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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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How Iran Could Trigger The Next 10 Percent Drop In Oil Prices

  • Iran announced plans last week to boost oil production from its supergiant South Azadegan oil field to at least 320,000 barrels per day
  • The development of the West Karoun fields are instrumental to the 25-year deal between Iran and China
  • The impact of additional Iran crude flows on global oil prices could be significant against a background of uncertain demand in the coming months

Given ongoing high and steady sales of crude oil to China and other Asian countries and the likelihood of a new iteration of the Joint Comprehensive Plan of Action (JCPOA) being agreed with the U.S. at some point this year, Iran announced plans last week to boost oil production from its supergiant South Azadegan oil field to at least 320,000 barrels per day (bpd) by the middle of 2023, from the current 140,000 bpd. This output from South Azadegan, and corollary increases in North Azadegan and other major fields that make up the oil-rich cluster of fields in the West Karoun region, will enable Iran to meet its long-standing target of 1 million bpd from this specific region within the next year or two, according to recent comments from the National Iranian Oil Company’s (NIOC) managing director, Mohsen Khojastehmehr.

To this end, OilPrice.com understands from sources close to Iran’s Petroleum Ministry, Javad Owji – the country’s new Petroleum Minister, met recently with senior representatives from China National Petroleum Corporation (CNPC) to discuss the development status of the West Karoun fields in general and of the South and North Azadegan fields in particular. As analysed in depth in my new book on the global oil markets, the development of the West Karoun fields up to a level where they are producing the requisite 1 million bpd of crude oil output was a key part of China’s obligations under the wide-ranging 25-year deal between Iran and China. According to the Iranian sources spoken to exclusively by OilPrice.com at the time, China in return is able to buy any and all oil gas, and petchems products at a minimum guaranteed discount of 12 percent to the six-month rolling mean average price of comparable benchmark products, plus another 6 to 8 percent of that metric for risk-adjusted compensation. Indeed, in the series of deals exclusively reported at the time by OilPrice.com that showed that the official figures showing Iranian crude oil exports stood at negligible levels were nonsense, each of the 5.8 million barrels of oil in total that were sent to China from Iran via the Giessel, Stream, and Snow tankers were discounted by at least a clear US$10.95 to the headline Iranian grade price. In addition to this straight discount, according to the Iranian sources exclusively spoken to by OilPrice.com at the time, an additional 8 to 12 percent discount proceeded from exchange rate differentials, and also Iran was offering (and still offers) offers China cost, insurance, and freight (CIF) cargoes at free-on-board (FOB) pricing.

Despite all of these enticements, however, China – according to comments from Iran’s NIOC, and the reason behind Owji’s recent meeting with CNPC executives in Tehran – has been delaying on the full implementation of the development plan for the entre Azadegan site. “In recent years, for various reasons, we have lost part of our oil production capacity and joint fields are lagging behind the development plan,” said Khojastehmehr. “The South Azadegan project had been awarded to China for an output of 320,000 barrels per day and under the 11th administration this agreement did not take effect for various reasons, leading to US$6 billion in lucrum cessans [basically, ‘lost profits’],” he added. According to the Iranian sources spoken to exclusively by OilPrice.com last week, the lack of decisive movement on South Azadegan (and any of the West Karoun sites) has largely been a result of the reticence of China to antagonise the U.S. government with overt actions in Iran whilst the Trade War issues are still in play. China’s usual workaround solution to this – to engage in dozens of ‘contract-only’ projects on the same site that do not attract the same sort of attention as major development and exploration activities - has been stretched by similar activities across multiple other sites in the Middle East, notably in Iraq in recent months. “However, it was decided at the meeting with Owji that China would put South Azadegan back up its list of priorities this year,” said one of the Iranian sources last week.

