How Iran’s reintegration to region could be a new year’s gift

As 80 million people across Iran and around the world celebrate Nowruz – the Iranian new year – many are hoping for a new dawn for their oil industry, economy and relations with the world.

Referring to the continuing nuclear talks, the Iranian foreign minister Javad Zarif tweeted “May Nowrouz indeed usher for the world a new day”. But oil producers are watching with rather more trepidation.

Talks between Iran and six world powers over Tehran’s disputed nuclear programme are to resume this week, with the goal of a framework agreement by March 30 and a full deal by June 30.

The oil minister Bijan Namdar Zanganeh has declared that Iran could raise its oil exports by 1 million barrels per day within a few months of sanctions being ended. Current exports are about 1.2 million bpd, down from 2.5 million bpd before the stricter sanctions were introduced by the US and the EU in the middle of 2012.

This may be somewhat optimistic, but another 800,000 bpd of production within six months or so appears reasonable. There will also be an initial surge of exports from storage.

Iran had plenty of time to shut down its fields in an orderly way. They will, of course, have suffered from underinvestment and lack of maintenance, and production was declining slowly even before sanctions were tightened. But the country’s fractured carbonate fields should have benefited from a period of rest when additional oil could drain into zones from which it can be recovered.

The timing of the production gain would depend on which sanctions were lifted, and when. Traders will be ready to buy Iranian oil almost immediately, and some are understood to have held preliminary discussions.

Investment in new field developments will take much longer. International oil companies such as Total and Eni will have to weigh spending billions of dollars on deals that may take 10 years or more to show a return, against the possibility that a nuclear accord may break down. EU and UN sanctions could be removed quickly. But the complex web of US legislation and executive orders, many not linked to the nuclear issue, could, as in the cases of Iraq and Libya, take years to unravel – even if Congress is disposed to be cooperative.

Given at least a year for negotiations and bids before new contracts would be signed, it is unlikely that significant new production would be added before 2020. After the initial rebound from sanctions, therefore, Iranian crude output is likely to plateau before gaining further. But with associated petroleum liquids from new gas projects, total output might surpass 5 million bpd by the early 2020s, a level last achieved before the revolution.

That would further reduce both near-term and long-dated oil prices, already depressed by the surge of US shale production and Opec’s policy of defending its market share rather than cutting output.

The parties could still fail to reach a deal, of course. But major oil producers need to be prepared for a more competitive market in the years to come.

Iran, Iraq, Venezuela and Libya, to name but four, all have giant under-exploited hydrocarbon resources. It is unrealistic for the leading Arabian Gulf oil powers to hope they all remain under sanctions or in chaos forever.

Instead, Iran’s neighbours need to continue building up their fiscal and economic resilience during a period of lower oil prices. They should consider where they can gain from Iranian reintegration into the regional economy – such as gas exports to its energy-short neighbours, and in non-oil trade.

Such initiatives are the best chance to undo the hardliners’ grip on Tehran’s “resistance” economy, and constrain their regional adventurism. That would be a new year’s gift both Iranians and their neighbours could share.

Robin Mills is the head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis

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