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Iran’s Crude May Be Just another Drop in the Barrel

Iran’s Crude May Be Just another Drop in the Barrel thumbnail

The world is awash in crude and overwhelming dwindling consumer demand. And just this week, the Western world responded by unleashing half a million barrels every day of Iranian oil, threatening to crush dismal commodities prices to stupefying lows. Or so many theories go.

But the energy sector in 2016 is in a different world than the one that existed in 2012, when those sanctions restricted Iran’s participation in the world market.

Despite the vast volumes of hydrocarbons beneath Iran’s salty deserts, its production was weakening. Since that time, capital and technology have abandoned the country. David Pursell, managing director and head of macro research at Tudor, Pickering Holt and Co. in Houston, said some estimates suggest Iran produced half of its fields years ago. Resuscitating them would require an influx of expensive technology when cash is in short supply.

“If Iran was on a decline before sanctions, and all of a sudden, it’s pulling the fields less hard, but also underinvesting in both capital and technology, we would argue there’s a chance that 500,000 barrels a day might be a stretch,” Pursell told Rigzone. “The market is worried, if not scared, that it could be more than half a million barrels a day.”

And, it’s hard to say for sure what Iran has in store because of widespread speculation of “leakage” deals in which a couple hundred thousand barrels of oil move across the border each day into Iraq for sales, Pursell said. If Iran can deliver 500,000 barrels per day simply from tapping its build-up of inventory, it would take a couple of months to see what the country can truly add to production.

Wynn Segall
Wynn Segall, Partner, Akin Gump Strauss Hauer & Feld LLP
Akin Gump Strauss Hauer & Feld LLP

Capital Flows to Opportunity

The lifting of sanctions – and especially the suspension of the European Union’s restrictions on the financial services sector – make it more likely that non-U.S. companies will first venture into Iran, said Wynn Segall, a partner in the Washington, DC, law office of Akin Gump Strauss Hauer & Feld LLP.

“For European and other non-U.S. companies, Iran is essentially open for business,” he told Rigzone.

But even that business remains subject to some remaining restrictions imposed by other countries in connection with non-nuclear concerns regarding Iran, such as other weapon proliferation and terrorism.

The new order established by the lifting of nuclear sanctions has produced a landscape in which non-U.S. companies have broad latitude to re-enter the energy market in Iran and to acquire mature Iranian-sourced oil and gas, he said. But U.S. companies, as a general proposition, remain subject to broad U.S. restrictions notwithstanding new general licensing provisions allowing activities of foreign-owned affiliates – foreign affiliates – of U.S. companies that are independent of U.S. parent company involvement.

The general license for foreign subs of U.S. entities generally allows them to engage in activities that are permitted under the laws of the country where they operate, but subject to a few important caveats. A U.S. parent company may opt to change its policy, allowing its foreign subsidiary to pursue independence. But limitations on how such foreign subsidiaries can then proceed include strict exclusion and prohibition of the provision of “facilitation,” support, direction or other involvement of a U.S. parent company, or other “U.S. Persons,” in any subsequent Iran-related activities. Moreover, U.S. sanctions still prohibit such foreign subsidiaries from engaging in transactions that involve blacklisted U.S. sanctioned parties,” Segall explained.

Looking beyond the general license for foreign subsidiary activities and other changes in U.S. law, there is a significant practical question that U.S. companies will need to address in considering whether this path to new business opportunities in Iran is practical for their business, he said, including whether the company is comfortable and consistent with their general business practices to have a foreign subsidiary act autonomously without parent company involvement.

“In other words, when it comes to fundamental management and governance practices, are companies really going to be able to say to their foreign subs, ‘Go ahead and do what you like. We’ll look at your revenue, but we’re not going to want to actually participate in discussion or decision-making on fundamental business decisions you make about whether to pursue a particular contract, investment or joint venture,” he said. “Ultimately this will be a critical business judgment, informed by consideration of related legal, reputational and investor relation risks, that executives in individual U.S. companies will have to make in order to determine whether or not the foreign subsidiary path to Iran is practical and meaningful for their organizations to pursue.”

Banking on Returns

Companies in both the United States and abroad will likely be cautious in their approach to operating in Iran, said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis.

