Iranian oil on the market. The quality of Iranian oil. Where does Iran supply oil?

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:45

The lifting of international sanctions against Iran has added another source of hydrocarbon supplies, the prices of which are already quite low. What could Iranian oil on the market mean for him, and for international and national oil companies operating in the Middle East?

Iran's potential

1976 was the best year for the country's oil industry. Iranian oil was consistently produced at 6 million barrels per day, and in November of that year this figure reached an unprecedented 6.68 million. At that time, only Saudi Arabia, the Soviet Union and the United States were larger producers.

Then a revolution followed, and over the past 35 years, Iranian oil has never been produced in excess of two-thirds of the peak of the mid-70s (although gas played the main role in this), despite the fact that black gold reserves in country over the past 15 years have grown by almost 70% - this is much higher than its neighbors over the same period.

Nevertheless, the experience of the 1970s is still a powerful reminder of whatIran's oil industry after the lifting of sanctions.

Effective measures

The sanctions imposed by the United States, the European Union and the UN since 2011 have caused a significant reduction in oil production in Iran. They failed to completely shut down global markets as some of the major consumers - India, China, Japan, South Korea and Turkey - continued to buy significant amounts of Iranian oil.

However, the impact of sanctions has been significant. In particular, serious restrictions on the import of technology have led to a deterioration in the technical condition of production facilities, which also reduced the quality of Iranian oil. In addition, the expansion of the EU ban on tanker insurance has placed serious limits on the country's export potential, as more than 90% of the insurance of the global tanker fleet is governed by European law.

The end result was a significant reduction in hydrocarbon production, mainly due to unplanned shutdowns with a total loss of 18 to 20% of potential production since the imposition of sanctions in 2011. Sanctions on Iranian oil cut production by 0.8 million b/d, an amount that is now being returned to the market.

Where does Iranian oil find its buyer?

After the removal of restrictions in January, according to official figures, Iran sold four tankers (4 million barrels) to Europe, including France's Total, Spain's Cepsa and Russia's Litasco. This is equivalent to only about5 days of sales at the level before 2012, when 800 thousand barrels per day were shipped to European buyers. Many former big clients, including Anglo-Dutch Shell, Italy's Eni, Greece's Hellenic Petroleum and trading houses Vitol, Glencore and Trafigura, are just about to resume operations. The absence of mutual settlements in dollars and an established mechanism for selling in other currencies, as well as the reluctance of banks to provide letters of credit, became the main obstacles after the lifting of sanctions.

At the same time, some former big buyers note Tehran's reluctance to loosen its four-year-old terms of sale and show greater price flexibility, despite supply over demand and Saudi Arabia, Russia and Iraq seizing Iran's European market share.

2016 Outlook

With the lifting of sanctions approaching, the global oil market turned bearish, with prices falling by 25% between June and August 2015. At the same time, NYMEX futures continued to point to their soft recovery, as well as some international agencies predicted in July and August 2015 that they would stabilize around $45-65 per barrel, similar to the price range between January and July 2015

Further direction of movement of the hydrocarbon market largely depends on how much and how quickly the export of Iranian oil will increase after the lifting of sanctions. There are two main views regarding this potential increase.

On the one hand, it is estimatedAccording to the International Energy Agency (EIA), Iran has a production growth potential of about 800,000 barrels per day, second only to Saudi Arabia. On the other hand, according to EIA forecasts, after the lifting of sanctions in early 2016, Iranian oil supplies will increase by an average of 300 thousand barrels per day per year.

The main reason for such disparate estimates is that the latter gives more weight to the impact of several years of restrictions on the deterioration of the Islamic Republic's mining infrastructure, which now needs some time to ramp up production. In the end, since mid-2012, due to unplanned shutdowns, Iranian oil gradually began to be produced less by 600-800 thousand barrels per day.

