Crude oil prices are at record lows due to a supply glut and weak demand—owed partly to slower growth prospects for China and Europe.
The global economy's footing is shaky at best, and with Saudi Arabia keeping up production to stem out America's shale oil producers, crude is expected to remain cheap for the foreseeable future.
Under the circumstances, Iran—once the OPEC's second largest producer—is opening its taps to regain lost market share once the western sanctions are lifted. But how will it do so and what will happen to prices?
Iran's oil revenues have been slashed since crude prices dropped under $50 per barrel from over $110 per barrel during last September, giving rise to a heftier fiscal deficit. The government has managed the crisis well so far, but it can ill afford to pay for its commitments, investment and current expenses. Talk of stimulating the economy and policymakers at the Economy Ministry lose color.
To bring money to the government's pockets, the Iranian Oil Ministry has resolved to ramp up production once sanctions are lifted. Officials at the ministry have wagered on cheap production costs of Iranian crude to help them both attract investments and ride out the low price period.
"After lifting sanctions, Iran will double its crude exports," Oil Minister Bijan Namdar Zanganeh told Shana. "This will amplify Iran's dependence on oil revenues, but will also boost economic growth."
Getting Oil Major on Board
"Right now, shale oil production is not as profitable and economically viable as before," Seyyed Mehdi Hosseini, head of the taskforce assigned to liven up Iranian petroleum contracts, told Mehr News Agency, "The same can be said for extracting the black gold from deepwater reserves in Brazilian waters, North Sea, Gulf of Mexico, West Africa and regions in Australia."
The National Iranian Oil Company plans to attract foreign investments, as Iranian crude is on average cheaper and more profitable to produce. Heavy investment is needed to get production levels on par with Iran's share of oil and gas reserves. NIOC needs $50 billion just to carry out its development projects in its 23 shared oil and gas fields.
Participation of global oil giants in tapping Iran's considerable reserves will also help better secure a market for Iranian crude. But the effects of foreign investment will take at least a year to materialize, as the removal of sanctions and return of foreign investors will take time.
Furthermore, the lower-for-longer oil price scenario may prompt oil majors to cut back on investment, but Iran will still have foreign companies queuing up to grab upstream contracts.
Friends in High Places
Iran negotiated a deal with the six world powers, agreeing to curb its nuclear energy program in exchange for sanctions relief in July.
Iranian oilfields, which pumped around 2.87 million bpd in July, could increase production to between 3.4 million and 3.6 million bpd within months of sanctions being lifted, the West's energy watchdog, the International Energy Agency said.
Unilaterally adding one million bpd to world supply will certainly put pressure on oil Prices. However, Oil Ministry officials are working to avoid further price falls by asking other OPEC members to cut their output and make room for Iranian crude.
"We will act in conjunction with other members. Our allies within the OPEC will make room for Iranian oil."
This is likely to happen as there are similar cases with Kuwait, Iraq and Libya losing market share, but regaining it with the help of other members.
Old Clients
Goldman Sachs has cut its long-term crude oil price forecasts, saying that improved US shale efficiency and higher production from OPEC will more than cover future demand.
The US investment bank's equities team, which closely followed investors, including large pensions and hedge funds, said it expects Brent to fall over time, reaching $55 a barrel by 2020. With prices remaining depressed in the foreseeable future, the Oil Ministry will market most of its oil to its old customers like Turkey, Japan, South Korea, China and Indonesia.
"Resuming pre-sanctions contracts with our old partners is high on NIOC agenda," Seyyed Mohsen Qamsari, NIOC's director for international affairs, told Shana recently.
So Iran will be back on the global marketplace, with an eye out for the long run. For now, the Iranian Oil Ministry intends to ride out the low price cycle.
