Iranian oil industry recovery would be gradual, experts suggest

Iran is unlikely to increase its crude oil production much as the Nov. 24 nuclear agreement it reached with Western governments is implemented, experts agreed. But the country will try to use it to create a climate for secondary sanctions to be eased so Iran can start rebuilding its oil and gas industry, they said during a Dec. 18 forum at the Atlantic Council.

“Almost every analyst I’ve read sees no change for the next 6 months,” said Guy F. Caruso, a senior advisor at the Center for Strategic and International Studies and former US Energy Information Administration administrator. “The 6 months after that could be different.”

Petroleum Minister Bijan Zanganeh wants to begin drilling new crude oil wells and raise production to 4 million b/d, increase production from the South Pars natural gas field by 115 bcm/d, and focus more on petroleum products and petrochemicals, said Sara Vakshouri, president of SVP International.

Iran will need about $100 billion of outside investments as it tries to restore production and export capacity which sanctions have hit hard, she continued. “It has experience negotiators who can appeal to a consuming country’s desire to diversify its sources,” Vakshouri said. “Iran historically has taken care of its customers, particularly when supplies are tight. But markets aren’t particularly strong now.”

Zanganeh realized Iran’s production agreements will need to be reformed and sought input from companies that used to have concessions there in anticipation of offering 10-13 potential projects in April, she indicated. “Iran has some advantages in that its conventional oil production costs are much less than for tight oil,” Vakshouri said. “Compared to Iraq, its labor force has better skills.”

Emphasis will shift

But another observer said he expects the country to move in another direction. “I think gas and petroleum products are the future of Iran,” said Bijan Khajepour, a managing partner at Atieh International. “It has some capabilities, even without Western assistance. It’s investing heavily in new refineries, and in industries which rely on gas. Come 2016, Iran will export less crude oil and more gas and products.”

He said the regional as a whole has little gas outside Iran and Qatar. But Caruso said Iran’s future gas sales likely will be confined to its neighbors because liquefied natural gas exports are growing from Australia and the US. “It might be able to sell some refined products, but it will be hard for Iran to compete outside of its region,” he added.

One reason is that its refineries have not kept pace with those in other countries because of sanctions, the speakers said. Gasoline has lower octane than elsewhere and uses methyl tertiary butyl ether, instead of ethanol, as an enhancer, they noted. “If Iran is going to build new crude oil refineries, it will need to move away from traditional technologies,” Vakshouri said. “That’s why it’s selling crude oil and importing gasoline from India.”

Iran initially will seek relief from United Nations sanctions, and address those imposed by the US later, predicted Barbara Slavin, a senior fellow at the Atlantic Council’s South Asia Center and the discussion’s moderator. Its statement on Nov. 24 indicated that its early expectations are minimal, she added. “It’s looking, instead, for the kind of détente similar to what the Soviet Union and the US reached in the 1970s where the countries don’t necessarily hug each other but begin communicating, sometimes through proxies,” she said.

The country’s ability to satisfy the agreement’s conditions will determine whether about $7 billion of sanctions – largely on its own oil earnings which have been frozen abroad – are eased. “A lot of [the National Iranian Oil Co.’s] subcontractors, including companies controlled by the Iranian Revolutionary Guard, have not been paid,” said Khajepour. “If sanctions were eased and cash flow was restored, they would be. That could create a little momentum.”

Contact Nick Snow at nicks@pennwell.com

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