Report

Iran’s Return to Oil Markets Is Good for Energy Firms but Bad for Russia

Iranian oil on global markets is good for energy companies. It's not so good for Vladimir Putin.

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The nuclear deal struck between Iran and the West will gradually add a major new player to the global energy market. But don’t expect a radical reshuffling of the deck, at least not in the short term, though Tehran could present a big problem for major energy players down the line.

Iran’s oil infrastructure is decades behind that of other oil powers like Russia, Saudi Arabia, and the United States. But the potential resource base there — Iran is thought to have reserves larger than those of each of the three aforementioned energy giants — has firms primed to change that.

Sara Vakhshouri, a former advisor to National Iranian Oil Company International, said Iran is going to need quite a bit of outside help to reach its target of producing 5 million barrels per day by 2020.

“To reach this goal Iran would need $70 billion of investment in its oil and gas fields,” Vakhshouri, who is now president of SVB Energy International, wrote in a note circulated Tuesday morning.

If true, the amount of money Iran would need to spend on infrastructure, along with the time it would take to build the necessary facilities, could undercut a central critique of the deal from opponents like Israel and Saudi Arabia: that lifting the sanctions will quickly give Iran billions of dollars to funnel to allies like Syrian strongman Bashar al-Assad and proxies like Hezbollah.

However, Iran must comply with the terms of the deal over the long term to even open the door for this investment to arrive, said Emma Ashford, an energy expert at the Cato Institute. If it does, she said, Western companies are likely to line up to invest.

“Iran is sitting on as much as 10 percent of [global oil] reserves,” Ashford told FP Tuesday morning. “It’s in need of a big modernization and investment push. Companies may be willing to do that.”

She said Exxon Mobil, which was recently shut out of the Russian energy market, is a prime candidate. Other companies, including European firms such as Total, BP, Royal Dutch Shell, and Eni, are champing at the bit to get their hands on Iranian crude. Shell chief Ben van Beurden said in June that Iran is a “wonderful country with a fantastic resource base.” Total CEO Patrick Pouyanne added, “We like Iran.”

There will be a short-term impact to Tehran’s getting back into the oil game, though it won’t be nearly as substantial as the long-term impact. Iran is thought to have oil reserves of approximately 40 million barrels sitting on offshore tankers waiting to be sold. “This amount of stored oil can be sold even before any removal of oil export related sanctions. China, India, South Korea and Japan [all] have waivers from sanctions,” Vakhshouri wrote.

“Iran can also increase its oil and condensate production up to 800,000 barrels per day within the next six to 12 months,” Vakhshouri said in a subsequent interview with FP.

That won’t bring Iran as much money as it would have a few years ago. Flooding an already oversaturated global oil market with more supplies would only serve to send crude prices down. Tuesday at noon, U.S. Eastern time, a barrel cost $52.20, down 1 percent from Monday — something that will keep American gas prices low. By contrast, a barrel of oil cost $107 at this time last year.

However, according to Ashford, because Iran had been almost completely shut out of the oil market, any profit, even small, is better than nothing. Since 2012, Iran has exported about 1.1 million barrels a day. Prior to sanctions, Iran exported about 2.5 million barrels per day.

“They’re going to increase their market share. It’s going to keep prices low for everyone,” she said.

This has important geopolitical implications. Russia, whose economy is suffering under the weight of Western sanctions and is heavily reliant on energy, now has a new regional rival.

“This is not very good for Moscow,” said Ashford. “The ruble is falling even this morning because people expect this is going to cut into Russian profits.”

Vakhshouri said this presents Russian President Vladimir Putin with a difficult choice: cooperate or suffer.

“If the geopolitical tensions in the Middle East don’t cause any supply interruption, the market, the oil producers — mainly OPEC and Russia — have to agree whether to reduce their production or … start a price war,” she said.

Photo credit: Getty Images

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