COLUMN-Iran needs time and favourable conditions to boost oil output: Kemp - RTRS

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15-Jul-2015 11:45:20

(John Kemp is a Reuters market analyst. The views expressed are his own)
 By John Kemp
 
LONDON, July 15 (Reuters) - Iran has big ambitions toincrease oil and gas production once sanctions are lifted but a
substantial increase in exports is probably years away.
 
The country has the world's fourth-largest proved reservesof crude oil (behind Venezuela, Saudi Arabia and Canada) and the
largest proved reserves of natural gas (ahead of Qatar and Russia), according to BP.
 
It is the oldest major oil producer in the Middle East andoutput peaked at more than 6 million barrels per day (bpd) in
 
But decades of revolution, war and sanctions have cutproduction of crude and condensates to just 3.6 million bpd in
2014 ("BP Statistical Review of World Energy" 2015).
 
In contrast, Saudi Arabia, Iran's main rival, has raised liquids output from 8.6 million bpd in 1974 to 11.5 million bpd
in 2014.
   
RECOVERY HOPES
 Sanctions imposed by the United States and the European Union amid concerns about Iran's nuclear programme have hit
Iran's production and exports particularly hard.
 
Exports of crude and condensates have been cut from 2.6million bpd in 2011 to 1.4 million bpd in 2014, according to the
U.S. Energy Information Administration ("Under sanctions, Iran'scrude oil exports have nearly halved in three years" June 24).
 
Following the conclusion of the nuclear negotiations withthe major powers, Iran hopes to raise oil production and exports
significantly.
 
Oil Minister Bijan Zanganeh has stated the country willreclaim its former market share and could raise exports by
500,000 bpd immediately after sanctions are lifted and boostproduction to 4 million bpd in less than three months.
 
"We want to reach our pre-sanctions capacity," the managingdirector of the National Iranian Oil Company (NIOC) said in a
newspaper interview published on Wednesday.
 
"Iran's oil production capacity was 4 million barrels a daybefore the sanctions. We can reach that if there is demand in
the market," he said. [ID:nL5N0ZV1TL]
 
Iranian officials have spoken of raising production to 5million bpd or more over the longer term by attracting foreign
investment and have opened preliminary discussions withinternational majors.
 
Even a small addition to production and exports could have abig impact on prices given the oversupplied state of the global
oil market.
 
But it is likely to be some years before significant amountsof extra crude are made available to the market on a sustained
basis.
   
FOUR STAGES
Iran's oil production and exports are likely to rise in fourstages, with timescales ranging from a few weeks to five years
or more.
 
First, the country will probably release the crude andcondensates currently stored on tankers it has not been able to
sell as a result of sanctions.
 
Most estimates put crude and condensates in floating storageat 30-40 million barrels, enough to boost exports by around
200,000-250,000 bpd for up to six months.
 
In theory, Iran could unwind floating storage faster, injust a month or two, but it would have to accept large
discounts. Policymakers will probably want to raise the best price possible by releasing the oil gradually.
 
In the second stage, Iran will re-open existing wells it hasbeen forced to shut in or choke back during the sanctions period
because it could not sell the output.
 
Reactivating newly shut in or choked wells is fairlystraightforward and explains why Iran's oil minister predicted
that it could raise output to pre-sanctions levels within "ashort time".
 
In the third stage, Iran will attempt to counter naturaldeclines and boost production from existing fields by injecting
more natural gas and repressurising them.
 
Iran's oil fields, many of them in the naturally fracturedAsmari limestone, have been excellent producers. The best wells
have produced at rates of up to 80,000 barrels per day for yearsat a time.
 
However, many of the fields have been producing for morethan 50 years and are now very mature.
 
Fractured carbonate reservoirs such as Iran's require gas injection to maintain field pressure and enhance oil recovery.
 
Existing reservoirs have suffered from decades of neglectand need substantial investment to maximise their production
potential.
 
It will take at least two to three years to reinvigorate existing fields with more gas injection and new wells, and
probably requires foreign technology and expertise.
 
In the fourth stage, Iran will attempt to develop new fieldswhich have already been identified but not put into production
and explore for new ones.
 
There has been relatively little exploration and developmentwork since the revolution so the country has high hopes of
finding and developing much more oil using modern technology.
 
But the fourth stage, where Iran hopes to attract investmentfrom foreign oil firms, will take at least five years to come to
fruition.
   
TIMELINE
Under the deal finalised between Iran and the major powersin Vienna on July 14, Iran will not receive any sanctions relief
until the International Atomic Energy Agency verifies thecountry has complied with transparency measures related to its
nuclear programme.
 
In practice, under the timeline set out in Annex V of thedeal, sanctions will not be lifted until January 2016 at the
earliest, and possibly some months later.
 
If that proves to be the case, oil from floating storagecould be released adding 250,000 bpd to the market in the first
half of 2016.
 
The re-opening of shut-in wells under stage two could then boost output by up to 800,000 or even 1 million bpd by the end
of 2016.
 
Repressurisation of existing fields would then sustain and perhaps grow output from existing fields during 2017 and 2018.
 
New field developments and fresh discoveries are unlikely to occur any time before 2019 or 2020 at the earliest.
 
This is the most optimistic scenario. In practice, disagreements over compliance with the nuclear accord, disputes
over the terms of foreign investment, and a range of field engineering problems could easily delay plans to boost output at
every stage.
 
Then there are questions about the conditions of the reservoirs. No one knows how much damage has been done to the
fields during the years of revolution, war and sanctions. Fieldscan suffer various forms of damage, some of which is
irreversible, if they are not carefully managed.
   
FOREIGN RELATIONS
Iran's oil resources are attractive to foreign oil companies because the geology is reasonably well understood, the fields
are conventional and they are located onshore.
 
There are significant above-ground risks from corruption and political relations between Iran and the Western powers.
Butthere is much less below-ground risk than frontier projects in the Arctic or ultra-deepwater.
 
Iran has achieved large increases in output over relatively short periods of time in the past.
 
Production increased by almost 1 million bpd between 1954and 1960 after the country settled disputes stemming from
nationalisation of the assets of the Anglo-Iranian Oil Company (forerunner of BP).
 
In the aftermath of the revolution and the outbreak of warwith Iraq, output rose by 1.2 million bpd from a low of just
1.3 million bpd in 1981 to 2.5 million bpd in 1983.
 
Between 2002 and 2008, production rose by almost 800,000 bpd before the country's international isolation began to
deepen again.
 
Large increases in output are possible over a 2-5 year time frame but only if international conditions remain favourable
and foreign investors are confident enough to supply capital, technology and expertise.

 

John Kemp
Senior Market Analyst
Reuters