One of the key components of last year’s OPEC production deal was the proviso that the Islamic Republic of Iran could continue increasing production by several hundred thousand bpd, until it had reached its 2012 level of output. The agreement came after months of Iranian boasts regarding its national crude oil production, which had surged by nearly 1 million bpd after sanctions on its economy were lifted in January 2015.
Now Iran is pumping 3.8 million bpd, its highest level of production since October 2008 according to OPEC data, and national production seems to be levelling off, at least for the moment. Despite the frequent assertions that Iran’s “true” production ceiling should be north of 4 million bpd, a level Iran hasn’t reached since 2011, it would appear that production from OPEC’s third-largest producer will remain at or near 3.8 million bpd. Iranian ambitions will run up against market realities, as well as the necessity to play nice with OPEC, at least for the time being.
Despite its status as a regional trouble-maker and a frequent adversary of OPEC-leader and first-rank producer Saudi Arabia, Iran has stuck fairly close to its OPEC commitment and won’t likely deviate, despite some assertions to the contrary. The original parameters of the deal dictated that Iran would not produce more than 3.9 million, while Iran insisted that it would keep pumping until it had recovered its pre-2013 export level. It has now surpassed that mark, and is exporting 2.5 million bpd. For a single day in February exports surpassed 3 million bpd, the highest export level since the 1979 Islamic Revolution, according to Bloomberg.
On March 14 Bijan Zanganeh announced that Iran would cap production at 3.8 million bpd in the second half of 2017, as long as the OPEC production deal held. That’s a bit of a change in tune for Zanganeh, who was demanding last fall that Iran produce as much as 4.4 million, its production level in 2011 according to data from BP.
Iran has been seeking more investment for its undeveloped gas and oil fields, some of the richest in the world. On March 14 the country announced production from the Azar oil field, shared with neighboring Iraq. Production is set at 15,000 bpd and is expected to double in spring before reaching 65,000 bpd in March 2018. A recent thaw in Iran-Iraq oil relations indicates further cooperation between the two countries, which share a long border and a number of oil and gas fields. In February a memo of understanding was signed on a pipeline from the Iraqi field at Kirkuk to the Persian Gulf, passing through Iranian territory. The deal would also have Iraqi oil refined and shipped from the Iranian refinery at Abadan, which was destroyed during the Iran-Iraq War and has since been rebuilt.
There are five Iraqi oil fields positioned along or straddling the Iran-Iraq border, and a London-based institute has estimated Iraq lost around $17 billion in stolen oil revenue from Iran pillaging these fields in 2012. Sour relations over shared fossil fuel reserves have troubled the two countries for decades, but the recent turn towards burying the hatchet foreshadows greater cooperation.
Much of this is political: the Iraqi government, quarreling with the autonomous Kurdish region in its north which has concluded its own oil deals, is looking for ways to boost revenue without having to negotiate with Erbil. Iran, enjoying considerable influence in Iraq thanks to its support for Shia militia groups and its actions in combatting the Islamic State, could stand to benefit if Kurdistan and Iraq continue to argue over Iraq’s oil resources.
Iran had signaled that it considers exploiting shared oil and gas fields a priority, as it attempts to draw in more foreign investment. Without that new capital, Iran can’t sustain its current 3.8 million bpd production rate. As part of its export plans, Iran will start exporting gas to Baghdad later this year, while pipelines to Oman and Pakistan have been contemplated, as are new plans to export LNG from the South Pars field, which Iran shares with Kuwait. But a glutted market and considerable competition, not to mention Iran’s own rising demand for gas products, will likely stifle export ambitions, according to Bloomberg.
The Iranian government confirmed a $1.3 billion bond issue in February, aimed at raising money for new projects. The government of Hassan Rouhani hopes to issue new oil and gas contracts later this year for dozens of projects. Yet with estimates of capital needs nearing $200 billion, Iran would require massive interest from companies. In March Iranian media reported the country was close to securing $80-85 billion in foreign investment, but this money hasn’t entirely materialized yet. If Iran were to ramp up production it would tax existing infrastructure and likely further depress prices.
Then there is the question of domestic demand. As Bloomberg has pointed out, Iran consumes nearly all its natural gas through domestic consumption: as the fourth-largest natural gas market on earth, Iran requires huge amounts of domestic purposes, petrochemicals and other industries. Increased natural gas production would begin earning export revenue after a relatively long ramp-up period.
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That leaves crude oil, which Iran is now exporting at higher levels than in any year since 2011. But data from BP shows that the level of Iranian exports left over after domestic consumption remains historically low. Iran may be pumping more, but a greater share of its domestic production goes to meet domestic needs.
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So, political improvements along the Iraq border notwithstanding, it’s clear that the obstacles to further Iranian growth in production are significant, which might explain Zanganeh’s agreement to abide by the OPEC, deal going back on a previous assertion that Iran would produce 4 million bpd by March 2017.
By Gregory Brew for Oilprice.com
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