Article contributed by DirectFN™, a subsidiary of National Technology Group (NTG) – one of the largest ICT companies in the Middle East. DirectFN™ is a provider of exchange information to institutions via direct feeds or its DirectFN™ workstation, which includes reference data, charting tools and other content required by both the professional and retail investment community in the Middle East and global investment community.

For more insights logon to Decypha.

Fluctuating global oil prices for the past three years have continually hurt both government and private sector oil investors. The near halving of oil prices overnight since mid-2014 came six months after the US lifted economic sanctions placed on Iran since 2011. The decision allowed Iran to ramp up oil production to ultimately increase its exports by over 150% in 2016 compared to 2013. It did not help that international demand has dropped significantly after China’s GDP growth rate stabilized near 7% compared to a 10% GDP growth rate floor prior to 2011.

A landmark deal was signed in November 2016 between the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC members to reduce global crude oil production output, effective 2017, in an attempt to reduce supply and increase global oil prices. However, Iran received an exemption from the deal, and has been allowed to increase its crude oil production to 4 million barrels per day (b/d), according to an EU Central Bank document reporting on the November meeting.

“Iran’s influence in OPEC, and indeed in the region, has been growing since the lifting of nuclear-related international sanctions,” said Bhushan Bahree, an OPEC analyst at IHS Market, to The New York Times in November 2016. To date, global oil prices have yet to cross the $55 a barrel, some way off their over $100 highs.

Making it difficult for Iran to reach this cap limit by the end of the year is the United States reinstating some sanctions on the country last July. The move, which will likely cut some of Iran’s export capabilities, should ultimately raise global oil prices once again. Meanwhile, Iran is taking advantage of the November 2016 agreement stretching to March 2018 and seeking new oil investments between $50 and $60 billion, according to Iran’s oil minister Bijan Zanganesh, as reported by Iranian Tasnim news agency, to raise production and ultimately exports beyond the current cap.

Iran’s Status in OPEC

Prior to the 2011 economic sanctions on Iran, its production capacity was 4 million b/d, of which 2.3 to 3 million b/d were exported. It was the second biggest oil producer in OPEC after Saudi Arabia and ahead of Iraq. However, the economic sanctions that were imposed on the country in reaction to its pursuing nuclear plans meant that exports dropped to around 1 million b/d. This dropped Iran’s global oil export market share from 9% to 6%. As a result, other OPEC countries increased production to try to compensate for the lack of supply. This allowed oil prices to stabilize above $100 a barrel.

After sanctions were lifted in 2014, Iran quickly increased crude oil production by one-third to 3.7 million b/d, partially leading to the sudden drop in global oil prices by mid-2014, according to a Bloomberg article in 2016. As of 2016, Iran’s crude oil production was 3.651 million b/d (10.32% of OPEC’s production), of which 1.92 million b/d was exported (8.3% of OPEC total crude oil exports). Iran’s exports of petroleum products were 0.899 million b/d (18% of OPEC’s total exports). This is according to OPEC’s 2017 annual report. Meanwhile, the country’s natural gas production topped 257.63 billion cubic meter in 2016 (22.4% of OPEC’s total production). Of that, 226.67 million cubic meters was exported (27.34% of OPEC’s natural gas exports).

This makes Iran the third biggest crude oil producer in OPEC after Iraq (4.647 million b/d) and Saudi Arabia (10.46 million b/d) as of 2016. Furthermore, Iran is the biggest natural gas producer in OPEC, according to the cartel’s 2017 report. It is followed by Qatar and Saudi Arabia in second and third place, respectively.

Oil prices

Iran’s high production levels and the fact that its production quota increased while its major competitors had to decrease their crude oil production, coupled with lower global demand, resulted in oil prices not being able to cross the $55 a barrel mark – despite an overall drop in oil production from OPEC to 32.5 million b/d from 33.7 million b/d before the November 2016 agreement. Iran needs oil prices to be closer to $135 a barrel for the country to break even for domestic operations, according to data compiled by Deutsche Bank reported by Thomson Reuters in 2014.

