Iran’s full return to world oil markets will be hindered by strong competition for foreign investment dollars from rival producers including Iraq, Mexico and Brazil, among others.
In a world of surplus supply, prices hovering around $50 a barrel and deep cuts to capital expenditures by oil companies, Iran will be challenged to find investors should it finalize a nuclear agreement that leads to a lifting of sanctions.
Other jurisdictions have already seen super-major oil companies walk away from reserves because returns were deemed inadequate. Exxon Mobil Corp. has rejected renewing a concession in Abu Dhabi because that country didn’t offer enough returns, and BP Plc has told Mexico it needs better terms to attract foreign investments as it reopens fields.
Even if all the obstacles are resolved, “negotiations could take a year” once sanctions are lifted, Nader Sultan, who ran state-owned Kuwait Petroleum Corp. for over a decade, said in an interview.
Tehran took the first step to reopening its fields last week when it reached a framework agreement with the U.S. and other leading powers to resolve a decade-old nuclear spat. The deal, if finalized by June 30, could prompt the U.S. and Europe to lift sanctions that have stopped foreign oil companies from investing in Iran.
Once that occurs, Iran will be eager to show the world it is open for business, according to Sultan. “They need the oil revenues,” he said.
The potential addition of millions of barrels of Iranian crude to the market promises to further delay a recovery in oil prices, hurting profitability of some of the world’s biggest producers, including Exxon and Royal Dutch Shell Plc.
Brent crude, an international benchmark, rose 6 percent to $57.96 after Saudi Arabia said it would increase the price for oil it sends to Asia.
Iran’s return as a dominant power in the international marketplace is “not going to be immediate,” said Gianna Bern, an energy consultant who teaches international finance at the University of Notre Dame in Indiana. “European companies such as BP that have a long storied history in Iran are likely to take the first crack at coming back into the country, although some may be wary initially.”
The International Energy Agency estimates Tehran produces 2.8 million barrels a day. Unconstrained by sanctions, Iran should increase that to 3.6 million barrels a day, perhaps in as few as six to 12 months.
It would need involvement by foreign investors and producers to raise its capacity beyond 3.6 million. A decade ago, it was able to pump 4.5 million barrels a day and output peaked at about 6 million a day in 1974.
The first obstacle for the country is competition. Iraq, for instance, is already swallowing billions of dollars from companies including BP, Eni SpA and OAO Lukoil. Abu Dhabi, the richest of the United Arab Emirates, has signed Total SA to a 40-year production concession, and is negotiating with BP and Shell to join. Others countries seeking foreign investment are Mexico, Brazil, Uganda and Angola.
The second challenge is the relatively low price of crude, which could come under renewed downward pressure precisely because of the return of Iranian production.
Exxon’s rejection of the Abu Dhabi concession and BP’s comments about Mexico’s terms puts pressure on Iran to offer better returns to potential partners, using its initial dealings to show the country is open for business.
The biggest oil companies have learned a great deal as Iran’s neighbor, Iraq, has taken the first steps in reopening its oil fields.
After more than a decade of war, the country has increased oil production to the highest level in almost 35 years without as much investment from Western companies as originally anticipated, said William Arnold, a former senior counsel over the Middle East and North Africa for Shell.
Exxon is among the companies that signed deals early on in Iraq, even with unfavorable economic terms, to have a seat at the table for any future bounty, he said. The contracts weren’t great in some cases, delivering $2 per barrel of oil to the companies extracting the crude, Arnold said.
“Iraq’s oil production has been a remarkable story, even with ongoing conflict there, and Libya also continues to produce without much dropoff yet from U.S. shale plays,” said Arnold, who teaches at Rice University in Houston. “The drivers all seem to be pushing toward steady or low prices, and if we add 500,000 barrels to that from Iran, it will not be a pretty picture for producers.”
The consensus is that Iran could get 500,000 barrels a day into the market relatively quickly, according to Arnold.
If so, he said, “as sensitive as the market is, without much change in demand, that could have an outsized impact on prices. It reminds us that oil is a commodity, and that relatively small changes in supply or demand can have an exaggerated impact on the world price.”