“There are a lot of things that have to be undone, one thing at a time – as part of lifting the sanctions,  was also allowing Iran’s banks back into the banking system. That’s the important element because everything [involved] is going to involve finance,” she told Rigzone.

What’s more, there are inherent challenges in simply doing business in a post-sanction Iran. Managers may be concerned about issues that arose when Western companies have operated in places such as neighboring Iraq, where procurement and equipment can be onerous. Granted, part of the challenges in Iraq involve its own transition, but in the end, Myers Jaffe said, “Iran is still going to be complicated.”

Whether companies opt to spend precious capital resources in Iran will have a lot to do with timing, Myers Jaffe said.

“Companies are interested in showing their shareholders that whatever they’re doing when they’re deploying capital, it’s going to be not some futuristic things where [they] invest $6 billion and in 2030 or in 2025, production” begins, she said.

Shale was an easy sell because successful companies could demonstrate a successful return on investment within a year of deploying capital. Also, energy companies want oil – not condensate – and so the resource itself is under scrutiny.

“If the production profile looks like its decades from now, and not a few years from now, it’s going to be less attractive to a lot of companies,” she said.

Segall said even with the licensing granted to foreign subsidiaries of U.S. companies, it’s still more likely European nations will be among the first to dip into Iran’s resources.

“Even before the sanctions were usually lifted, non-U.S. executives were already meeting with their Iranian counterparts to explore potential opportunities,” he said. “I expect we’re going to see a lot of activity by non-U.S. companies in the energy sector. For U.S.-based companies, it remains to be seen what the art of the possible and the practical will be for the foreign subsidiaries.”

Among the most likely first movers are large multinational companies, such as Italy’s Eni S.p.A. or the integrated French company, Total S.A., Myers Jaffe said. BP plc, another expected contender, has said it’s taking a more cautious approach.

The British oil and gas giant’s CEO, Bob Dudley, told the BBC his company isn’t necessarily in a rush to wrangle resources in Iran. Other sanctions, such as those in the United States that restrict corporate arrangements with foreign subsidiaries, coupled with the freefall in capital spending, make opportunity in Iran a wary pursuit. Plus, with Mexico entering the open market and BP’s commitment in the North Sea, the company will likely take a measured approach to Iran.

“I don’t think anyone will invest in Iran just because it is Iran,” he told the world news organization. “I think it has got to be an economic decision on the use of our very scarce capital.”

Perception Plays on Price

At TPH, Pursell noted that in June 2008, oil was $145 per barrel and well on its way to $200. The story line at the time? Demand is really good and demand is tight. Except, demand wasn’t good and it was falling apart, Pursell said. And if anyone asked questions about where this demand existed, the answer was in China, a nation that operates in such opacity that you never really know.

“Then they said, ‘Well, demand must be good, or the price wouldn’t be $140’. But you’re seeing that exact same behavior today, which is, ‘Oh, demand must be bad.’ But no, demand is actually very good,” he said. “The term glut is commonly thrown out there – we may get a glut if demand goes to zero, but the most recent trending data from the [Organization for Economic Cooperation and Development] has actually been pretty positive.”

As such, Pursell said he’s more optimistic about a recovery today than he was just four months ago, and TPH is bullish on $85 oil in the second half of 2016 when inventory decline becomes more pronounced and demand is expected to grow significantly.

Pursell said the numbers point to recovery, but given the tenor of geopolitics in the Middle East, numbers can change.

“What are we worried about? Well, if Saudi says, ‘You know what? We’re tired of the Iranians. We’re going to increase production and match their growth one-for-one. I don’t think so, but that’s a possibility. And then if you saw a replay of 2008 and 2009, well, all bets are off and you can push a recovery out into 2017,” he said.

Still, Iran is more likely to produce incremental barrels, he said.

“I think we should be more worried about Libya than Iran just because … if peace ever broke out there, you could see a surprise … but what happens in these time periods, the narrative is driven by the price,” Pursell said.


23 Comments on "Iran’s Crude May Be Just another Drop in the Barrel"

  1. Plantagenet on Sat, 23rd Jan 2016 11:56 am 

    These people are MORE optimistic about an oil price recovery because Iran is entering the oil market?

