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Iranian oil gushing forth

Oil output and exports are rising fast. But longer-term gains will need the support of the IOCs

SINCE emerging from international sanctions in January Iran has steadily increased its crude production and regained its place as a major oil exporter to Europe and Asia.

The swift return of the country’s oil – a much quicker recovery than many analysts expected – is likely to prolong the global oversupply, and remains a major obstacle to any efforts by Opec and other producers to restore balance to the market.

Iran produced 3.4m barrels a day in April, says JBC Energy, a firm of analysts, up from 2.99m b/d in January. It has vowed to reach 4m b/d as soon as possible, putting it within 100,000 b/d of its pre-sanctions 2011 level.

Sources close to state oil company Nioc say that by June its international exports of crude and condensate will reach a pre-sanctions level of around 2.5m b/d. Condensates will account for about 0.5m b/d with the rest crude oil, according to Iman Nasseri, an analyst at Facts Global Energy (FGE). Crude exports have already been rising quickly, he says. In April, they rose by 100,000 b/d from the previous month, to 1.8m b/d. Exports amounted to 1m b/d in the fourth quarter of last year.

For Riyadh, Iran’s ambition to regain market share remains intolerable

Condensate output has also increased thanks to higher production from the South Pars gasfield.

But Iran faces some hurdles in finding buyers for all its extra oil – not least competition from other exporters in the Gulf.

“Saudi Arabia has specifically ramped up production to Iranian export markets,” says Mehdi Varzi, an independent oil analyst. “It’s doing everything it can to undermine Iran.

Playing the field

Iran, on the other hand, has tried not to pique its rivals, says Nasseri. Its original plan was to increase liquids production by around 0.5m b/d between January and June and then by the same amount again by the end of the year. Fearing this would antagonise other Opec members it opted for a more conservative 400,000 b/d rise.

It needn’t have bothered. Saudi Arabia torpedoed the most recent Doha freeze talks before delegates attending the meeting even had a chance to discuss numbers. For Riyadh, Iran’s ambition to regain market share remains intolerable.

What isn’t yet clear is how much of Iran’s rising supply to the market is coming from the wellhead or storage. It’s probably both.

For Nasseri, the answer lies in new production. Iran isn’t storing much crude oil and has already sold most of its condensate, he says.

The Energy Information Administration estimated that in January Iran held between 30m and 50m barrels of crude stored in offshore tankers, most of which was condensate. Crude was also being stored at onshore facilities, it said.

Julius Walker, an analyst at JBC Energy, says some Iranian crude exports are “almost certainly” coming from tank farms. But as with much else about Iran’s oil business, the details remain vague and confidential.

Data on Iranian domestic oil production, exports and storage levels are not publicly released and so remain difficult to verify.

So traders glean what they can. The country’s oil minister, Bijan Namdar Zangeneh, said at the beginning of May that Iran’s exports to South Korea had quadrupled, to 400,000 b/d since the removal of sanctions in January.

FGE estimates that of the 1.7m b/d of crude oil Iran exported in March, about 1m b/d was split evenly between China and India. Another 200,000 b/d went to both South Korea and Japan and 300,000 b/d to Europe.

Iran’s ageing fields badly need the capital, technology and expertise that the IOCs can bring

Asian buyers – many of which remained loyal customers during the sanctions period – remain key to Iran’s efforts to boost exports. But the exporter also wants shipments to Europe to reach 0.8m-0.9m b/d by June, according to Nasseri.

The trend is certainly going in the right direction. Europe sucked in 0.5m b/d of Iranian crude in April, just 100,000 b/d less than it was importing from the country before sanctions.

As for talk of a freeze – a prospect that seems to have ended for now thanks to Saudi intransigence anyway – Iran will only discuss it when it has reached its 2.5m-b/d-liquids-export target.

But it wouldn’t mean much anyway, because Iran won’t be able to increase exports beyond that level until international oil companies (IOCs) arrive to perk up its upstream.

Iran’s ageing fields badly need the capital, technology and expertise that the IOCs can bring. President Hassan Rouhani has said Iran wants to attract as much as $50bn a year in foreign capital, much of which will be directed at achieving its ambitious 5.7m b/d output target by 2018.

But, by comparison with this year’s output recovery, the plan to re-open Iran’s upstream isn’t moving ahead nearly as quickly. Investors remain wary of lingering US sanctions and details on the new petroleum contract remain hazy. More information might be available later this year, but 2018 looks a little too early for the next output leap Tehran is trying to engineer.

This article is part of an in-depth series on upstream in the Gulf. Next article: UAE upstream standing still.

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