How relevant are these production estimates for the current global black gold market? An increase of 800,000 barrels per day is about 1% of today's total global oil supply, which may be enough to cause sharp price changes in a highly competitive environment, but not to glut the market. More specifically, in the medium to long term, hydrocarbon prices tend to level off to the cost of producing the last barrel to meet demand. The long-term low cost of oil inhibits investment in the development of more costly fields; eventually the wells shut down and the supply is reduced. If the price rises above the marginal, new investment brings in additional, more expensive sources of hydrocarbons.

In this context, in relation toshift in oil prices in 2014, today's market has a less sensitive cost curve (since the most expensive developments are already profitable). Thus, a small source of cheaper supplies will have much less of an impact on the price than in the tough conditions of mid-2014.

As a result, the oil market model suggests that Iran should be able to increase production by an additional 800,000 bpd in 2016. Brent is likely to remain in the $45-$65/bbl range in 2016, in line with the price range already seen throughout 2015.

What will happen in 3-5 years?

In the long run, however, the impact of Iran's return could be more significant. Over the past few years, we have witnessed a wave of new discovery well above the average in the Middle East. The country is not able to fully utilize these reserves due to limited access to the external flow of technology and experience. As a result, not only crude oil production has fallen, but the proven level of reserves is the highest in the history of the country. At the same time, current levels of production are still far from meeting government spending levels.

This, coupled with the fact that Iran (unlike Kuwait, Saudi Arabia and the UAE) does not have enough investment fund to make up for the budget deficit. This means that more Iranian oil will be exported, which in turn willdepend on the state's ability to use the necessary technology and expertise.

The Islamic Republic's regulatory framework also poses a major challenge for foreign companies wishing to invest money and know-how in the country's energy sector. The Iranian constitution prohibits foreign or private ownership of natural resources, and production sharing agreements are prohibited by law. IOCs and other foreign investors are only allowed to participate in exploration and production through buyback contracts. These contracts are essentially equivalent to service contracts, allowing outside investors to explore and develop hydrocarbon deposits, provided that, once production commences, control returns to the National Iranian Oil Company or one of its subsidiaries, who can buy the rights under predetermined price. In 2014, the Iranian Ministry of Oil announced plans to implement so-called Single Petroleum Contracts (IPCs), which operate as joint ventures or PSAs with a potential duration of 20 to 25 years (twice as long as the duration of buyback contracts). If this new type of agreement is allowed by law, the attractiveness of the country as an investment target for IOCs and other international players will increase significantly and lead to an acceleration in the development of hydrocarbon reserves.

Prospects for capital investment

According to some estimates, new investment could increase oil exploration and production inIran by 6% per annum over the next five years (which is consistent with the growth rate in Iraq over the past few years), compared with an estimated 1.4% increase in oil production in the Middle East as a whole. In this scenario, assuming that demand remains the same, oil prices may vary between $60-80 per barrel by 2020, while in the absence of these events, all other things being equal, the cost could be 10-15% above.

In this price range, investment in higher cost fields such as shale, sandstone or offshore is unlikely to return to pre-2014 levels. Although production should continue as long as oil production costs remain sufficient low to justify the cost, the rapid depletion of such sources will diminish their importance (shale wells in particular tend to produce 80% or more in the first 3-5 years). Under these conditions, the entry of Iranian oil to the market in additional volumes will hit shale production in the United States, and slightly less on offshore fields in North and South America, Asia, Africa and the Russian Far East. And the rapid depletion of North Sea deposits will see them replaced by increased production in Iran and potentially other countries such as Iraq and Libya.

Iranian oil and Russia

The low quality of Russian Urals oil supplied to Eastern European countries is causing increasing concern among consumers, as it leads to a drop in the profitability of its refining and financial losses. Thus, the sulfur content in the supplied through the Druzhba pipeline and throughterminals in Primorsk and Ust-Luga oil exceeds 1.5%, and its density increased to 31⁰ API. This does not comply with Platt's specification, according to which the sulfur content should not be more than 1.3%, and the grade density should not be less than 32⁰.