    Sorry—that does’t make sense. We’re in an oil glut with a daily production surplus of over 1 million bbls of oil per day. Adding another 500,000 bbls/day from Iran is just going to make the oil glut worse.


  2. Outcast_Searcher on Sat, 23rd Jan 2016 4:09 pm 

    Well, you got it wrong in the first sentence. Global oil demand is increasing year after year, led by consumers driving more and more cars. How is that “dwindling consumer demand”?

    When the marginal production at expensive crude oil sources is shut in due to lower prices, supply will decrease as global demand tends to increase. At some point THAT will cause prices to increase.

  3. geopressure on Sat, 23rd Jan 2016 5:11 pm 

    The Glut was manufactured using the contents of the US’s Strategic petroleum Reserve…

    There never was an excess of crude oil…

  4. Apneaman on Sat, 23rd Jan 2016 5:12 pm 

    Outcast, in the last 20 months the price has fall by 70%. How much has demand increased? How much when you have to add 80 million ape consumers (births minus deaths) per year? 70% price reduction plus 120 million new consumers = 3% increase. Wow – let the good times roll.

    How much of that 3% can be accounted for by all the military gesturing and sorties in Syria, Yemen, etc?

  5. Truth Has A Liberal Bias on Sat, 23rd Jan 2016 6:00 pm 

    It is doubtful that all of irans increased production will be exported. They will consume more oil also as they increase production and export of argricultural and manufactured goods. Iran has a lot of catching up to do on the consumption side of the oil equation. Irans military will no doubt raise consumption considerably as they become more active.

    Of course retards like Plant can’t fathom that complex thought.

  6. twocats on Sat, 23rd Jan 2016 6:27 pm 

    Very good point Truth. Export Land Model is still in effect.

  7. Outcast_Searcher on Sat, 23rd Jan 2016 7:59 pm 

    Apmeaman said:

    “How much has demand increased? How much when you have to add 80 million ape consumers (births minus deaths) per year?”

    Well, you can make economic stats up all you like, and that may wed you to the tribe of the hard core doomers, but it doesn’t change the real world stats any.

    But pretend that crude oil demand isn’t growing any, as long as that fits the doomer echo-chamber talk.

  8. makati1 on Sat, 23rd Jan 2016 8:08 pm 

    Increase in use in one area is NOT indicative of global increase in use. I would like to see some FACTUAL STATS from the last 10 years on actual USE, not storage or propaganda. Actual use, not shipping it to one country on purchase and then shipping it somewhere else and calling it an oil export/import. Counting an orange twice does not make it two oranges.

    I suspect that world consumption is going down as we type, not up. I think it will soon be obvious when there is no more places to hide the excess. Population increase does NOT indicate higher oil use. THAT is Western thinking, not world thinking.

    The Philippines could double their oil “use” but that would only increase oil demand in the world by ~400,000 bbls/day. But, if American drivers each drove about three miles LESS per day, that “growth” would be offset.

    With declining ability to purchase, the West is already offsetting any oil price increases projected for the future. Oil prices will bump along a very narrow price range, trending down, I think. Baring war, of course. Then all bets are off, but it won’t matter to you or me at that point.

  9. Apneaman on Sat, 23rd Jan 2016 8:23 pm 

    Outcast, what “stat” are you claiming I made up?

  10. twocats on Sat, 23rd Jan 2016 9:16 pm 

    The Philippines could double their oil “use” but that would only increase oil demand in the world by ~400,000 bbls/day. But, if American drivers each drove about three miles LESS per day, that “growth” would be offset. [makati1]

    Gregor Macdonald has done some great analysis of the BTU transfer from the West to the East. approx 12 quadrillion BTU increase in China/India consumption in past decade or so. 10 quad of that came from OCED decreases, only 2 quad from actual production increases. That’s your “drive 3 miles less” right there, the easy changes. The question is, where is the next 10 quad decrease going to come from?

    Another more recent tidbit from Gregor:

    Don’t let anyone tell you they know the level of global oil demand. Since Non-OECD crossed over 50% share (2013) it’s nearly impossible.

