Iran gears up to boost global oil sales as talks to lift sanctions show signs of progress. But even if a deal is made, the flow of additional crude into the market can be gradual.
State controlled National Iranian Oil Co. has primed the oil fields – and relationships with customers – so it can increase exports if a deal is struck, officials said. By the most optimistic estimates, the country could return to pre-sanctions production levels of nearly 4 million barrels per day in as little as three months. It could also harness the value of oil from a flotilla that is stored.
But there are still a lot of hurdles to overcome before this can happen. Any agreement must completely dismantle the range of US barriers to trade, navigation and insurance involving Iranian entities. Even so, buyers may still be reluctant, according to Mohammad Ali Khatibi, a former NIOC official.
“Our return can be a gradual process rather than a quick and sudden – it cannot happen overnight,” Khatibi said in an interview. It may be a “protracted process, in part because of the coronavirus pandemic, which has drastically affected demand.”
The pace of Iran’s return could prove critical to the global oil market. While fuel mileage is on the rebound, it remains depressed by lockouts and new virus epidemics. Additional Iranian supplies would place a burden on its counterparts in the OPEC + alliance, which has worked hard for more than a year to eliminate a persistent supply glut.
US and Iranian diplomats, currently negotiating through intermediate governments in Vienna, have signaled that a deal is underway.
If successful, they could reactivate the international nuclear deal that Donald Trump unilaterally withdrew in 2018. This would force Iran to once again accept limits on its atomic activities, in exchange for the lifting of a set of severe sanctions. imposed by the former president.
Tehran has already benefited from the less hostile climate announced by the election of President Joe Biden. It is to revive oil sales, to send a flood of Iranian crude to emboldened Chinese buyers. Production climbed nearly 20% this year to 2.4 million barrels per day, the highest in two years, according to data compiled by Bloomberg.
“Even if the sanctions are not lifted, depending on their ability to sell oil on the gray market, they will further increase their production,” said Sara Vakhshouri, president of consultancy firm SVB Energy International LLC in Washington.
Engineers at the government-owned NIOC have rotated crude production between different fields to maintain sufficient pressure in the reservoirs, according to company officials, who asked not to be identified during discussions of operations. . The procedure is crucial to maintain production levels. Gas injections into former oil fields in the south of the country play a similar role, SVB’s Vakhshouri said.
If there is an agreement with the United States, the Islamic Republic could increase production to nearly 4 million barrels per day in three to six months, according to Iman Nasseri, managing director for the Middle East at consultant FGE , who has decades of experience in the region. including a period of work in Iran.
Others expect a slower pace. It would take 12 to 15 months after the sanctions were lifted to increase production to 3.8 million barrels per day, said Reza Padidar, head of the energy committee of the Tehran Chamber of Commerce, in a telephone interview. Some work needed to restore the capacity of fields, such as the removal and maintenance of stuck borehole pumps, can take up to a month per well, he said.
Even before increasing its production, Iran could generate an increase in oil sales. FGE’s Nasseri estimates the country has stored around 60 million barrels of crude. About 11 million barrels of this crude, plus an additional 10 million barrels of a light oil called condensate, are in “bonded storage” in China, where it is ready to be sold to end users, according to FGE.
NIOC officials say they have maintained contact with customers, who are ready to resume purchasing on regular contracts.
An Iranian restart poses complications for the Organization of the Petroleum Exporting Countries and its allies. Led by Saudi Arabia, the 23-country coalition is gradually restoring oil production it cut last year when the coronavirus crisis hit demand.
Saudi Energy Minister Prince Abdulaziz bin Salman said the producer group will make room for Iran to increase production, as it has done in the past. It’s unclear whether other members of the alliance, which include countries keen to jumpstart production like Russia and the United Arab Emirates, will be so accommodating. But they may not need to be.
While Tehran and Washington are still struggling to get the best possible deal terms, a deal may take much longer. If recent attacks and incidents in the Persian Gulf escalate into open hostilities, this could disappear altogether.
The talks could also be affected by next month’s elections, after which Iranian President Hassan Rouhani will step down. While Supreme Leader Ayatollah Ali Khamenei has so far endorsed the negotiations, Rouhani’s successor could take a tougher stance against the United States.
Even if the sanctions are lifted, Iran faces other problems. Oil refiners likely signed annual contracts at the start of the year, leaving little room for Tehran to make its own long-term supply agreements for now, Khatibi said.
“Our biggest concern is the limitations placed on our customers and their fear of buying oil from Iran,” he said. “As we approach the end of the year, we’ll see more futures materialize.”
Trump’s sanctions have “stifled” Iran’s relations with traditional customers, including India, China, South Korea, Japan and Turkey, to a greater extent than previous rounds of trade restrictions , said Padidar of the Tehran Chamber of Commerce.
For many in the market, Wall Street banks like JPMorgan Chase & Co. to trading houses such as Vitol Group, oil demand is picking up fast enough to comfortably absorb additional Iranian barrels. With rapid vaccine roll-out helping end lockdowns, pent-up travel demand is expected to propel consumption up in the second half of the year.
“There is room for the return of oil from Iran,” said Mike Muller, head of oil trading in Asia for Vitol Group, the world’s largest independent trader. “It won’t come back all at once.”
– With the help of Golnar Motevalli and Jonathan Tirone