After years of sanctions Iran is in the process of recovering rapidly, despite operating in an environment of oversupply. These gains are a result of the bold stance Iran has taken, but will Iran's ambitious oil policy succeed?
The international sanctions had a strong impact on Iran’s oil revenues, halving crude oil exports to 1.1 million b/d and forcing the NIOC to shut down production at many of its southern fields. Four months since the lifting of most sanctions, both production and exports are now ramping-up. The country is on the brink of retaking its pre-sanctions market share after having targeted its legacy markets in Europe, China, India, Japan and South Korea, at the expense of declining non-OPEC supply.
Iran has been an oil producer for more than a century. There is a dense midstream infrastructure, which is in a relatively good state. Although some pipelines, tankers, and storage tanks need upgrading, they do not present a bottleneck in the short run. In addition the export infrastructure has been expanded, with increased storage and tanker capacity. Crude tank storage capacity has increased four-fold since 2000, to 30 million barrels. So, the short-term goals of surpassing pre-sanctions levels of production and export are attainable.
Risks to long-term growth of Iran oil production and exports
The longer term growth prospects rely on attracting capital investment and the fiscal vehicle for this is the new Iran Petroleum Contract (IPC). There are 29 oil projects out of 49 upstream oil and gas development projects offered to local and foreign investors.
We estimate the 29 oil projects hold 11 billion barrels of recoverable crude oil. The implementation and attractiveness of the IPC will be critical to meet many of these long term objectives. But the IPC is proving controversial and is still to be approved. The new terms face internal criticism from conservative MPs and from the IRGC, who are against too much openness; the Supreme Leader’s final stance is critical.
A lack of investment on greenfield projects and limited EOR skills have resulted in low recovery rates and unmet targets. Other producers in the region such as Saudi Arabia, Kuwait and IOC-backed Iraqi fields have significantly higher recovery rates, so Iran is currently underperforming within the region. Reserves growth represents a huge opportunity, but investment and EOR skills from IPC projects are critical.
The NIOC is preparing the launch of West Karun, a new heavy oil blend with 25° API. We estimate West Karun could represent 12% of Iran’s crude oil output by 2025, becoming Iran’s third main blend in terms of volumes, after Iran Heavy and Iran Light. But although Asian heavy oil demand is expected to grow, West Karun will face strong competition within growing Middle East heavy oil supply.
New refining capacity will absorb strong growth in condensate production. With new South Pars phases coming onstream, condensate production will increase by 60% by 2025 to reach close to 1 million b/d. Two ambitious refinery projects – Persian Gulf Star and Siraf – will potentially increase refining capacity by 840,000 b/d and will turn the country from a gasoline importer to an exporter.
In the short-term Iran is in a strong position and the bold policy it has adopted is proving a success. In the long term everything is not in Tehran’s hands: many foreign companies remain very tentative about engaging with the country. With the US primary sanctions still in place, the financial restrictions are creating a cautionary approach.
Given the resources on offer, setting the right terms could trigger a huge inflow of much needed capital investment in the upstream sector, which could free capital to be spent on critical downstream projects. Internally, such reform is likely to go through a difficult political battle too. Other chronic issues such as project delays will also need to be tackled if Iran wants to reach its long-term goals.