Iranian crude oil production is likely to increase in 2016, but will take a number of years to reach its previous peak, says Fitch Ratings.
The Iranian nuclear deal announced earlier today could, if passed by the relevant legislatures involved and abided by, allow Iran to significantly increase oil output. Iran’s oil exports at the moment are around 1.1 million barrels per day (mmbbl/d), versus levels of around 2.5mmbbl/d before 2012.
Once the deal is approved by national governments, the relevant sanctions have to be removed. The parties have outlined a staged approach that will only begin when Iran has met initial commitments, including the removal of the core from Iran’s heavy-water reactor in Arak, the dismantling of centrifuges, and the shipping out of the majority of Iran’s stockpile of enriched uranium.
Then, Iran will be able to increase production. Details of the condition of Iran’s production infrastructure are sketchy, but with limited investment, as sanctions have been increased, it is likely that only a portion of this capacity can be brought back on-line without material investment, says Fitch Ratings.
“We would expect to see some increases in production throughout the course of 2016, but that this would be less than half of the full 1.4mmbbl/d that was lost,” says a release. “The remainder will require significant investment and expertise – for which Iran is likely to want to partner with international oil companies. These projects typically take many months to agree, as oil companies and governments manoeuvre for the best terms, and often years to implement.”
It seems likely that the additional crude in 2016 will delay the recovery in oil prices somewhat, but Fitch Ratings still expect an improvement in prices next year, as demand grows and the cuts in investment since the price collapsed show through in areas other than U.S. shale. “However, we believe it will take two-three years for prices to recover to their marginal cost of around USD80 (Brent) a barrel.”