International sanctions against Iran were lifted in 2015,paving the way for the potential for increased trade andexportation of Irans fossil-fuel products. The removal ofsanctions also opened the door to new business partnersin the nation. For example, Frances Total signed a20-year contract with the National Iranian Oil Company(NIOC) to develop a resource-rich field called theSouth Pars, a shared natural gas condensate fieldowned jointly by Iran and Qatar.
The South Pars/North Dome field is thought to be the worlds most plentiful natural gas field. The two nationshave jointly shared it since the late 1980s as part of along-standing, deeply rooted relationship. Al Jazeerareports, This field plays a central yet often underratedrole in the development of foreign and national policies inboth Qatar and Iran. In light of this, any attempt forisolation or pressure on either country to alter selectpolicies is futile insofar as it disregards this fact.
Totals investment in Iran, coupled with the earlierremoval of sanctions and expansion into liquefied naturalgas (LNG), help the geopolitical ambitions of the currentIranian regime in attracting new business and fosteringdomestic growth. Iran aims to be a more significantcontributor to the global LNG trade, alongside nationslike Russia, the United States and Qatar. With these factors in mind,we provide a deeper understanding of Irans oil-exportprofile and the regions with which it is collaborating.
Iran increases its oil exports
Irans oil exports nearly doubled in the period betweenDecember 2015 and January 2016, when the country wasgiven the green light to freely market its petroleum undera deal with the P5+1, which laid out restrictions onnuclear development. (The P5+1 are the five permanentmembers of the UNs Security Council: China, France,Russia, the UK and the U.S., plusGermany.) Iran rapidly increased exports of crude oilabove the 2 million barrels per day (bpd) mark, effectivelydoubling quantities compared to the period whensanctions were in place. Exports have consistentlyremained above 2 million bpd for the last year, as shownin Graph 1, with the exception of April 2017 when theydipped to 1.84 million bpd.
The South Pars/North Dome Gas Condensate Field, jointly shared by Iran and Qatar, is considered to be the worlds most plentiful natural gas field.
Crude oil exports peaked in October 2016 at 2.77 million bpd, largely due to a sharp rise in demand from India and European countries, which reached 811,000 bpd and 621,000 bpd, respectively. Exports to Europe continued to grow after October 2016 as old clients, predominantly in the Mediterranean region, became increasingly more interested in sourcing additional quantities of Iranian crude. However, at the same time, interest from India began to decline as Iranian crude oil volumes were replaced by Saudi and Iraqi quantities despite relatively stable pricing, while volumes from Iran dropped below 300,000 bpd in December 2016.
Interestingly, crude oil exports from Iran to India have not recovered to the October 2016 highs, as shown in Graph 2, given the fact that Indias bid to develop an offshore natural gas project was denied by Iran, potentially jeopardizing the relationship between the two countries. This is in contrast to the strong trade links maintained by the two nations throughout the sanctions period as crude oil continued to find its way from Iran to India.
Floating inventory
Notably, Iran had built a sizable floating inventory ofcrude oil in vessels which, for the most part, are owned bythe National Iranian Tanker Company. However, there arecurrently minimal quantities of crude oil in this floatingstorage, as depicted in Graph 3.
The drawdown of floating storage to maintain exportinglevels suggests that production may have facedchallenges during the same period as the need forinvestments is growing. Iranian crude-oil-output potentialis limited as the producing fields need enhancedrecovery projects. These projects require the technical andfinancial support of international oil companies (IOCs).In addition, the countrys fiscal circumstances are lackingdesired conditions for some foreign investors. Greenfielddevelopments like the West Karoun fields are havingmyriad challenges due to a lack of technical capabilitiesand investment, as well as problems in Iraq, the jointoperator for the West Karoun project.
Condensate oil conditions
Iran has struggled to lift exports of oil above the October2016 level despite competition from Asian buyersremaining strong. The countrys combined crude andcondensate oil exports are consistent and likely to offera significant boost to the countrys economy in thepost-sanctions era.
Condensate exports have stayed strong (as shown inGraph 4) with Asian demand offering significant supportand petrochemical processing units in the Far Eastcontinuing to be keen buyers. Its also important tonote that the countrys condensate output potential issupported by its increasing gas-production capacity.Unlike oil sales, Iranian gas sales are secured with termcontracts, enabling Iran to ramp up gas production andthereby condensate output capacity. The South ParsDevelopment region, Irans major condensate productionarea, is projected to produce approximately 530,00 bpdof condensate in 2017, representing a 3 percent year-over-yearincrease.
Irans challenges in opening oil reserves for foreign investment are not only a function of current oil market conditions, but also of its domestic political issues. It is very unlikely that the speed of attracting IOCs will be greater than expected in light of the current price situation and demand recovery.
If there were to be a global crude oil demand recovery, the drawdown of additional Iranian barrels could be replaced by other producers, mainly from Russia and Iraq, as both nations have the potential to fill the gap. Unless there is another unexpected disruption in Iranian oil supply, as happened with the U.S. sanctions, the effects to the global supply would be minimal.
Iranian oil is not in the free market as it is produced, priced and traded by the National Iranian Oil Company. The buyer companies are mainly other national oil companies (NOCs) in the importing countries. This is the standard approach for Asian buyers.
Irans current situation with India is a good example of this. IOCs and trading companies are on the buyer side for European deliveries. Irans plans to build refineries and petrochemical plants within Europe are an attempt to change this dynamic and create a cushion for any potential future sanctions. From this perspective, Iran is expected to maintain good relationships with Asian-buyer countries, and the relations with European countries are expected to be minimally affected by these oil sales.
