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Growth hiatus

The Opec deal lets Iran increase output. It’s unlikely to breach that limit … for now

Former president Akbar Hashemi Rafsanjani, who died on 8 January at the age of 82, was frustrated by US sanctions when he tried to entice ConocoPhillips to his country. Now the administration of his successor and protégé, Hassan Rouhani, is treading a tricky path between new politics abroad, elections at home, sanctions, foreign oil companies and Opec.

Iran has long had the goal of raising oil production significantly, in line with its reserves and its historical importance within Opec. For many years the group's clear second-largest producer, it has now fallen well behind Iraq into third place. Its oil production target is 5.8m b/d by 2021, of which about 4.8m b/d would be crude oil.

This strategy has not obviously been shifted at all by the Opec deal reached on 30 November. Under that accord, supplemented by the arrangement with a selection of non-OPEC countries in December, Iran was granted an output target of 3.79m b/d, a 2.9% increase on its October production, in contrast to most countries who committed to cuts of about 4.5%. Iran's figure was justified by a complicated reference to its pre-sanctions capacity.

From a level of around 2.8m b/d during 2015, Iran's production rose sharply following the lifting of sanctions in January 2016 to reach 3.62m b/d by June. Since then it has only inched up to 3.7m b/d in November, and gained another 30,000 b/d in December, according to a Reuters survey.

Since the start of October, about half its crude and condensate in floating storage has been sold, reducing stocks from 29.6m barrels to 16.4m - that is, an average boost to exports of 140,000 b/d. But one that cannot continue much longer. So although production will probably keep inching up, Iran will not threaten to breach its Opec target seriously until it achieves a major boost from new investment.

As the chart illustrates in the case of Japan, the gain in Iranian exports from the start of 2016 was particularly in Iran Heavy grade (30.2°API), produced from the Gachsaran, Marun, Bibi Hakimeh, Rag-e Sefid, Ahvaz and Mansouri fields in the southwestern Khuzestan province. Iran Light (33.5°API) comes from the Ahvaz field (Asmari reservoir), Karanj and Agha Jari fields. (The sharp drop in imports in April 2016 was due to remaining sanctions issues with shipping).

All these workhorse fields, discovered between the 1920s and 1960s, are in decline. They need redevelopment and the expansion of gas-injection schemes. Bahregansar, Foroozan and the heavy Soroosh grade are offshore crudes, as are Lavan and Sirri, which were not imported by Japan in this period.

Heavy gains: Japanese crude and condensate imports from Iran by grade. Source: Ministry of Economy, Trade and Industry

Most new Iranian crude production is scheduled to come from a group of greenfields along the Iraqi border, in the West Karun area. The most important are Azadegan, Yadavaran and Yaran. These contain mostly heavy crude, and state company Nioc plans to offer a new grade of 25-26°API, which would be akin to Iraq's Basrah Heavy. Yadavaran is set to produce 300,000 b/d when fully developed, North Azadegan 75,000 b/d and South Azadegan 0.6m b/d, lifting total output from the area from about 260,000 b/d to 1m b/d.

West Karun would therefore make up most of the planned gain in Iranian output, but only if declines at the mature fields can be halted. In early January, Nioc announced the list of international oil companies approved to bid for several oil-and gasfield-development projects under its newly minted Iran Petroleum Contract (IPC). The list of projects includes 13 oil greenfields and 17 oil brownfields (including Ahvaz and Mansouri), as well as 15 gasfields.

Hopeful partners: IOCs approved to bid

Cnooc (China) Itochu (Japan)  Perenco (France/UK) Shell (NL/UK)
CNPC (China)  Korea Gas (South Korea) Pertamina (Indonesia) Sinopec (China)
CNPW (China)  Lukoil (Russia) PGNiG (Poland) Total (France)
DNO (Norway)  Maersk (Denmark) Pluspetrol (Argentina) Wintershall (Germany)
Eni (Italy)  Mitsubishi (Japan) Posco Daewoo (South Korea)
Gazprom (Russia)  OMV (Austria) PTTEP (Thailand)
Inpex (Japan)  ONGC Videsh (India) Schlumberger (US/NL)

 

Shell, Total and Petronas have all signed memoranda of understanding (MOUs) to evaluate South Azadegan; Shell for Yadavaran (which is under development by China's Sinopec); and CNPC was previously working at North Azadegan. The first deal under the IPC was signed by local firm Persia Oil and Gas (part of Supreme Leader Ali Khamenei's Setad organisation) for the South Yaran field. This was intended to deflect domestic criticism of the IPC by hardliners as a 'sell-out' to foreign interests.

Total made the biggest splash so far, signing, in partnership with CNPC, a heads of agreement for Phase 11 of the South Pars gasfield on 8 November, the day of the US election. No final deals have been signed with international companies yet, and one of the biggest factors holding them back is, of course, the change at the White House. Donald Trump's inauguration on 20 January leaves the future of the nuclear deal and the continued suspension of sanctions unclear, though Secretary of State nominee Rex Tillerson spoke about it in fairly moderate terms at his confirmation hearing.

President Rouhani himself faces a re-election test in May this year. The death of his mentor Rafsanjani robs him of some cover. But it also cements his position as one of the key leaders of the pragmatic-reformist current, and diminishes the association with corruption which tarred the fabulously wealthy Rafsanjani, including the early 2000s Statoil bribery case involving his son Mehdi Hashemi Rafsanjani.

To win re-election, Mr Rouhani needs to keep the nuclear deal, his signature agreement, alive; avoid any impression of capitulating to the US; and leverage the end of sanctions to revive the still-tepid Iranian economy. OPEC production cuts and the boost in price help, but new oil investment is increasingly crucial. At some point - though not in the next six months - Iran's output strategy and Opec's production restraint are set to collide.

PE verdict: In the short term, Iran will struggle to add more supply than its Opec pledge allows. But that could change later.

This article is part of a report series on Opec. Next article: Saudi dealmaker

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