Reuters: OPEC member Iran is in danger of slipping down the table of oil exporters and leaving a hole in global supply as output stagnates because of a lack of investment blamed on U.S. sanctions and political interference.
By Simon Webb – Analysis
LONDON (Reuters) – OPEC member Iran is in danger of slipping down the table of oil exporters and leaving a hole in global supply as output stagnates because of a lack of investment blamed on U.S. sanctions and political interference.
OPEC’s second largest producer could lose up to 250,000 barrels per day (bpd) of exports per year as it fails to invest enough to compensate for steep decline rates from oilfields and meet rising domestic demand, analysts say.
A report by academic Roger Stern at U.S. John Hopkins University last week predicted Iran’s exports could dwindle to almost nothing by 2015 if it did not change its energy policies.
Iran is the world’s fourth largest exporter, shipping around 2.4 million bpd to international markets of its 3.9 million bpd output.
“The short story is that every aspect of the oil infrastructure has been starved – drilling, refineries, distribution, even the gas stations in Iran,” Stern told Reuters in a telephone interview on Thursday. “It’s a mess.”
Oil Minister Kazem Vaziri-Hamaneh told Iranian student news agency ISNA in September that Iran’s annual output decline from producing fields was as much as 500,000 bpd.
Analysts have more conservative estimates of between 350,000 to 400,000 bpd per year.
U.S. sanctions since 1995 on involvement in Iran’s oil sector have limited the technology available to maintain output from oilfields.
Iran is also struggling to produce the gas it needs for reinjection into oilfields to maintain well pressure.
As older fields decline, Iran needs to bring new projects on line to compensate, requiring billions of dollars of investment.
U.N. sanctions against Iran over its nuclear program will further curtail already limited foreign investment, even though the sanctions are not related to the oil industry.
A deal for Japan’s INPEX Holdings Inc <1605.T> to develop the country’s giant Azadegan oilfield collapsed in October.
INPEX said Iran’s delay in clearing land mines from the war with Iraq and rising costs stopped the deal, but some analysts said the company also had an eye on the potential for the nuclear dispute to escalate.
Output from Azadegan was expected to reach 260,000 bpd by early 2012 and would have been key in arresting decline. Iran has since awarded the field’s development to a local company, although analysts say it needs foreign expertise and investment.
INVESTMENT TERMS
Aside from sanctions and politics, deal terms have frustrated foreign investors.
Iran forbids foreign ownership of oil resources, instead offering investors buy back contracts which repay international oil firms with a share of output from new projects for a short period. Companies have complained the returns have failed to cover rising project costs.
“Iran is its own worst enemy,” Mehdi Varzi, independent energy consultant at Varzi Energy, said.
“There are companies that are prepared to ignore sanctions if the rate of return is right.”
Political interference after deals have been signed has also made Iran a less attractive investment prospect, analysts say.
While output declines, domestic demand is rising by five percent per year, or around 80,000 bpd in 2007. That means even the most conservative decline estimates imply Iran must increase output by 430,000 bpd this year just to stand still.
“It is clear that in the near future demand is going to rise substantially, and so Iran will require more crude domestically,” said Paris-based International Energy Agency supply analyst David Fyfe.
“That will certainly play a role in capping Iranian exports.”
IEA forecasts were less pessimistic than Stern’s, but still see output declining from 2008 onwards.
SUBSIDIES
Iran subsidizes oil products and sells some of the cheapest gasoline in the world, encouraging more of its citizens to take to the roads and providing no incentive for fuel efficiency.
Iran’s seven million cars consume around 420,000 bpd of gasoline, around the same amount as Britain with 35 million cars, Deutsche Bank said in a recent report.
Populist President Mahmoud Ahmadinejad appears reluctant to spend his political capital on cutting subsidies, so consumption is likely to continue rising at a brisk rate.
Instead of stemming demand, the government has commissioned refinery expansion projects that will reduce oil imports from 2009 but require more of the country’s crude.
Iran has to spend billions of dollars to import 40 percent of the gasoline its vehicles consume every day.
