Iran’s oil, rusty taps

IN IRAN’S glory days in 1974, it pumped a record 6m barrels of oil a day (b/d). Revolution, war, politicking, mismanagement and sanctions have all taken their toll. Production is 2.8m now. If an outline deal on Iran’s nuclear programme, discussed this week, is firmed up, it should begin to reverse that trend by opening new export markets and bringing in foreign investment to develop the world’s fourth-biggest oil reserves. The International Energy Agency, representing oil-consuming countries, thinks that in the short term, Iran’s production could rise by 0.8m b/d. Global oil prices weakened this week on the prospect of extra supply entering the market.

Hopes of a rapid rise in Iranian output may be optimistic. Though its geology is friendly and production costs low, other problems abound. Global demand for oil has slackened, supply from elsewhere is plentiful, Iran’s oil industry in poor shape, and its investment climate unfriendly.

The current sanctions regime, relaxed in stages since November 2013, is already somewhat leaky. Iran exports over 1m b/d, mostly to Turkey, India, Japan, South Korea and China, which are among the 20 countries beyond the reach of the sanctions. But others benefit too: wily middlemen have long managed to evade the sanctions, using ships with frequently-changing names, operating under flags of convenience

But lifting sanctions generally takes longer than imposing them. Though President Barack Obama can temporarily suspend America’s curbs on Iran’s finances and exports, permanently ending sanctions would require the approval of a highly suspicious Congress. Lifting the EU’s sanctions would be easier. It could end its ban on crude imports (which were 0.7m b/d before 2012), ease restrictions on shipping insurance, and allow Iranian banks to use the SWIFT financial-transactions system.

Low prices and a dip in demand from India mean that Iran has perhaps 30m barrels in floating storage. By starting to run that down it could quickly raise its exports by 0.3m b/d. But any further significant boost to foreign sales should not be expected until late this year, says Amrita Sen of Energy Aspects, a consulting firm.

The country has been working hard to prepare its fields for the lifting of sanctions, which explains a recent rise in their capacity (see chart). But getting production back anywhere near 1970s levels will be a long job. Ms Sen says that some of the country’s older fields are declining at an annual rate of 15%. They will need perhaps $30 billion a year spent on them, for a number of years, just to stem the decline in productivity, let alone reverse it. Chinese and Russian involvement does not make up for the absence of big Western companies, which are currently looking for ways to cut their capital expenditure, rather than increase it.

Attracting the Westerners back would require not just an end to sanctions, but big changes to Iran’s oil and gas laws. These do not allow foreign ownership, but instead reward international oil companies for their investments with a slice of the revenues, a scheme known as “buy-backs”. The Iranian authorities say this regime already offers sufficient incentives, and will become even more favourable. Most foreign companies will need more details—and more reason to trust the authorities—before they are convinced.

Another obstacle is internal politics. Iran’s technocrats have long tussled with its radical Revolutionary Guards for control of the industry. This is not just a matter of ideology: the militia’s business empire includes companies selling engineering services. They see foreigners as unwelcome competition. A final difficulty is OPEC, the oil-exporters’ cartel, which is dominated by Iran’s arch-rival, Saudi Arabia, and its Sunni Muslim neighbours. They may seek ways to prevent the detested Shias from gaining market share.

So the best long-term prospects may be not in oil, but in other hydrocarbons. Iran has even richer reserves of gas than it does of oil, and these fields are in a less parlous state. The EU yearns to lessen its dependence on Russian gas imports. Why not from a newly approachable Iran?

http://www.economist.com/news/business/21647626-deal-nuclear-weapons-will-help-more-oil-and-gas-flowbut-slowly-rusty-taps