Iran Oil & Gas Report Q1 2014
BMI View: The November 2013 interim nuclear deal reached in Geneva has rightly been hailed as a significant development in the negotiations between Iran and the West, and marks a further improvement in the Islamic Republic's international position since the election of Iranian President Hassan Rouhani in June 2013. However, it is crucial to note that the agreement does not lift sanctions on Iran's oil exports and does not allow for additional Iranian oil sales. Any significant easing of the oil export ban would only come as part of a broader, final settlement, which would be at a minimum 6-12 months away. Therefore, for the moment, the Iranian hydrocarbon sector remains largely impaired due to the ongoing sanctions. We do not expect a large increase in oil production and exports for the moment. In terms of gas, we believe that Iran will not be able to increase production sufficiently to satisfy mounting domestic gas demand. This will translate into increasing gas shortages. Meanwhile, Iran is claiming a succession of major oil and gas discoveries that, if proven, demonstrate considerable upside potential to its existing resource base. In a bid to secure much-needed investment, Iran is offering improved terms to contracts long seen as uncompetitive by operators, but few national oil companies are likely to bite in view of sanctions and a backlash from the US/UN.
We highlight the following trends and developments in Iran's oil and gas sector:
- The country's oil reserves have increased in the past two years. In 2012, Iran's oil reserves were estimated by the Energy Information Administration (EIA) at 151bn barrels (bbl), a 1.8% increase from the 2011 figure of 137bn bbl. This figure is slightly below that provided by OPEC, which estimated Iranian oil reserves at 154bn bbl for 2012. At the time of writing, Iran's oil reserves are estimated by the EIA at 155bn bbl.
- Iranian oil production and exports have fallen substantially since 2011, on the back of ever-tightening sanctions against the current Iranian government. We estimate that production in 2012 fell by around 16% from 2011 levels. According to the country's former oil minister, Rostam Qasemi, Iran's crude exports have declined by 20% amid international sanctions between 2011 and 2012. However, we estimate that the decline is much more pronounced. The International Energy Agency estimates that crude oil exports averaged just 1.1mn b/d over the first nine months of 2013, down from 2.5mn b/d in 2011 and 1.7mn b/d in 2012. Iran's current crude exports most likely hover between 1.2-1.3mn b/d. We note, however, that there can be no certainty at this stage over the scale of Iran's production and overseas sales.
- Without an easing of sanctions covering Iran's ability to sell additional oil, the country is unlikely to increase its production or exports significantly in the short term. While the November 2013 interim nuclear deal reached in Geneva is a positive development, we have not yet reached the point at which we can factor into our forecasts a return of significant volumes of Iranian crude to the market. At such, we are forecasting oil production of approximately 3.46mn b/d for 2014. We then see a very small increase of about 0.5% in annual production throughout our forecast period, but this will, of course, depend on the evolution of the sanctions situation.
- Over the near term, we see Iranian gas production increasing at an average rate of 2.5% per annum, to reach 176bcm by 2017. Iran has the capability to produce gas at a much higher level. However, the current sanctions regime leads us to believe that the country will not be able to access sufficient capital and investment for production to rise above a 3% per annum increase rate.
- Iran's gas production is increasingly insufficient to meet growing domestic demand, resulting in increasing gas shortages. The current sanctions situation leads us to believe that the country will not be able to access sufficient capital, technology or investment to complete the development of ongoing phases of its crucial South Pars field. We therefore estimate that production will not be able to meet domestic demand, pushing Iran into an increasingly difficult situation, where gas shortages are likely to occur over the coming years. We note that, in the case where sanctions are lifted, immediate additional gas supplies would likely go towards the domestic market and for re-injection into oil fields. As a result, it is unlikely that Iran would become a significant gas exporter within our forecast period, which runs until 2022.
- Iran is reportedly eyeing its first gasoline export hub in the southern Iranian city of Bandar Abbas, near the Persian Gulf, amid Western sanctions against the country. The Bandar Abbas and Persian Gulf Star refineries are expected to have a total production capacity of 50mn litres of gasoline per day. Gasoline produced at the two refineries will meet Euro-4 and Euro-5 requirements. Four oil refining projects are underway in Iran, which are expected to boost the country's gasoline production capacity to 144mn litres, according to Farhad Ahmadi, the managing director of National Iranian Oil Engineering and Construction Company.
- On May 10 2012, Iran's state news agency announced the discovery of 8-10bn barrels (bbl) of oil in an unnamed oilfield located within the Iranian sector of the Caspian Sea. After the 'huge light crude oil' discovery reported by the Mehr news agency in April, this was the second reportedly substantial find to have been made in 2012. The Caspian oil discovery suggests that the total volume of resources found since 2009 - according to Iranian news sources - could easily exceed 53.06bn bbl of liquids and 3,500bn cubic metres (bcm) of gas.
- A consortium has been formed to develop Iran's oil and gas fields in the Caspian Sea, reports Mehr News Agency, citing Mohammad Sahid Seigi, the head of the maritime studies centre at the Sharif University of Technology. The consortium was created by the country's oil ministry, several Iranian universities and Khazar Oil Company. Close to 2,500 oil and gas wells are likely to be drilled and commissioned during the country's fifth five-year economic development plan (2010-2015).
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