Iranian government pessimistic about 2016 oil price rise
The government of Iran may set the price of oil between $42 and $50 in the state budget beginning March 2016
Iran’s government has little confidence that the global price of oil will rise next year, following announcements that the price may be set between $42 and $50 in the state budget for the Iranian year beginning March 2016.
In common with other producing nations, the dramatic slide in oil prices since mid 2014 has left the Islamic Republic reeling from a widening budget deficit and desperate to boost crude exports following the implementation of the nuclear deal struck with world powers in July. For the government of the president, Hassan Rouhani, an end to the numerous sanctions against its oil industry which more than halved its crude exports to around 1m barrels a day (b/d) can’t come soon enough.
While the country has offset some of the fiscal pressure by boosting exports of gas condensates and petrochemicals over the last two years – these commodities were unaffected by sanctions – continuing low prices continue to pose major challenges for the government’s spending plans.
“In consultation with the ministry of petroleum, three price options of $42, $45 and $50 were discussed which are expected to earn tomans 68 trillion (about $22.5bn),” government spokesman Mohammad Baqer Nobakht told Iranian television mid-September.
But in a separate interview, Nobakht tried to put a positive spin on the situation, saying that Iran was weaning itself off its long-time dependence on oil: “At most 30% of the budget is dependent on oil and 70% is independent from oil revenues and that is a positive point,” he was quoted by Shana, the oil ministry news website, as saying 15 September.
Over the last year, Rouhani has shaved spending on social security cash payouts and pushed up the cost of subsidized food and fuel. But with the public having suffered major economic strain in recent years there are limits to what further cuts in funding his government can impose. That leaves many hopes pinned on kick-starting Iran’s economic recovery through boosting oil exports.
Oil minister Bijan Zanganeh has said that exports can be boosted by around 0.5m b/d as soon as sanctions are lifted and by a further 0.5m b/d in the following six month period. While such targets may be a stretch, any increase will provide valuable additional revenues for the government.
Iran has been busy developing a new international oil contract to replace its outdated and disliked buyback agreement. The framework contract offers much more competitive terms over 20-25 years with rewards for greater risks taken. It is expected to be unveiled at a conference in December in London alongside a list of some 40 priority oil and gas projects that Iran wants international expertise on.
An official familiar with the draft contract said it was the subject of discussions among the many international oil companies visiting Tehran. He confirmed that it had been discussed with executives from Anglo-Dutch major Shell who accompanied the UK foreign minister Philip Hammond to Tehran last month.
“The contract has passed most stages now and is just waiting for approval from the cabinet,” the source told Petroleum Economist, declining to outline any further details.
Encouraged by the nuclear deal and invitations from Iranian oil officials, many of Europe’s IOCs are queuing up to visit. Although there is reticence to invest at a time of low prices, Iran offers potential for profitable returns at lowish cost. But there are other pitfalls, namely the risk of "snapback" sanctions if Iran fails to comply with its nuclear obligations. Companies will also continue to proceed cautiously to avoid breaching US legislation if they have operations there.