August 14, 2014

Iran: Oil, Sanctions and Reality

In 2014, the United States have suspended the number of sanctions imposed on Iran. As stated in Washington, this decision was made due to the progress achieved in the negotiations on the IRI's nuclear program.

In particular, has been lifted the ban on purchase of Iran's petrochemical products, Iran is allowed to be supplied with spare parts for the repair and ensuring safety of the civil aviation. At the same time, the ban still works for individual companies, included in the Treasury Department of the USA's special list. It is emphasized that these decisions work only in the period from January 20 to November 24 this year.

The share of Iranian oil in the oil importing countries
The share of Iranian oil in the oil importing countries

Nevertheless, even a partial lifting of sanctions on the purchase of Iranian oil will help increase revenue from the export of oil and oil products, which are the main source of foreign exchange and formation of the revenue side of the state budget of Iran. Moreover, they provide Iran's economic growth and make 85% of foreign exchange earnings and 75% of revenues in local currency (Rial) of the Islamic Republic of Iran. For example, in 2001 in Iran oil was produced in the range of 3.4 to 4.1 million barrels per day. In total this year have been produced 182 million tons of oil, of which 112 million tons were exported. In connection with the established high level of world oil prices, foreign exchange earnings to the country have exceeded the fixed in the state budget sum by 3 billion US dollars and made 16 billion US dollars.

EU refuses Iranian oil
EU refuses Iranian oil

By oil reserves, Iran ranks 4th in the world (after Saudi Arabia, the United States and Russia). Its total reserves are 370 billion barrels (50 billion tons). The confirmed recoverable reserves, according to various experts, range from 96 to 100 billion barrels (13-13.4 billion tons). Iran's share in the world production of crude oil is about 5.7%.

Of formally proven oil reserves 87% occur on the fields in the province of Khuzestan (the main fields are Gachsaran, Bibi, Hakim, Ahwazi deposit, Masdzhede-Soleyman, Haftgel, Naft-Sefid, Agha Jari (consists of fields Karanja and Maroon) and Paren) and on offshore fields of the Persian Gulf, where 0.6 million barrels are produced per day. Costs of the development and production of crude oil in Iran are only 3-4 dollars per barrel, and in some continental deposits these costs are even less.

In recent years the country has intensified exploration for oil and gas. Thus, in 1999-2001 the increase in its oil reserves made 50 billion barrels, while for 1979-1998 this figure was 10 billion barrels.

Over the past two years, the increase in natural gas reserves totaled 1.4 trillion cubic meters. Virtually all of the oil was found in southern parts of the country. For individual fields the proven oil reserves are distributed as follows (in billions barrels): Azadegan — 25; Kushk — 11; Mansurabad — 4.5; South Pars — 6; Chashlle — 1.

In coastal waters of Iran in the waters of the northern shallow part of the Persian Gulf (in the zone of Abadan desert) has been discovered a new oil field, with estimated reserves of 26 billion barrels, and in Ramhormuz district (Khuzestan province) has been discovered a new gas field, which is estimated at 40 billion cubic meters.

Since 1999, Iran has been actively engaged in exploration of oil and gas in the north of the country and, in particular, on the shelf of the southern sector of the Caspian Sea, but because of the unresolved question of its division, mining is not conducted. Exploration work was carried out by the National Iranian Oil Company (NIOC), with the participation of the British company «Lasmo» and the British-Dutch company «Royal Dutch Shell».

Reserves of the discovered deposits are estimated at 10 billion barrels of oil and 560 billion cubic meters of gas. Production cost of a barrel of oil in this area could be 5-7 US dollars.

The total reserves of oil and gas in the waters of the entire Caspian Sea are estimated by experts at 30 billion barrels of oil and 12 trillion cubic meters of gas.

Producing capabilities of Iran's oil industry today is 4 million barrels per day. The main buyers of the Iranian oil are oil companies in Japan, South Korea, China, Italy, Germany and India.

