The nuclear talks that have been ongoing for more than twelve years between Iran and the P5+1 (USA, Russia, China, France, UK and Germany) are in their final stage. As the deadline of 30th June looms for the parties to finalise an accord, Wood Mackenzie and Verisk Maplecroft are in agreement that a deal leading to the unwinding of sanctions is likely.
According to Verisk Maplecroft, the key above ground risk considerations are:
- Although nuclear negotiations between Iran and the P5+1 countries face a number of hurdles, a final deal is now more likely than not. Most importantly, the high value placed on an agreement by both sides continues to produce compromises.
- Despite the growing momentum of talks, nuclear negotiators still have to reach a consensus on the outstanding issues of disagreement. Agreeing a timetable for the lifting of sanctions and the parameters of the inspection regime will be particularly challenging.
- Western oil and gas companies returning to or entering Iran in the wake of a deal will face a broad range of political and regulatory challenges. These range from an inefficient petroleum bureaucracy to heightened regional tensions.
Wood Mackenzie bases its global oil market and Iran upstream analysis and forecasts on the assumption that a nuclear deal is reached in mid 2015 kicking off a gradual process with sanctions fully lifted by mid-2016. The key points from Wood Mackenzie's analysis on the impact of an agreement on the energy industry are as follows:
- The country presents a range of important oil and gas opportunities covering the whole value chain, from exploration to petrochemicals.
- Iran has the third largest oil and gas reserves in the World (behind Russia and Venezuela and ahead of USA and Saudi Arabia). Three quarters of its total recoverable reserves are yet to be produced.
- Iran's remaining oil reserves are the third largest in the world and could become a key source of global oil supply after 2020.
- Iran has the second largest gas reserves in the world but its market share of the global gas trade is less than 1%.
- Iran could add crude oil production to global supply of 600 000 bbls a day (b/d) by end 2017, incrementally on an annual average basis of:
- 120 kb/d by end 2015.
- Another 260 kb/d end 2016.
- Another 220 kb/d end 2017.
- This gradual rate of growth is not expected to have a significant downward effect on oil prices.
- We expect total crude production capacity to rise from 2700 kb/d in 2015 to 3400 kb/d in 2020 – and could reach as much as 4.4 million b/d by 2025 with foreign direct investment in the upstream sector.
- Gas production and export potential is enormous but more in the longer term.
- We expect gas production to increase sharply – we're forecasting sales gas plus re-injection to increase from 19.3 billion ft3/d in 2014 to 24 billion ft3/d in 2017, representing a 24% increase.
- Five new South Pars phases coming onstream in 2014-2015 - eventually increasing production capacity by more than 6 billion ft3/d.
- Gas reinjection (for oil production) would be prioritised over export.
- Iran’s oil and gas industry is in need of significant external investment - a golden opportunity for International Oil Companies (IOCs) and National Oil Companies(NOCs). There are likely to be multiple upstream avenues (early life developments, EOR, gas and exploration) as well as downstream opportunities.
- Iran has to offer competitive fiscal terms because there are many other countries courting the IOCs and their - much reduced - investment budgets.
- New upstream terms will be clarified by H2 2015 and are expected to be considerably more attractive than the previous buy-back contracts in which returns have underwhelmed.
Petrochemicals & Downstream
- The outlook for the refining sector remains uncertain as Iran was originally a major gasoline importer in the region but is now self-sufficient.
- Iran's petrochemicals operations and ambitions have been severely hampered by the sanctions. Currently units are highly underutilised and production could be ramped up with access to additional markets and technology support. Lifting the sanctions could result in an additional 3 million t of ethylene plus derivatives by 2025.
Adapted from a press release by David Bizley