Mohammad Reza Kamali, Director of the Center for Exploration and Production in Iran’s Oil Ministry, announced a new shale oil discovery in the Lorestan Province on April 25, compounding Iran’s shale discoveries of last year in the southeast Kerman and northern Semnan provinces.
What is the significance of this discovery for Iran? Should Saudi Arabia worry about its arch rival after this new find? Will it affect the U.S. shale oil industry and worsen the existing supply glut in the world? Yes, and no.
Significance for Iran
Iran has 158 billion barrels of proven conventional oil reserves—the fourth largest in the world—and 34 trillion cubic meters of natural gas reserves, which is the largest in the world. Though the new announcement adds to their existing reserves, it is unlikely that Iran will extract shale oil in the near future due to its high production cost. Related: Lets Stop Pretending Nuclear Power Is Commercially Viable
The production cost of conventional oil in Iran is under $10 per barrel, whereas the production cost of shale oil is anywhere between $40 and $80/b. Hence, developing shale oil is a nonviable option at the current prices. Nevertheless, if crude oil prices rise above $70/b, Iran might consider producing shale oil.
In its continuing conflict with Saudi Arabia, the new discovery is a morale booster for Iran—and in geopolitics, this is significant even if not immediately tangible.
Should Saudi Arabia worry about Iran’s new discovery?
The second largest known oil reserves of 266 billion barrels are in Saudi Arabia. It is the largest producer in the world with a spare capacity of 2 million b/d, which can be used in an emergency. Though the U.S. shale oil industry has challenged the Saudi supremacy in the world, Iranian shale will not create any trouble for Saudi Arabia in the short-term. Related: Why Canada’s Oil Industry May Never Be the Same
Nonetheless, Iran and Saudi’s tussle for regional dominance will continue, and the latest Iranian find should be considered as an open-ended threat to the Saudis. It lets the Saudis know that their current status is not necessarily secure.
Does Iran’s announcement affect the U.S. shale oil industry?
Iran’s shale oil discovery does not represent any real or immediate competition to the U.S. because the U.S. shale oil industry is challenging the conventional oil producers. They are performing way better than the experts’ expectations and have decreased their cost of production from $80/b initially to $20-$30/b currently, with technological advances.
If at all, Iran will have to turn to the U.S. shale oil producers and equipment manufacturers to learn from them how to reduce the cost of shale oil production. The Saudis should really be worried about potential U.S.-Iranian shale producer cooperation here.
Will it increase the global supply glut?
Though Iran wants to increase its oil production to pre-sanction levels, it is taking a measured approach. Tehran isn’t interested in adding to the supply glut and bringing down prices further if not necessary. And the country is also dealing with certain administrative issues that complicate matters. Related: How Microgrids May Transform The Future Of Energy
As such, it is unlikely that Iran will produce any of this shale oil any time soon, and the discovery will therefore not add to the current supply glut.
However, the discovery will ensure a few more years of crude supply to future generations.
More than anything, the announcement of this discovery is a message and a hidden warning to Saudi Arabia that Iran will continue to challenge the Saudis’ leadership position in OPEC.
By Rakesh Upadhyay for Oilprice.com
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