The rapid growth of consumption of petroleum products both domestically and with regard to Iran's quest to maintain its share in the total production of oil within OPEC, which in volume will continue to increase (demand for crude oil at the world market will grow annually by some 1.5 million barrels daily), demands from Iran’s oil industry urgent measures aimed at increasing the production of crude oil and gas. The main tasks in the formation of the policy aimed at the development of the oil and gas industries are as follows:

- Prior development together with other countries of oil and gas fields;

- Preservation of Iran's quota in OPEC;

- Attraction of investments for development of oil and gas fields;

- Using advanced technologies to develop oil and gas fields;

- Preservation of the sovereignty of the Iranian oil and gas fields;

- Attracting the transit of Caspian hydrocarbons to world markets through Iran;

- Expansion of production of natural gas;

- Increasing the use of gas as a fuel instead of other petroleum products.

The Oil Ministry of Iran is developing a project on expansion of capacity of the industry in the long term, since Iran in order to hold its positions in the group of major oil-producing countries, needs to increase oil production to 8 million barrels per day, i.e. to increase its production twice as much. Implementation of such a program will require additional investments in this sector, at least 21 billion US dollars.

In order to improve the management of industrial enterprises, regional oil and gas companies have been created. According to the Minister of Oil B. Zanganeh, creation of regional companies will help to increase oil and gas production and the increase in revenue from the sale of hydrocarbons. For the first time in the post-revolutionary period, the Government and Parliament of Iran have decided to eliminate the state monopoly in the oil industry.

Iran's government has also developed a set of measures for structural reforming the country's oil industry. These measures include:

- Decentralization of management of the sector;

- The reform of the management system and improving the effectiveness of subdivisions of the industry;

- Privatization of a number of structures and companies included in the Ministry of Oil.

For sustained development of the oil and gas industry, Iran needs annual investments of at least 10 billion US dollars. It is estimated that at the current stage Iran urgently needs 3 billion US dollars for expanding production capacities, and 2.5 billion US dollars to compensate for falling oil production from existing wells.

Iranian Oil Minister Bijan Zanganeh
Iranian Oil Minister Bijan Zanganeh

Thus, due to the pressure drop in the number of wells in southern fields, caused by intensive production of oil, in early August of this year, the Iranian Oil Minister Bijan Zanganeh gave special orders to heads of oil and gas companies to increase the volume of natural gas injections into these wells in order to extend their functioning.

As we know, gas injections into oil wells increase the reserves of recoverable oil, reduce the cost of its production and stop the pressure drop in wells in old fields. Besides, gas injected into wells, may eventually be recovered.

According to official data of authoritative research institutes, today it is possible to inject into oil wells up to 600 million cubic meters of gas per day. Experts believe that growth in the oil recovery rate by one percent increases Iran's oil reserves by about7 billion barrels.

In recent years, Iran has signed with foreign companies 12 major agreements on the development of its oil and gas sector for a total of 15 billion US dollars. The projects will be implemented with the involvement of Iranian and foreign sources of funding, as well as of foreign technologies. It is expected that after the execution of such contracts, Iran will be producing additional 340 thousand barrels of crude oil and 214 million cubic meters of natural gas per day.

But the participation of foreign companies in Iranian oil and gas projects is constrained due to the United States' sanctions against Iran and Libya by D'Amato's law. This applies to a number of major companies, including such as the French-Belgian «Toalfina-Elf», the English-Dutch «Royal Dutch Shell». Today the Italian «ENI» and its subsidiary «Adzhin», Malaysian «Petronas», as well as several Russian companies headed by «Gazprom» are already involved in the implementation of some of the Iranian oil and gas projects and compete in international tenders announced by Iran.

Representatives of American companies participate in international conferences and seminars on issues of the oil and gas sector of Iran and the region. There is information about applications of these companies to participate in tenders for certain projects (as observers in order to obtain information).

Speaking on the state and prospects of development of the oil and gas industry in Iran, we should not ignore the fact that the IRI is a member of the Organization of Petroleum Exporting Countries (OPEC) and the second largest (after Saudi Arabia) producer of crude oil within the framework of this organization, with a quota of 14 6%.

