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Iran makes the best of it

Sanctions are constraining Iran’s output and straining oil storage capacity

The latest round of sanctions on Iran have confronted its petroleum industry with a new set of challenges. For at least two decades, it has struggled to sustain production at its ageing oil fields. Now, as under the Obama-era confrontation, sanctions pose a different problem: how to keep oil exports going as best as possible.

When the Joint Comprehensive Plan of Action (JCPOA) came into force in January 2016, a new Iran Petroleum Contract was being defined to cover a range of fields for foreign investment. But this process made little progress, with the most advanced deal, with France’s Total and China’s CNPC for development of Phase 11 of the South Pars gas field, ending with Total’s exit in August 2018.

During 2016, Iran’s output rebounded from about 2.8mn bl/d to a post-Revolution high of just over 4mn bl/d in December. The US withdrawal from the JCPOA in May 2018 and steady intensification of sanctions again cut off most Iranian oil exports, with only China and Syria (which is not likely to be paying) continuing as significant destinations.

Production has fallen jerkily in line with export drops. From about 3.8mn bl/d at the re-imposition of US sanctions, it fell sharply before plateauing around 2.7mn bl/d in December 2018-March 2019. Since the end of sanctions’ waivers in May 2019, production appears to have dropped again, to around 2.2mn bl/d in August.

The steady intensification of sanctions has cut off most Iranian oil exports

Swings in production have generally been managed by the old, giant fields producing from fractured Asmari carbonates—notably Gachsaran (350,000bl/d in March 2018), Agha Jari (200,000bl/d) and Marun (400,000bl/d). Decline rates in these fields are often quoted as 6-11pc annually, requiring some 275,000bl/d of new production annually to compensate. However, with lower production rates due to sanctions, this requirement may have dropped to around 150,000bl/d. Newly available gas may also allow higher reinjection rates to boost recovery.

China’s Sinopec and CNPC had been working on the giant Yadavaran and North Azadegan fields and may return for further development phases if terms can be agreed. But, due to concerns about sanctions exposure, even Chinese firms are likely to make only slow and cautious progress.

Meanwhile, the Arvandan Oil & Gas Company (AOGC), a separate unit of the National Iranian Oil Company (NIOC), has continued developing the West Karoun greenfield projects, adjacent to the Iraqi border. But, with a reliance on Iranian contractors, West Karoun’s production, now 350,000bl/d, has run behind schedule. Nevertheless, Iran for now faces no particular problem in maintaining output at current depressed levels—a stark contrast to the situation in Venezuela. 

Oil storage challenge

Instead, the problem is managing excess barrels that cannot be exported. Storage stocks rose from 33.6mn bl in June 2018 to 66.1mn bl in May 2019, when the latest sanctions waivers expired. They then surged to 111.5mn bl in July, split evenly between onshore and floating storage, an implied build rate of 740,000bl/d during June and July.

Onshore storage has capacity of 69.1mn bl. More is being built, but Iran is nevertheless approaching tank tops, at which point production could have to be cut back substantially, unless it can continue putting oil into bonded storage in China. Increased domestic condensate refining capacity, including the new 350,000bl/d Persian Gulf Star refinery, will only partially alleviate this problem.

2.2mn bl/d: Iranian production in August

The pressure on Iran’s energy sector from the latest round of sanctions has been intense. The upstream sector seems to be coping fairly well—the problems are to find buyers, to deal with excess storage volumes and to keep the economy afloat on severely restricted export revenues. And even that list of challenges assumes, of course, that the Abqaiq attacks do not lead to further escalation in the Gulf conflict.

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