Iran’s oil output could hit 4.5m b/d if investment flows
Production could rise by 0.9m b/d by 2025 but it needs help from international oil companies (IOCs)
Iran's oil production could reach 4.5m barrels per day over the next decade - but only if it manages to secure billions in foreign investment to boost recovery rates, according to Wood Mackenzie.
After emerging from international sanctions in January, the Islamic Republic's oil output has increased by more than any other Opec member this year, reaching 3.6m b/d in July. Tehran is targeting 4m b/d as soon as possible, or roughly its level before sanctions. By 2021 the National Iranian Oil Company wants output to reach 4.8m b/d.
Iran's 2021 oil output target may be a stretch but by 2025 production could reach 4.5m b/d if just five or six new projects are developed, the consultancy said.
The country's oil exports are likely to remain at around 2.2m b/d but they could reach 2.5m b/d by 2017.
Iran's ageing fields badly need the capital, technology and expertise that the IOCs can bring. President Hassan Rouhani has said the country wants to attract as much as $50bn a year in foreign capital, much of which will be directed at achieving its ambitious output targets.
The main production increases are likely to come from the country's heavy oilfields, according to Homayoun Falakshahi, an analyst at Wood Mackenzie.
Some of Iran's most important oilfields, such as Yadavaran and Marun, have recovery rates as low as 20%, Falakshahi said.
Iran knows that to boost its oil output it needs to attract foreign investment - something which is still proving tricky.
The lifting of nuclear-related sanctions in January removed an important barrier to foreign involvement in Iran's oil and gas industry but investors haven't been rushing into the country's upstream.
Between 2010 and 2015, Iran lost most of its oil market share to Iraq and Saudi Arabia. Since emerging from international sanctions this year the country has steadily increased its crude production and regained its place as a major oil exporter to Europe and Asia.
In terms of Opec oil output, the biggest gains so far this year have come from post-sanctions Iran and Iraq, which have added around 0.56m b/d and 0.5m b/d respectively.
This is despite Iraq receiving significantly more upstream investment than Iran does. Between 2010 and 2014, total upstream investment in neighbouring Iraq averages around $15bn-20bn per year. Meanwhile, investment in Iran's upstream was just a quarter of that level last year, Falakshahi said, at around $4bn-$6bn.
Most of this capital went into developing the South Pars gasfield. The country's southern oilfields are 'very much neglected'.
Part of the problem is that not all financial sanctions have been removed. US banks are still unable to do business with Iran and European banks also face significant hurdles in dealing with the country. Their inability to process business transactions with Iran in US dollars - the industry's main currency - and through the US financial system is proving a particular problem. Investment bank BNP Paribas was fined almost $9bn in 2014 for conducting business deals with Iran, Sudan and Cuba - countries against which the US had imposed sanctions. Investors remain wary.
At the beginning of August, Iran began to outline some of the terms of its new upstream oil in a bid to attract foreign investment.
Iran has 49 oil and gas development projects on offer to upstream investors, both onshore and offshore.
These untapped resources, which include heavy oil, deep-water oil and gas, sour gas and conventional onshore resources, could equate to around 28bn barrels of oil equivalent of potential reserves, Falakshahi said.
But developing these reserves - around half of which are offshore gas - will need in excess of $150bn in upstream investment.
Because of the restrictions on US companies being involved in Iran it will most likely be European, Russian or Asian companies which invest.
Iran's oil ministry has spent around two years designing a new upstream licensing system, the Iran Petroleum Contract (IPC).
The government released some details of the IPC in December but had to adopt a number of changes after objections from the country's parliament related to foreign ownership of natural resources.
In August, the state-run Shana news agency released some general details of the IPC which stated that new contracts should be divided into three main categories: exploration, development and enhanced oil recovery (EOR).
The government has said that 20-year development contracts will be on offer, which can be extended for a further five years if EOR techniques are being used. More specific details of the IPC will likely be negotiated on a company by company basis.
Falakshahi said that despite US financial sanctions remaining in place and the fact that the core framework of the IPC will likely be very similar to the previous fiscal terms, positioning in Iran's upstream is still a good move for IOCs.
'The geological risk and costs are very low. Fiscally speaking even if returns are low initially it's a strategy position to be in the country,' Falakshahi said. 'Iran is such a big place in terms of oil and gas. Can companies afford to be left out?'