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About Commodity Insights
26 Mar 2024 | 12:43 UTC
By Rosemary Griffin and Aresu Eqbali
Highlights
Doubling capacity target seen unrealistic
Heavily dependent on Chinese demand
Israel-Hamas war spillover may intensify sanctions
Shackled by Western sanctions, Iran's oil sector has been largely stuck in neutral, restricted from much-needed foreign investment to reinvigorate its mature fields and develop new finds, while its crude exports have been limited mostly to China.
Despite holding some 12% of the world's proven global oil reserves, Iran is unlikely to raise its production much further and reach its geologic potential, analysts say, particularly if Tehran's geopolitical relations become further entangled in the Israel-Hamas war.
"Unless sanctions are diminished or removed, substantial increases in capacity -- especially over a relatively short period of time -- will be difficult. Reality will differ from potential," said Jim Burkhard, S&P Global Commodity insights' vice president of oil markets, energy and mobility.
Iran has said it is targeting crude production capacity of 5.7 million b/d by 2031. This is roughly double its 2023 average of 2.82 million b/d, according to the Platts OPEC+ survey by S&P Global.
S&P Global forecasts production of 3.2 million b/d in 2024 and 2025.
Timeframes for capacity growth vary significantly. Ahmad Rajabi, director for incorporated planning at National Iranian Oil Co., said in January that Iran would reach 5.5 million b/d in 2031 and maintain this level until 2041.
Former oil minister Bijan Zanganeh said March 8 that Iran could easily reach production capacity of 7 million b/d within six years.
"In order to increase production capacity by 3.5 million b/d, less than $70 billion are needed," he said.
Iran's oil ministry did not reply to a request for comment on production plans.
NIOC said previously that capacity growth required investment of $89 billion. Despite energy agreements signed with non-western countries, NIOC recently awarded $13 billion worth of projects targeting 400,000 b/d relying on its own and state money with domestic companies.
Reaching that would be highly ambitious even without sanctions, which have canceled Iran's ability to attract investment and technology.
Domestic funding has been complicated by the difficult economic situation in the country. S&P Global estimates Iran's fiscal breakeven oil price at $112/b in 2024, and $113/b in 2025 -- well above current prices. Platts, part of S&P Global, assessed Dated Brent at $84.895/b on March 22.
The US in 2018 withdrew from the Iran nuclear deal, which had relaxed sanctions targeting Iranian crude exports in exchange for concessions on Tehran's nuclear program.
In addition, previous sanctions and embargoes imposed by the US and its Western allies over Iran's ballistic missile program, alleged human rights violations and other legal reasons over the past several decades have crimped Iranian trade and access to international finance, battering its economy.
As a result, Iran's options for foreign cooperation to expand its oil sector are limited to its main customer China and key ally Russia.
China buys some 90% of Iran's crude exports, often at steep discounts and sometimes trading goods instead of paying cash, according to market sources. For example, a top Iranian housing official said recently that the government had agreed to provide oil to China for much less than it is worth, in return for building houses. The oil barter is also financing 2,500 km of railroads across the country. Since the oil ministry provides substantial cash for its upstream projects, the broad barter system squeezes its pockets even more.
Iran produces mainly heavy and medium sour crudes, competing with other Middle Eastern grades, such as Saudi Aramco's Arab Light and Arab Medium, as well as Russia's Urals. Chinese refiners crack Iranian Light directly in their CDUs, while Iranian Heavy is typically mixed with lighter grades, market sources have said.
Other countries that had purchased Iranian crude while the Iran nuclear deal was in force, including India, Japan and South Korea, have halted all imports. Venezuela has in recent years taken some Iranian condensate cargoes, but only in a limited swap agreement.
Absent other buyers, Iranian supply growth has limited upside, said Ben Hoff, Societe General's global head of commodity strategy.
"For Iran to really grow beyond where they are right now, they need another significant customer and it seems a little bit elusive who that could currently be," Hoff said.
Russia is a key upstream investor, and is jointly developing seven oil fields in south and west Iran. Local partners are unlikely to match Russian investment, however, limiting prospects for significant capacity increases.
Russian investment is also contingent on managing its own economy through its expensive invasion of Ukraine and sanctions.
Iran, which is exempt from a quota under the OPEC+ accord due to the sanctions, has seen some production gains in recent months, as Western countries have relaxed sanctions enforcement to focus on Russia. Platts OPEC+ survey pegged Iranian crude output at 3.10 million b/d in February.
This sanctions respite is unstable, however. The continuing spate of attacks by Yemen's Houthi militia on Red Sea shipping, and the potential expansion of the Israel-Hamas war into Lebanon, threaten to embroil Iran, raising the risk that Western countries will intensify sanctions pressure on Tehran.
US presidential elections could also result in changes to policy, with presumptive Republican nominee Donald Trump withdrawing the US from the Iran nuclear deal when he was previously in office.
Recent production gains have mainly come from reopening wells shut in due to sanctions and repair work.
Hamid Hosseini, an Iranian oil expert and member of the country's refined products exporters union, said further repairs could boost Iran's crude output to 3.8 million b/d with minimal costs.
Increasing production beyond this level requires significant new investment, which Iran will struggle to cover domestically.
"As long as there is no opening in our foreign relations, providing major foreign investment to this end is definitely impossible," Hosseini said.