Increased Iranian production - where will it fit?

Gerry Rogers, senior associate at Galadari Advocates and Legal Consultants writes for

Gerry Rogers.
Gerry Rogers.

With a deal struck on Iran’s nuclear programme after protracted negotiations, commentators are already speculating as to whether this could clear the way for lifting the current sanctions on Iran’s hydrocarbon production, though the details of the JCPOA remain undisclosed at this time. Any deal is subject to ratification, making an immediate lifting of sanctions unlikely.

Iran has recently claimed that it would be able to increase its oil production considerably, and in a short space of time. In addition, it is understood that Iran has already been storing crude in anticipation of a lifting of sanctions.

With the Middle Eastern oil & gas market training its eyes on negotiations with Iran, what then would the likely impact of an increase of Iranian hydrocarbon exports be on both the world markets and in OPEC (which Iran is a founder member of)?

Current world oil market situation
The world markets have historically witnessed a number of shocks, the most recent being the increase in domestic production in the US (not an OPEC member) as a result of fracking. Fracking technology has allowed for increased production to the extent that the US is producing more crude than it is importing for the first time in 20 years. A sharp decrease in the cost of crude since the middle of 2014 has accompanied fracking’s introduction and, whilst the price has rebounded slightly, it is still below the US$100+ price per barrel levels of the last few years.

Current OPEC situation
OPEC is an organisation arranged by statute. The OPEC statute sets out its objectives and its governance. The OPEC conferences, to be held at least twice a year, are the supreme authority and decide the policy and implementation of such policy by unanimous decisions.

OPEC controls a share of the world crude market of around 40%, and sets published targets for aggregate production of its members. This policy is observed to a greater or lesser extent dependent on the country and the economic situation. The current target is 30 million bpd, with total production fluctuating around the 31 million bpd mark. Until recently OPEC also published individual country quotas, but this practice ceased in 2008.

OPEC has historically waited until any change impacts global oil prices: Saudi Arabia is by far the largest oil producer in OPEC and has traditionally acted as a swing producer . For example, in 1986, Saudi Arabia increased its own production to introduce a disciplined approach to decreasing crude prices which, at the time, had crystallised an increase in production by other member states in an attempt to offset their reduced revenues.

The last two OPEC conferences have defined a new policy in response to increased US production of unrestricted oil production i.e. it has been left to the market to adjust to increased production of non-OPEC states.

This has naturally led to a decrease in the oil price, a decrease which certain OPEC member states may be better placed than others to weather - certain member states have prudently created sovereign funds from their recent profits, whilst other member states face a number of challenges. For example, Iraq reportedly requires a price of US$ 100/bbl for its budget to break even, resulting in a predicted deficit of 25% for 2015.

Increased Iranian production in this context
OPEC’s response to a marked increase in Iranian crude would be either to allow an increase in the production target, leave the target at the same level, or set a lower target. Each option will have consequences. The first option may result in a further fall in crude oil prices, the second would require a reduction of certain OPEC members’ quotas and the third an even greater one. The difference now is that increased US production means that reductions in capacity may not necessarily result in an increase in oil price, as had previously been the case.

To date the cost of recovery of oil through fracking has been expensive relative to other regions. The US is a marginal producer , as opposed to a swing producer.
Fracking is a versatile technology and, whilst the recent decrease in crude oil prices has resulted in reduced US rig counts, there are also a number of plugged wells available to be processed on any increase in crude prices.

Further, there are also indications that innovations (including reworking existing drilled wells) may increase shale production and/or reduce cost of drilling.
The oil price is dynamic and there are a number of other fluctuating factors which may guide OPEC’s approach to Iran’s increased exports. These factors have been exacerbated by the recent political upheavals in many OPEC member states in the Middle East and in the region in general.

The market may well be awash with speculation around increased oil production but recent history teaches us that this does not always come to fruition, as seen in the unfulfilled promises of increased Libyan production (which has actually decreased) and increased Iraqi production which was then revised downwards after internal political turmoil.

Given the susceptibility of oil producing nations to sudden, often unanticipated change, the impact of an increase in Iranian oil in the world market will be determined solely by the global circumstances at the time.

Gerry Rogers is a senior associate at Galadari Advocates & Legal Consultants. 


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Oil & Gas Middle East - September 2020

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