World Energy Blog

Iranian oil impact, are we seeing an underestimation of geopolitics and wishful thinking?


7/23/2015 1:23:46 PM

by Dr Cyril Widdershoven
The unexpected success of the P5+1 Iranian nuclear agreement is still making headlines in the global media. Analysts are convinced that the return of Iran into the global economy will have an huge impact, leaving oil and gas prices low for the foreseeable future. Optimists are indicating that Iran could easily bring 600,000 -1.5 million bpd of crude oil onto the market, while gas exporters are dreading the return of Iran’s gas exports. Western politicians and corporations are flocking to Tehran’s 5* hotels, and are sucking up to the former member of the Axis of Evil.  The world has changed, nobody can deny that, but has it changed for the better?  


The impact of Iran’s enormous oil and gas reserves on the future security of oil supply to the West should not be exaggerated.  Most of the additional supplies will go to Asia, or be consumed domestically as Iran’s economy will be growing over the next decade.  Negative repercussions for geopolitical stability and Western interests are largely dismissed by analysts which makes no sense what so ever. 
Iran’s potential to enter the global oil market is clear. Last reports, like the one by Vessels Value (UK), indicate that Iran could be supplying another 250,000 bpd for a period of four months within days.  The impact on crude oil prices should not dramatic, but will certainly result in a weakening of overall prices.  The impact of holding around 30-50 million barrels of crude on VLCCs for years is to be taken into account. Iran is slated to have around 25 VLCCs, with a capacity of 56.7 million barrels in the water at present. For the long term, the impact of Iranian crude is still unclear. 

Based on assessments made by the former ENI CEO Scaroni, Iran might be able produce as much as 6 million bpd by 2020. Others are more skeptical, indicating an additional export potential of around 1.6-1.8 million bpd by 2020, in contrast,  overall production today is around 2.8 million bpd.   Iran exports around 1.2 million bpd today, but that is sure to change. 

These figures are impressive, but do they really take into account the difficulties of oil and gas operations and investments.  Iran’s oil and gas sector has been producing at levels that not were expected due to the strict international sanctions regimes.  The country’s technical capabilities and the resilience of its operators have been underestimated by far. That Iran has been unable to take advantage of new technological developments, the impact of production optimization or large scale IT implementation projects is impressive, Overall production levels have been showing an increase during the last couple of years.  This is due to large domestic investments, the total support of the government and the support of the Islamic Revolutionary Guards, Iran has been able to use its capabilities, and higher others to continue to increase production.  Some analysts also rightly state that Russian, Chinese and Indian technical and financial support have also has played a role in preventing a total shutdown under sanctions.

Iran will however be able to enter the market in with full force, if all UNSC members agree to put in place the agreement that was signed this month.  The Iranian regime has already stated its support for the  deal, leaving no room for discussion that the economic considerations are the reason for the sudden Iranian flexibility on nuclear research and their willingness to sign up.  Western governments are all ready blowing the trumpet of victory, stating that the end of the Islamic Fundamentalist Hardliners in Tehran and Qom is near.  

US president Obama will expect a positive role in the history books, fulfilling the promise of his inaugeration when he was given even a Nobel Peace prize.  Still, if we look to the future the outlook is bleak with a small silver lining at best.  The Iranian potential to supply additional millions of barrels of crude oil per day or vast amounts of LNG to the market should not have us shouting for joy. Hundreds of billions of US dollars will need to be invested to bring the Iranian industry up to the technology levels currently in place elsewhere.  International companies and investors will need to be convinced that there will not be any change in attitude in Tehran over the coming years which could threaten their investments and operations.  At the same time, Iran will have to change parts of its current concession agreements to make it more attractive to investors and operators than possible oil and gas operations elsewhere. 
What will happen if they are successful?  Bringing an additional couple of millions of barrels per day of crude oil or vast volumes of LNG on the market will destabilize the markets more, than they will help them. Lower oil and gas prices are biting into the profit margins of most operators, leaving no room for budget overruns or mistakes.  Companies such as Shell, ExxonMobil or Total, will not be entering into a new adventure without being able to account for the right NPV in each of the operations. No economic reason is viable at present to commit additional billions of doallars  in producing a commodity that has no profitable return.  This was bluntly stated by Alexander Novak, who stated that he is not worried about the impact of Iranian crude on the market today.  His concerns, as also was stated by Saudi Arabia and others, is much more focused on the impact of shale oil production around the world and particularly in North America.

The media seems to have also missed that  Iran is part of the OPEC oil cartel. Within this framework, Iran will have to comply (at least partially) with the official production quotas in place. If Tehran wants to increase its overall export volumes, others will either try to compete or put in a veto.  OPEC’s main power player Saudi Arabia, supported by the UAE, Kuwait, Algeria and Bahrain, already has warned Iran not to increase its overall production without talking to OPEC first.  The underlying meaning of this warning coming from Riyadh is even more stern. Saudi Arabia, UAE, Bahrain and Egypt, are totally unhappy with the Iranian nuclear agreement. Very harsh words have been spoken between the Arab regimes and Washington.  The US, and its Western allies, have however shown an unwillingness to listen to their Arab allies, continuing on a path that could potentially further destabilize the MENA region.  Most Arab analysts agree that opening up Iran, bringing in new technology and investments, will strengthen the Islamic hardliners. They have already claimed the deal as their victory at the expense of archenemies US and Israel. The lifting of sanctions is regarded by most Arab regimes as aWestern support for the Al Khamenei regime, which still openly calls for the destruction of Israel, sees the West as the enemy, and wants to remove the conservative Gulf monarchies.  
 
The Western position is not taken lightly by the Arabs, the effects of the Arab Spring, the insufficient support against Daesh/IS and others, the call for democracy which has removed staunch Western allies (Egypt), is taking its toll in the Arab-West relationship. The Iranian deal will increase Tehran’s financial and economic capabilities to support its regional hegemonic ideas and support for opposition groups in Syria (Hezbollah), Yemen (Houthi’s) and Iraq (Shi’a militias).  At the same time, the expected Iranian oil glut will further put economic pressure on other Arab regimes, that already are in dire need of money to meet their expandd social agendas. 
Saudi Arabia’s move to increase its government debt by issuing state bonds should be seen as a warning that things are becoming critical.  Bahrain, Qatar, Iraq and all of North Africa, are already unable to meet their government budget requirements.  All will be focusing on keeping prices at the same levels or would like to see crude oil prices increase.  Iran, in combination with the US shale oil threat, is not seen as a positive development.  If consumers expect that their gasoline bills will decrease because of this deal, it could be wishful thinking and its not a real option.  Oil and gas producers will not be willing to lose their source of revenue. 

For American consumers the overall picture is even more difficult. Car junkies are longing for lower gasoline prices, understandable but negative for their economy as a whole. Lower oil prices, supported by Iranian oil exports, will further crush US domestic oil and gas production.  Most shale producers are already struggling, and only surviving due to the fact that production was hedged for a long period of time. This situation will change dramatically very soon. Obama’s Iranian move, meant to fulfill his promise of bringing Iran back to the fold, could mean the destruction for America’s booming shale gas renaissance.  Low prices seem to be profitable for all, but in general result in more casualties than winners.  Iran at present is the only one still smiling. 

Dr Cyril Widdershoven is a Middle East specialist, holding a PhD War Studies, and long-time oil and gas analyst. He has worked for over 20 years in the Middle East and North Africa for international consultancies and think-tanks in the US, UK, UAE and the Netherlands. He can be reached via cwiddershoven@hotmail.com or Skype: Cyril.widdershoven