IRANIAN OIL WILL UP
Over last weekend, Iran took a step toward increased oil and other liquid fuels production and exports as the international community lifted many of the nuclear-related sanctions that severely constrained Iran's ability to operate in the global market.
The sanctions were lifted on January 16, which was implementation day for the Joint Comprehensive Plan of Action (JCPOA), an agreement among the P5+1 (the five permanent members of the United Nations Security Council and Germany), the European Union (EU), and Iran. On that day, the International Atomic Energy Agency verified that Iran had completed the key physical steps required to trigger sanctions relief. With this milestone, the United States, the EU, and the United Nations have lifted nuclear-related sanctions against Iran, which include oil-related sanctions that have limited Iran's ability to sell its oil on the global market since late 2011. With nuclear-related sanctions being lifted:
- Some Iranian banks can get back on the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system to conduct financial transactions electronically on the world market.
- Iran can access its foreign reserves held in banks worldwide. Iran's Central Bank has $100 billion to $125 billion in foreign exchange assets globally, but Treasury estimates Iran's usable liquid assets to be just slightly more than $50 billion.
- Non-U.S. companies can invest in Iran's oil and natural gas industry, including the sale, supply, and transfer of equipment and technology.
- Countries within the EU and elsewhere that had ceased imports of energy from Iran can again import Iranian oil, natural gas, and petrochemical products. Countries that are already importing from Iran can increase their purchases.
- European protection and indemnity (P&I) clubs can provide Iranian oil tankers with insurance and reinsurance.
Nonetheless, U.S. sanctions related to human rights abuses and terrorism are still in place, and some Iranian individuals and entities that were delisted under nuclear sanctions are still covered under existing sanctions. As a result, non-U.S. companies may be slow to rush back into Iran as they figure out how to resume business with Iran without violating the non-nuclear sanctions that remain in effect.
Ultimately, nuclear-related sanctions relief will lead to an increase in Iran's oil production and exports (Figure 1). Iran's crude oil production has been relatively flat over the past three years while sanctions were in place, averaging 2.8 million barrels per day (b/d) in 2015, representing 9% of total crude oil production from the Organization of the Petroleum Exporting Countries (OPEC). Iran's annual average crude oil production is forecast at 3.1 million b/d in 2016 (10% of projected total OPEC production), and almost 3.6 million b/d in 2017.
Consistent with these forecasts for average annual production, Iran's crude oil production is expected to reach 3.3 million b/d at the end of 2016 and 3.7 million b/d at the end of 2017. EIA estimates an uncertainty range of +/- 250,000 b/d surrounding these year-end projections, with actual outcomes dependent on Iran's ability to mitigate production decline rates, deal with technical challenges, and bring new oil fields into production.
Most of Iran's forecast production growth comes from its preexisting crude oil production capacity that is currently shut in, while the remainder comes from newly developed fields. Iran has a number of new oil fields that Iranian and Chinese companies have been developing over the past several years, which have the potential to add 100,000 b/d to 200,000 b/d of crude oil production capacity by 2017. The STEO forecast also accounts for production declines at Iran's mature oil fields (Figure 2).
Beyond crude oil, Iran's condensate and natural gas plant liquids (NGPL) production is currently almost 750,000 b/d, of which 75% is condensate and the remainder NGPL. Iran's noncrude liquids production has grown over the past few years. The main buyers of Iran's noncrude liquids have been in countries in Asia, mainly China, and the United Arab Emirates (UAE).
Iran's noncrude liquids production is expected to grow by 150,000 b/d by the end of 2016 and by an additional 100,000 b/d by the end of 2017, as more project phases at the South Pars natural gas field come online. More than 80% of Iran's condensate production comes from the South Pars field located offshore in the Persian Gulf, which is Iran's largest nonassociated gas field. Lack of foreign investment and insufficient financing, stemming from international sanctions, have slowed the development of South Pars. However, some progress has been made in recent years, and sanctions relief is expected to quicken the pace of development of its remaining phases over the next decade.
With Iran's petroleum and other liquid fuels consumption expected to remain flat over the next two years, crude oil and other liquid fuels from the production increase is likely to be sold in export markets. The pace at which Iran will ramp up its exports now that sanctions are lifted is uncertain. Iran has a considerable amount of oil stored offshore in tankers (between 30 million and 50 million barrels), most of which is condensate, and crude oil stored at onshore facilities. Initial post-sanction increases in Iranian exports will most likely come from storage, while meaningful production increases will occur after some of the storage is cleared.
Iran is targeting its traditional customers in an attempt to reestablish trade links and regain market share. The anticipated global inventory builds in 2016 will present challenges to Iran in regaining market share quickly. Iran lost a significant amount of its market share in Asia, Europe, Turkey, and South Africa after the last round of sanctions hit, causing a more than 1.0 million b/d drop in Iran's crude oil and condensate exports after 2011. Iran lost an average of 3% of its market share in Asia, which was mostly purchasing Iranian heavy crude oil. Iran lost 5% of its market share in Europe, which mostly purchased Iranian light crude oil. Iran lost 22% and 20% of its market share in Turkey and South Africa, respectively, where Iran previously was the top oil supplier.
Displaced Iranian oil was substituted by multiple countries, including Nigeria, Iraq, Russia, Angola, UAE, Kuwait, and Saudi Arabia. Nigerian barrels were the top substitute in Europe and South Africa, Russian barrels in Asia, and Iraqi barrels in Turkey (Table 1 and Figure 3).
In 2017 the global oil market to become more balanced as global consumption catches up to production. Also, with the exception of Iraq and to a lesser extent Angola, production from the countries that substituted for lost Iranian barrels is forecast to remain flat or decline in 2016 and 2017. As a result, Iran has the potential to regain a significant portion of market share lost since 2011 during the two-year forecast period.
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