Following the historic deal on Iran nuclear sanctions reached between Iran and the P5+1 IUSA, Russia, China, France, UK and Germany), the research team of Wood Mackenzie put together a note for clients affirming its view on the likely pace of production ramp up and the opportunity for foreign investment.
'The deal is a crucial first step towards reviving Iran's oil and gas industry' - Homayoun Falakshahi, Wood Mackenzie research associate
Event: Following marathon talks, on 14 July 2015, Iran and the P5+1 (USA, Russia, China, France, UK and Germany) announced a final accord, curbing Iran's nuclear programme in exchange for the lifting of most international sanctions. The deal's implementation is pending approval from the US Congress and the Iranian Majles (parliament), as well as the implementation by Iran of nuclear-related measures described in the deal.
Implications: Iran's oil and gas industry has been hit hard by waves of international sanctions set in 2010 and 2012, which President Obama called "the toughest in history". Foreign companies, with the exception of CNPC and Sinopec, have all left, crude oil exports have halved to 1.1 million b/d, production has been curtailed by 1 million b/d, while Tehran has also been unable to repatriate its crude oil export revenues because of banking sanctions.
Even if all parties approve the deal – which is by no means certain – the legal process to remove sanctions could take several months. As a result, we do not expect Iranian crude to flood the market in the near-term. Moreover, although Iran has around 20 million barrels of oil in storage, some of it is needed for operational reasons domestically and is therefore, not destined for export.
We believe it could take Iran until the end of 2017 to increase production by as much as 600,000 b/d. There is a great deal of uncertainty over whether there has been any degradation of the reservoirs or facilities while production has been shut in. While well shut-ins may have increased reservoir pressure, it will be hard to quickly reverse the production decline rates experienced over recent years without additional gas re-injection or more enhanced oil recovery schemes. Since the increase in Iran's output will occur steadily rather than one sizeable step change up, we do not see a large-scale downward effect on oil prices. Our oil market view already includes an assumption that Iran's sanctions would be fully lifted by mid-2016.
Potential for investment in Iran is huge, three quarters of its combined oil and gas reserves – the third largest in the world – are yet to be produced. The country is expected to unveil new upstream fiscal terms in late 2015 and some IOCs and NOCs, including Shell, Total and Eni, are already eyeing opportunities. Tehran is eagerly poised to attract foreign investment and gain access to modern technologies in the whole energy chain. However, it will take years for IOCs to gain access to projects and start having an impact on production capacity – even if fiscal terms are set at internationally competitive levels.