With further deterioration in the quality of Russian raw materials, consumers in Europe will give preference to other varieties - Kirkuk and Basrah Light or Iran Light. The quality of Iranian oil Iran Light is comparable to the Urals standard. The density of this grade is 33.1° API, and the sulfur content does not exceed 1.5%.

The lifting of sanctions against the Islamic Republic requires international and national oil companies in the region to review their strategic plans and take into account the challenges and opportunities of the following scenarios.

Foreign investment

Iranian oil on the world market opens up a wide range of potential opportunities for IOCs and other foreign investors, especially with the approval of new IPC contracts. After several years of limited access to outside technology and experience from the Iranian extractive industry, outside help will be needed, and the state of the country's finances suggests that it is in his interest to remove all barriers to quickly receiving this help.

Furthermore, while mining will be in the first place, a similar situation may develop with transportation (pipelines to export growing production volumes), chemicals (gas chemical cracking to obtain olefins for export), and processing (for replacement of equipment for oil refining,which has not been modernized during the sanctions).

Before the restrictions were imposed, Iran was a major importer of oil products, so refining capacity can now be expanded to meet local demand, partly due to the low exchange rate of the rial, which promotes import substitution.

Production in Iran and Iraq is growing, and with the stabilization of the political situation, it is planned to increase it in Libya, which is likely to strengthen and prolong the current scenario of cheap oil. There are a number of strategies that will allow NOCs to mitigate the impact of this.

Exploration and production

Opportunities to reduce costs and increase efficiency, in particular related to oilfield services, contractors, and other external costs, are available. With low hydrocarbon prices, global investment in exploration and production of high-cost fields is slowing, service companies have overcapacity and become much more open to lowering their rates. In addition, when key commodities such as iron ore are now trading at historic lows, significant cost reductions can be achieved through material management. For Middle Eastern NOCs, whose reserves are still cheap enough to justify continued investment, focusing on improved supply represents a real opportunity to cut costs significantly without attracting real capital investment.

Recycling

Inexpensive raw materials also mean cheap processed products. Since natural gas tends to be sourced more locally, the cost of petroleum products correlates with crude oil prices.

This means that in the face of falling demand, prices for refined products are declining faster than for gas. At the same time, if Iran enters the market with additional gas crackers, which are relatively easy to put on stream to take advantage of growing gas production, this will put more price pressure. Indeed, given that the country has no LNG export facilities (and could take years to build), the opportunities for profiting from surplus gas are either building new pipelines (such as the one that today links Turkey, Armenia, and Azerbaijan), or gas processing. Iran is already actively pursuing the latter option, while at the same time planning additional gas pipelines to meet the feedstock needs of new petrochemical plants in the country's west. For example, the construction of the 1,500 km Western Ethylene Pipeline is in its final stages. This, combined with the low operating costs of Iranian plants, is likely to make the Islamic Republic the producer with the lowest quotations for light olefins.

This also means that the combined price of petroleum products will expand the use of catalytic cracking. Iran's return to the market will require a review of the relative profitability of products based on hydrocarbons, andgas producing countries of the Persian Gulf may achieve a comparative profitability of exporting gas in the form of LNG compared to processing it into olefins.

Just as cheap fractions are good for crackers, cheap Iranian crude oil on the market is good for refiners. This will lead to additional investment opportunities in the Persian Gulf - several projects are already underway to increase capacity (excluding downstream expansion, which could take place in Iran). With financially distressed IOCs and independents elsewhere in the world seeking to divest their own downstream assets, NOCs in the Middle East have a chance to make attractive M&A deals.

The lifting of sanctions against the Islamic Republic and the associated increase in hydrocarbon supplies leads to the conclusion that the world, as in the 1980s, is at the beginning of a potentially prolonged period of low oil prices. The Iranian perspective holds new challenges and opportunities, and it belongs to those who will quickly and effectively incorporate these changing dynamics into their strategic plans.