Note: OPEC includes 12 countries: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

Organization of Petroleum Exporting Countries (OPEC)

Organization of Petroleum Exporting Countries (OPEC)

By decision of the OPEC, the quota of Iran in oil production in 2001 was 3.916 million barrels per day. On February 1, it was 3.698 million barrels, but from September 1, it was reduced to 3.406 million barrels per day. In 2012, Iran was producing almost 3.7 million barrels per day, of which 2.5 million barrels were exported. For example, in October 2012, the oil exports from Iran fell to 715 thousand barrels per day. This is the lowest level since January 2012 — the date of imposing of the USA’s oil and banking sanctions against Tehran.

Note: The Council of the European Union at the level of Foreign Ministers approved the introduction of an oil embargo against Iran from July 1, 2012. Oil supplies from Iran were banned in response to Tehran's refusal to abandon the "sensitive" nuclear development.

China, India, Japan and South Korea — the largest Asian buyers — cut Iranian oil imports by 21%, 15%, 39% and 36%, respectively. Total imports into these countries from Iran declined to about 1 million barrels per day (from 1.4 million barrels per day).

The embargo on the import of oil from Iran caused a significant increase in demand for the Russian blend Urals. Analysts point out that in the medium term, it may be advantageous for the EU to replace Iranian oil in the structure of imports with the oil from Saudi Arabia, but at the moment it is the purchase of Russian Urals that seems the most viable solution for many former consumers of oil from Iran.

The jump in demand for Russian mixture is mainly due to the reaction of the Italian oil company Eni and Turkish Tuprash to the embargo coming into effect. Italy and Turkey, to a large extent dependent on Iranian supplies, until recently had been trying to use a delay, and from July 1, began actively buying Russian oil.

At that time, the Iranian oil had been purchased by 23 countries, now — only China, India, South Korea, Japan, Turkey and Taiwan are buying it. As to Malaysia, South Africa, Singapore, and Sri Lanka, they have stopped buying it completely.

The largest importers of Iranian oil
The largest importers of Iranian oil

In 2014, due to some progress in the Iran-EU talks on the Iranian nuclear issue, these countries for the next six months are again free from the sanctions regime working in the United States in relation to buyers of Iranian oil. Prior to these sanctions, Iran was the second-largest producer of crude oil in OPEC, with the introduction of sanctions, it has become the sixth.

In December 2013 in Vienna, the Organization of Petroleum Exporting Countries at a ministerial conference decided not to change the quota and fixed the limit parameters in oil production in 2014 at 30 million barrels per day. In fact, in 2013 OPEC increased its production to a record 31.36 million barrels per day, against the background of growing demand and despite the significant increase in production in North America.

The largest buyers of Iranian oil
The largest buyers of Iranian oil

At the meeting it was unanimously decided that in case of need 12 OPEC member countries will take consistent steps to ensure market balance. Members of the organization confirmed their readiness to react strongly to events that affect stability of the oil market.

In the press release after the meeting it was said that since 2014, oil prices have been relatively stable. The demand for oil worldwide from 90 million barrels per day in 2013 has increased to 91.1 million barrels in 2014. It is expected that the amount of oil supplied to the world market by non-OPEC countries will daily increase by 1.4 million barrels.

During the meeting, it was emphasized that, despite the fact that the pace of global economic growth has increased from 2.9% in 2013 to 3.4%, there is still the danger of recession globally.

Since December last year, the situation in Iran, Libya, Ukraine and other hotbeds of international tension have had a negative impact on the supply of oil to the market, due to which fact oil prices have risen by about 10% and remained at over 100 US dollars per barrel.

In late 2013, OPEC analysts prepared the annual report, which predicted that the price of oil in the long term to 2035 will remain fairly stable and will increase to 160 US dollars per barrel. Experts also believe that the world's need for energy by 2035 will have increased by 52 per cent, at this, more than 80 percent will be covered by the extraction of natural resources.

So, Iran is developing its capacity for oil production and is ready to significantly increase its exports to interested buyers.