24/01/2016

The US government’s Energy Information Agency expects Iran to ramp up oil output at a fairly modest pace, adding its voice to those sceptical of Tehran’s claims it can increase production rapidly in coming months.

There have been a wide range of forecasts from interested parties and independent analysts about how much Iran might be able to increase, which is one of the most important questions facing the oil market this year.

The widespread view is that the market will take many months for demand to catch up with supply and allow the price to recover some of the 75 per cent it has lost since late 2014.

As the International Energy Agency in Paris pointed out last week, Iran’s full return to the market is crucial: “Post-sanctions Iran is, in fact, likely to emerge as Opec’s only source of significant growth in 2016.”

Iran’s oil industry has been subject to international sanctions since 2011, which have curbed its ability to export oil and starved it of investment.

In an analysis of Iran’s prospects after nuclear-related sanctions, which were formally lifted last week, the EIA concludes that Iran’s production is likely to grow by 300,000 barrels per day this year and by another 500,000 bpd next year.

Bijan Namdar Zanganeh, Iran’s oil minister, has claimed that production would rise by 1 million bpd over six months.

But “the pace at which Iran will ramp up its exports now that sanctions are lifted is uncertain”, the EIA concedes. For example, it is not clear how much Iran has stored oil it could not sell.

“Iran has a considerable amount of oil stored offshore in tankers [between 30 million and 50 million barrels],” the agency notes. So any “meaningful production increases will occur [only] after some of the storage is cleared”.

After that, the rate of increase will depend on how much investment it can attract.

There are a number of factors that may stymie investment, including the fact that the oil price crash has put international oil companies under pressure from investors who want dividends protected even with much reduced cash flow.

The industry consultant Wood Mackenzie has argued that many big IOCs may be “willing to leave some value on the table” to secure a rare access to Iran’s huge reserves.

But the EIA says that political pressure may also still apply, even though the nuclear-related sanctions have been lifted.

Key to Iran’s impact on the market will be how exactly it goes about trying to recapture market share lost during the sanctions years, the EIA said.

Opec output is forecast to be flat this year, while non-Opec output is forecast to drop by 600,000 bpd.

So assuming its production increase is modest and it offers significant discounts, “Iran has the potential to regain a significant portion of market share lost since 2011 during the two-year forecast period”, the EIA concluded.

Anthony McAuley - The National