's investments in Iran include projects such as the $4.7 billion development of the giant offshore South Pars gas field and the North Azadegan and Yadvaran oilfields. Activity on these developmental projects were stalled o r scaled back in late 2010 as Western sanctions tightened. Among oilfields Chinese companies have worked on, the Yadavaran project has progressed relatively well, with 95 percent of the work completed and the field, operated by Sinopec, ready from about September, Zamaninia added. He further said the field, in the southwestern province of Khuzestan, once developed will have a 75,000 bpd capacity in phase one. Sinopec agreed in late 2007 to a $2 billion deal to develop the field. CNPC, China's top energy group, has an agreement to take on other projects, including a $2 billion contract to turn North Azadegan into a 120,000 bpd field. Iranian officials are now saying that CNPC, which pulled out of Iran's giant South Pars natural gas field in 2012, now seems interested in returning to the offshore project. Iran was also China's sixth-largest crude oil supplier last year, behind Saudi Arabia, Angola and others, with sales up 28 percent from 2013 to 27.46 million tons, or about 550,000 bpd, according to Chinese customs data. Iran now wants the volume of sales to Beijing to go up too. A new condensate deal between Zhuhai Zhenrong and NIOC is set to lift China's total crude oil contract volumes to above 600,000 bpd later this year. However, Iran's full return to the oil markets may not be very easy and straightforward. It would be hindered by strong competition for investment dollars from rival producers including Iraq, Mexico and Brazil, among others, Javier BlasBradley Olson underlined in his story on the issue. In a world of surplus supply, prices hovering around $50 a barrel and deep cuts to capital expenditures by oil companies, Iran will be challenged to find investors should it finalize a nuclear agreement that leads to a lifting of sanctions. Other jurisdictions have already seen super-major oil companies walking away as returns were deemed inadequate. Exxon Mobil Corp. has rejected renewing a concession in Abu Dhabi because of less attractive returns and BP Plc has told Mexico it needs better terms to attract foreign investments as it reopens fields. Even if all the obstacles are resolved, “negotiations could take a year” once sanctions are lifted, Nader Sultan, who ran state-owned Kuwait Petroleum Corp. for over a decade, told an interviewer. Iran's return as a dominant power in the international market place is “not going to be immediate,” Gianna Bern, an energy consultant who teaches international finance at the University of Notre Dame in Indiana was quoted as saying. “European companies such as BP that have a long storied history in Iran are likely to take the first crack at coming back into the country, although some may be wary initially.” Tehran still has a long way to go! Yet one has to concede, the potential of additional barrels of Iranian crude to the market holds the promise of delaying any substantial recovery in oil market prices.
