Iran must wait months for oil investors

The timing of Iran’s return to the international oil market could hardly have come at a more inopportune time as it seeks to attract investment in the sector.

The formal lifting of nuclear-related sanctions, which has been in the works since spring last year, came late on Saturday as the International Atomic Energy Agency reported that Iran had met the conditions required to allow it fully back into the oil market for the first time since 2011.

Iran’s top oil officials have been holding meetings with industry executives for months and in December the oil ministry unveiled the outline of new contracts aimed at attracting the billions of dollars it needs to rehabilitate its neglected oil and gas infrastructure.


But as Ian Wood, the founder of the British oil services company Wood Group, said in an interview with the BBC on Saturday, Iran may have the capacity to increase exports by 500,000 barrels per day “but they can’t actually have a huge impact immediately [because] they won’t find it easy to get the big international companies to invest at $30 a barrel”.

Indeed, the oil price slump is biting deep into industry investment, although some analysts say is setting the stage for a recovery later this year.

Already, the tally of oil investment that has been cancelled or delayed because of the oil price crash has reached US$380 billion, with another $170bn at risk, according to Wood Mackenzie, an industry consulting firm.

The pace of investment deferral or cancellation has quickened in the past six months. WoodMac, in a report, has identified 68 major projects, accounting for about 26 billion barrels of oil equivalent, that have been axed as the price of world benchmark North Sea Brent fell by more than 70 per cent from its 2014 highs.

Brent last week fell below $30 per barrel for the first time in more than a decade and was down $1.90 on Friday to $28.94.

“The impact of lower oil prices on company plans has been brutal,” WoodMac’s report noted. “What began in late 2014 as a haircut to discretionary spend on exploration and pre-development projects has become a full surgical operation to cut out all non-essential operational and capital expenditure.”

The precursor for the industry upheaval had been a growing glut of oil supply driven not only by a doubling of US production since 2010, but also by investment in huge projects, many of which were offshore developments. “Deepwater oil developments have been hit the hardest, because the high project break-even [prices required], large capital requirements and relative inflexibility,” said WoodMac.

Companies have had to make severe adjustments with a resultant loss of hundreds of thousands of jobs, as well as huge financial costs.

On Friday, the mining company BHP Billiton, for example, said it would be writing off $7.5bn in US shale oil assets. “Oil and gas markets have been significantly weaker than the industry expected,” said Andrew Mackenzie, BHP’s chief executive, echoing the industry’s general surprise at the severity of the downturn.

Also last week, BP had said it would be axing an additional 4,000 jobs.

The severity of the downturn has been partly responsible for the volatility in financial markets this year, as worries about effects of financial losses in the world’s largest industry coupled with concern about the slowdown in China’s economic growth have outweighed the benefits for consumers of lower energy prices.

The ripple effects were evident at the end of last week, when two of the largest US banks showed deepening weakness in the energy industry.

Citigroup reported on Friday that it had set aside $588 million as a provision against loan losses in the fourth quarter, about half of which were related to energy sector weakness. The bank said its total exposure to the energy sector is about $58bn.

Also, Wells Fargo, which has been the steadiest of the large US banks, said its credit losses were $831 million in the fourth quarter, up from $703m in the third quarter, mainly as a result of $90m in higher oil and gas losses.

The financial pain is having the desired effect, even if the oversupply is expected to take many months to start to dissipate. The US energy information agency has forecast that US production will drop to 8.7 million bpd this year and 8.5 million bpd next year, having averaged 9.4 million bpd last year.

“The industry’s spending has been out of control … so naturally the unprecedented weakness in balances evident in record stockpiles has been met by unprecedented cutbacks in activity and spending,” said Amrita Sen at Energy Aspects, an industry research firm.

Energy Aspects and other analysts, including Goldman Sachs, are saying that the cutbacks are already sowing the seeds for a turnaround in oil prices, which may be as severe as the slump.

“While it will undoubtedly take many months to reduce the inventory overhang, it will also take the industry several years to recover from the belt tightening,” said Ms Sen. “The longer the current price rout lasts, the bigger the [capital investment] cuts will get, leading to an all-the-more gaping future supply hole.”

WoodMac says that the deepwater oil project cuts account for 1.5 million bpd of lost production by 2021, rising sharply to 2.9 million bpd by 2025.

While there are only the beginning signs that the oil market is moving back toward balance “the material price declines are behind us”, Jeffrey Currie, the head of commodities research at Goldman Sachs, said on Friday.

A Goldman Sachs note on Friday said the bank expects an upturn in commodities market this year, but Mr Currie made it clear he sees that upturn for oil taking “at bare minimum nine months”.

amcauley@thenational.ae

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