Oil + Gas E1:R1
◢ Iran's surprisingly rapid recapture of oil market share has stalled, and new investment will be needed to drive production levels higher and improve marketing and export
◢ The country is seeking to expand natural gas exports beyond regional neighbors through investment and access agreements to LNG infrastructure
A Recovery Underway
When President Rouhani took office in 2013, Iran’s oil and gas industries were in a poor state. International sanctions targeting the exportation of Iranian hydrocarbons had reduced Iran’s global market share dramatically. Oil exports were limited to about 1 million barrels per day (bpd). Since the conclusion of the JCPOA and the lifting of sanctions in January 2015, Iran’s production levels have risen considerably, reaching about 4 million bpd, and enabling Iran to double its exports.
Oil analysts have been impressed by the speed of Iran’s return to global markets, but this rebound has recently faltered. Iran’s oil industry faces structural challenges that predate the imposition of sanctions (though they were likely exacerbated by the related economic pressure). These deficiencies were largely hidden during a period of historic USD $100 per barrel oil prices. Oil revenues continued to rise despite the fact that Iran’s oil industry was losing its competitive edge.
Iran will need to make comprehensive improvements in extracting, refining, marketing, and exporting its oil and gas reserves in order to properly use natural resource revenues to drive wider economic growth. However, as oil prices have now collapsed to roughly USD $30 per barrel, the competition over market share has intensified. Iran has been involved in a protracted economic and political contest with Saudi Arabia. These contests have impacted coordination within OPEC, where Saudi Arabia and Iran are engaged in a battle for market share.
The oil price is currently recovering. Supply has been constrained in North America, where wildfires effected production in Canada and the low oil price forced a scaling back in the United States. Instability in other producers like Nigeria and Venezuela has also limited the volume of oil on international markets, enabling Iran some reprieve from the near USD $20 per barrel prices seen earlier this year.
Iran’s Oil Production and Exports
Although recent concern around Iran’s economic recovery has focused on the continuing hesitation of major banks to facilitate Iran trade and investment, Iran’s oil trade has not been similarly encumbered. The assurances of the United States and the clear provisions for the export of oil outlined in JCPOA have been instrumental in safeguarding Iran’s expansion in output and export levels.
Iran’s oil exports surpassed 2 million bpd in late May 2016, a much-touted landmark. The current output levels of about 2.31 million bpd is the highest in 5 years. Steady demand from Europe and Asia has seen exports rise by roughly 50,000 bpd per month in each market in the last month. What is significant is that this recovery in production and export volume precedes any significant investment in the country’s oil industry. To take the next step, however, foreign partners will be required. Estimates from the Ministry of Petroleum place the required capital investment at USD $100 billion in order for Iran to raise its industry to a position of true global competitiveness.
LNG is Firmly on Iran’s Agenda
Perhaps Iran’s most promising energy project is the development of the remaining natural gas fields in the South Pars energy zone. Iran’s natural gas production, unlike its oil production, is intended to be used primarily for export as the country’s reserves far outpace future demand. Iran increased its production of natural gas by 5.7% in 2015 to reach levels as high as 192.5 billion cubic meters (bcm). By some estimates Iran has overtaken Qatar, the country with which it shares the South Pars fields, to become the world’s 3rd largest natural gas producer. While most of Iran’s gas is currently consumed domestically, investment in production capacity needs to be matched by new transport infrastructures in order to unlock export potential.
Iran has been exploring investments in LNG terminals and new pipelines to boost export capacity. The value of LNG exports exceeded USD $1 billion in the Persian calendar month of Khordad (May 21-June 20). Most of this gas was directed to regional neighbors through pipelines, a network that Iran is seeking to grow. However, regional instability also leaves these exports vulnerable. A major pipeline between Iran and Pakistan was launched through a preliminary agreement in 1995, but has been dogged by delays owing to the respective political challenges in both countries.
In order to diversify its client base beyond the region, Iran has turned to Africa and South East Asia. In May 2016, Iran announced it had made its first LNG exports to Kenya, South Africa, and Tanzania. An agreement was signed in the same month to make a similar shipment of 80,000 tons of LNG to Indonesia and another was concluded with the Philippines in June.
Iran lacks LNG tanker terminals, and so these shipments are made using ISO tank containers, which can be transported on normal cargo ships. This method is not cost-effective at scale however and Iran is actively pursuing better infrastructure. LNG sales to Japan were halted in June reportedly due to supply chain issues.
In a move that may help Iran avoid such disruptions, Norway’s Helma Vantage has signed a USD $600 million MOU with Kharg Petrochemical Company, which is semi-private, to produce and export LNG through a new floating liquefaction unit in the Persian Gulf. Such a terminal would enable Iran to develop a global supply chain for its natural gas, exporting to whatever markets where demand is highest. However, natural gas prices remain at about half of their 5-year highs. The effects of the American “shale revolution” which unlocked massive supply, continues to be felt.
Investment in LNG is expensive, and Iran cannot necessarily afford to wait until prices rebound and technology owners such as Total decide to engage major investments once again. As such, Iran is taking the novel step of a new project with regional LNG player Oman. A newly constructed pipeline will deliver Iranian natural gas to Oman. Two-thirds of the delivered gas will be consumed domestically; one-third will be delivered to Oman’s Qalhat LNG plant for liquefaction before being exported to international markets from Oman’s LNG terminals. Korean contractor KOGAS will lead on the Oman pipeline project as part of a wider set of Oil and Gas contracts agreed with the National Iranian Oil Company (NIOC) in May.