However, the low price and production figures are proving to be a best-case-scenario for Iran, for the time being.  “Iranians will try to win back markets by price. They will go back to their traditional customers in Asia who simply had reduced their share of Iranian oil. It is not like Iran has been out of the market. Iran has only been half out of the market,” said Daniel Yergin, Vice Chairman of IHS to CNBC in January 2016.

Meanwhile, Iran is able to quickly meet the demands for these markets because they have an estimated 40 to 50 million barrels of crude and petroleum products in floating storage, ready for quick delivery.

Throughout 2016, the instant increase in oil export volume allowed Iran to convert economic contraction during 2015, by up to 5.4% during the last quarter of the year, to a growth rate of 15.7% during the last quarter of 2016, according to Trading Economics.

Much more oil

The negative impact Iran has on global oil prices will likely increase in the near future. This is because Iran is looking to increase its production by attracting new oil investment to ultimately increase crude oil production to between 4.28 and 4.8 million b/d by 2021, as reported by Bloomberg in October 2016 and The New York Times in November 2016, respectively.

The investment potential is definitely there. Iran is the third biggest crude oil certified reserves among OPEC countries and has the second biggest natural gas reservoirs compared to other cartel members as of 2016, according to OPEC data reported in 2017.

However, expanding beyond the 4 milliom b/d mark needs a lot of investments by foreign private sector firms. These firms will also have to plug the technology gap in Iran’s infrastructure to increase the efficiency of excavating crude oil for local use and refinement or for direct exporting.

“Ramping up production beyond this level would require massive new investment, which can in any case only materialize in the long run,” wrote David Ramin Jalilvand, who works in the Middle East and North Africa department of the Friedrich Ebert Foundation in Berlin, in Al Monitor in December 2016. Total expected investments in crude oil extraction, natural gas and petrochemicals is expected to top $200 million to reach and take maximum advantage of the 4.28 million b/d forecasted production increase, according to Zanganeh, as reported by Bloomberg in October.

There are currently some signed investment agreements with international oil firms including France’s Total SA, who are developing the South Azadegan oil deposit. The company is also in the running to develop a portion of the country’s South Pars 11 gas field, the biggest natural gas field in the world. Meanwhile, the National Iranian Oil Company (NIOC) has signed 10 agreements with international oil excavation companies to get government data regarding the country’s fields with the ultimate aim of attracting excavation firms to invest in the country, according to NIOC Managing Director Kardor, as reported by Bloomberg in October 2016. They are also in negotiation with Royal Dutch Shell to secure an undisclosed energy project. There are a total of 50 oil and gas project opportunities in Iran right now, according to Kardor, as reported by Bloomberg.

Still a High Risk Environment

Despite the lifting of the sanctions and apparently positive attitude from the Iranian government towards oil Foreign Direct Investment (FDI), there are still inherent risks in doing business in Iran. It is currently ranked 120th on the 2017 Doing Business Report out of 190 countries. Its lowest ranking factors are protecting minority investors (ranked 165th), trading across borders (ranked 170th),  and resolving insolvency (156th).

Iran is also facing massive political risk after the US introduced fresh sanctions mid-July 2017. So far they have been minor, singling out 18 Iranian individuals and entities that are accused of missile development, weapons procurement, and software theft, according to a joint announcement by the Department of State, Treasury and Justice. These individuals and entities would be unable to do business in the US or with American companies outside the North American country.

“The United States remains deeply concerned about Iran’s malign activities, which undermine regional stability, security and prosperity,” said the official statement. On the other hand, other sanctions have been relaxed since the current US President Donald J. Trump came to office. “There is a lot of uncertainty,” said Homayoun Falakshahi, an Iran analyst at Wood Mackenzie talking to The New York Times in November 2016.  This, for many, makes giving solid forecasts regarding future oil price movements a difficult task, to say the least.

By Tamer Mahfouz