For Iran, the exploitation of South Azadegan’s full potential is crucial for three key reasons in its plans to achieve a quick bounce back to pre-sanctions crude oil production levels as soon as possible after sanctions are withdrawn as and when a new iteration of the JCPOA is agreed with the U.S. Firstly, South Azadegan was originally going to be lead-developed by France’s TotalEnergies, after the initial work on Phase 11 of South Pars had been completed, so the desire to make this a success now that the French company has pulled out of Iran entirely is profound, said the Iran source. Secondly, South Azadegan – and its sister field, North Azadegan – draw on the same deposit as neighbouring Iraq’s Majnoon field, which makes developing it quickly essential in order that Iraq does not benefit from the site at Iran’s expense or destroy the favourable geology of the field through its drilling. And thirdly, South Azadegan is a key field in the massive West Karoun group of oilfields, also comprising North Azadegan, North Yaran, South Yaran, and Yadavaran, which together are estimated to contain at least 67 billion barrels of oil in place but also, propitiously, the average recovery rate across the West Karoun site is just 5-6 percent. “For every one percent increase in the rate of recovery that can be achieved, the recoverable reserves figure increase by 670 million barrels, or around US$34 billion in revenues with oil at US$50 a barrel,” one of the Iran sources highlighted. With the right developers, an increase in recovery rate across the site to at least 25% over a 20 year contract period could be expected to add US$838 billion in revenues for Iran, he added.

The impact on the oil price of such an increase from South Azadegan and then from the additional input from all of the West Karoun fields would be significant, particularly against a background of uncertain demand in the coming months, given ongoing uncertainties over the Covid-19 pandemic and over China’s likely marked decrease in economic growth, as analysed by OilPrice.com recently. Even without any of these production increases, a senior commodity analyst at global energy markets intelligence company, Kpler, told OilPrice.com that Iranian crude oil and condensate production could bounce back very quickly after the Petroleum Ministry orders the NIOC to ramp up production – to an 80 percent recovery of full production within six months and to 100 percent recovery within 12 months. “[As at the beginning of Q4 2021] Iranian crude oil production capacity stands at 3 9 to 4 million bpd according to the NIOC with current output holding near 2 4 million bpd, of which 1.7-1.8 million bpd is consumed in domestic refineries, and close to 1 million bpd of condensate and natural gas liquids [NGL] - LPG [liquefied petroleum gas] and ethane - are also being produced at present, primarily from the South Pars gas field, although total condensate and NGL production capacity stands at around 1 3 million bpd,” said the Kpler analyst. “Ultimately, we believe Iranian production could technically jump by 1 7 million bpd including 200,000 bpd of condensate and LPG/ethane, in a 6 to 9 month period from when sanctions are lifted,” the analyst added. “An immediate impact of a 5-10 percent fall in the oil price would be likely,” the analyst concluded.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on January 04 2022 said:
    Let me first state some facts of life about Iran’s oil production.

    1- A lifting of sanctions will never see the light of day now or ever because the positions of the United States and Iran are irreconcilable. In my view, the only deal Iran will accept is one on its own terms meaning a lifting of sanctions against it and a new nuclear deal with no limitations on its nuclear and ballistic missile development programmes.

    2- Iran isn’t in a hurry to reach a deal having virtually managed successfully to evade US sanctions to the point of nullifying them altogether and has also won the geopolitical war with the United States thus emerging as the major regional power in the Gulf region and working slowly but diligently to eject the American military presence from Iraq and the whole Middle East. One has only to look at the growing influence of the Islamic Guard Corps (IRGC) in Iran to realize that the IRGC is running the show in Iran behind the facade of a hardline government endorsed by the Supreme leader Ali Khamenei.

    3- Even in the very unlikely event of sanctions being lifted, Iran could only add 650,000 barrels a day (b/d) to the market being the difference between its pre-sanction and post-sanction exports.

    4- The maximum Iran could produce in a no-sanction scenario is estimated at 3.70-3.75 million barrels a day (mbd). Since OPEC has introduced production quotas for its members in 1981 (41 years ago), Iran has never ever achieved the 4.0-mbd quota allotted to it by OPEC.

    5- Moreover, the only time Iran produced 6.0 mbd was in the early 1970s under the Shah but in so doing it has damaged its major oil reservoirs some of which are still damaged for lack of investments or being beyond repair.

    6- If Iran won’t able to raise its production high enough to meet its OPEC quota of 4.0 mbd in 41 years, does anyone believe that it will raise its production by 320,000 b/d from the South Azadegan oilfield by 2023?

    In view of the above, Iran will never be in a position to affect global oil demand and trigger the next 10% drop in oil prices as the author suggests.

    Oil prices are on an upward and steep trajectory which will take Brent crude beyond $150-$170 by 2050 underpinned by rising world population projected to rise from the current 7.9 billion to 9.7 billion by 2050 and a growing global economy projected to grow from the current $91 trillion to $245 trillion by 2050.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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