The nuclear agreement with Iran opens the way for a flood of new oil eventually to pour onto world markets, setting up a potential windfall for energy giants. But it will take a year or more before Iran can increase production significantly, delaying any impact on oil prices. "It's not just a matter of turning on the taps again," said Andrew Slaughter, executive director of the Deloitte Center for Energy Solutions. "They will need some investments and technology."
With nearly 10 per cent of global oil reserves and 18 per cent of natural gas reserves, Iran is potentially an energy market mover that can compete with producers like Saudi Arabia and Russia. As optimism increased for a nuclear deal, oil giants like Royal Dutch Shell, Total of France and Eni of Italy looked for investment opportunities in Iran in recent weeks. Even after years of underinvestment and mismanagement of its ageing oil fields, Iran has a production capacity of 3.5 million barrels a day, roughly four per cent of the global output. It is already a major supplier to China, India, Japan, South Korea and Turkey.
Oil companies are not the only businesses eyeing Iran. With some exceptions for food and medical supplies, American companies have been prohibited from selling to Iran since the 1979 takeover of the United States embassy in Tehran. If sanctions are lifted, consumer-oriented companies, in particular, could find opportunity in this country with 81 million consumers, many of whom are young.
Significant hurdles remain. The Iran oil industry is in a state of disarray. For most of the last three decades, Iran has been off limits to Western oil companies because of sanctions and Iranian laws that limit the profitability of private energy investments. Without modern technology and new investment, oil and gas fields have been in sharp decline. The country has lost a million barrels a day of exports since 2012. Iranian officials have been promising to regain those barrels quickly once a deal is signed. At the Organization of the Petroleum Exporting Countries meeting last month, Bijan Namdar Zanganeh, the Iranian oil minister, predicted a quick export rebound of 400,000 barrels a day and an additional 600,000 barrels after six months.
But most independent oil analysts say Iran's projections are overly optimistic. "It should take a good year between the day they sign the agreement and when they add 500,000 barrels of production a day," said Gary Ross, executive chairman and head of global oil at the Pira Energy Group, an international consultancy. Ross said the world market should be able to absorb the extra barrels. Production in many countries is declining with oil prices slipping. Global demand, has been increasing. With each day, the market will be in a better position to accommodate the incremental Iranian oil," Ross added.
Iran has as much as 40 million barrels of crude in storage on supertankers at sea - nearly half of what the world consumes in a day - that it may soon try to release on the market. But some analysts say the stored oil is of poor quality and most refineries may be incapable of processing it.
The lifting of oil sanctions has been one of Iran's prime foreign policy objectives. Its government finances and national economy are highly dependent on oil sales. The sanctions have caused major delays and cancellations in projects, partly because of the state oil company's lack of money.
About 70 per cent of Iran's oil reserves are onshore in fields that are easily accessible. The remainder is mostly in the Persian Gulf, as well as in the Caspian Sea, where advanced exploration could significantly bolster output, according to oil experts. Senior executives of Royal Dutch Shell,
Total and Eni met Iran's oil minister in Vienna in June, and there have been other meetings in Tehran in recent months between the oil companies and Iranian officials.
Shell says it has already discussed potential areas of cooperation with Iran, assuming that the sanctions are lifted. "Strictly within the boundaries of the law, we are interested in exploring the role Shell can play in developing Iran's energy potential," the company said in a statement.
The companies are likely to invest the tens of billions of dollars required to give a major lift to Iranian production only if they are comfortable with the terms offered. Before the sanctions, Iranian deals generated low returns and did not permit the international companies to book the reserves or oil in the ground, which are important to investors' valuation of oil companies. Iranian officials say they are working on new contracts, but they have not disclosed full details.
"Iran has a massive resource base," said Kenneth B Medlock, the director of the Center for Energy Studies at Rice University. "If Western capital can flow in there, that will be the first place it wants to go because of its relatively low-cost oil."
© 2015 The New York Times News Service
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