  11. twocats on Sat, 23rd Jan 2016 9:17 pm 

    *OECD decreases,

  12. makati1 on Sat, 23rd Jan 2016 11:40 pm 

    twocats, most of that Chinese oil use came back to the Us in the form of “stuff”. Or, it used to before the depression set in in the US. Now less is being consumed by the US and less will be actually used by the Chinese. The Chinese are putting oil into storage. Soon that large buy will also end and then the real use will be obvious. A huge decrease should appear.

    We cannot ASSUME that someone has the ‘real numbers’ or tells the real story. You have to read widely to get an glimpse of reality these days. If someone makes his/her living from petroleum or BAU, you have to suspect their motive and pronouncements as they are covering their ass, so to speak.

    Gregor may be correct about the last decade but that is ancient history. Next week and next year are more important to you and I. India and China will soon slow their use for the same reason the Us has. Inability of the consumer to buy, even at today’s prices. The oil price road between now and then will likely be very bumpy.

  13. twocats on Sun, 24th Jan 2016 1:20 am 

    I’m imagining Boat here with a crappy italian accent, “and so then you take the money from things that are doin’ good and put it into things that ain’t doin’ good and then when realities change your strategies gotta change and you start putting it into extra houses and cars and that’s fundamentals investing 101”.

  14. Apneaman on Sun, 24th Jan 2016 2:16 am 

    Das Boat – he make an impression on volks.

  15. Ralph on Sun, 24th Jan 2016 2:31 am 

    I have been doing my own oil demand reduction scheme for some years now. First replaced a 35mpg (imp) car with a 70 mpg (imp) car. Then replaced an old, 60% efficient oil furnace with a new (80-90%) efficient furnace, and better insulated the house. Also, used wood burner to supplement house heating. Next, will be a Nissan Leaf which should reduce transport oil consumption by at least another 80%. That is the easy part. After that, it will take significant effort, and indirect consumption exceeds direct consumption manyfold already.

  16. Davy on Sun, 24th Jan 2016 4:18 am 

    The next two references are just made up anti-American agendist speak. The reality is quite different

    Here is one on the usual anti-American and pro Asia blather:
    “twocats, most of that Chinese oil use came back to the Us in the form of “stuff”. Or, it used to before the depression set in in the US. Now less is being consumed by the US and less will be actually used by the Chinese. The Chinese are putting oil into storage. Soon that large buy will also end and then the real use will be obvious. A huge decrease should appear.”

    The largest buildout in human history took place in China in the past 20 years and most fully in the last 10. China built out a huge amount of housing and infrastructure that had little to do with American “stuff”. The American stuff that was bought going back and starting 20 years ago allowed China the economic growth to build out and advance its society.

    Here is a doomer and anti-western blather and more unreality:
    “I suspect that world consumption is going down as we type, not up. I think it will soon be obvious when there is no more places to hide the excess. Population increase does NOT indicate higher oil use. THAT is Western thinking, not world thinking.”

    I doubt world consumption is going down as we type. It is more likely the rate of growth is declining. This decline is likely permanent for economic reasons and because of oils terminal decline towards and economic dead state. Short’s ETP gives all the details one needs to know about the declining economic contribution of oil as it depletes. Eventually as a bullets slows it drops.

    More importantly in the short term it is about economic demand destruction coming out of failed QE, zirp, nirp, and other government stimuluses. We have created far too much debt and economic bubbles. We prevented a recession at some levels while many levels never recovered from the 08 crisis. A significant amount of Main Street never recovered. A lot of areas thrived on the commodity bubble and asset bubbles.

    We are now in a slide with oil production potential that will bite us as soon as we try to return to a positive rate of growth. Returning positive rate of growth is a big “IF”. I have been arguing and will continue to argue we are now in a paradigm shift from growth to decline. Currently it is rate of growth dropping. It will not take long to erase rate of growth into actual decline. We will see serious confidence issues and greater economic decline once we have actual declining consumption. Energy equals economic activity.

    We must also recognize that a significant amount of growth in the last 15 years was malinvestment and now is surfacing as bad debt as the economy loses momentum from the inertia of broad based limits, diminishing returns, and deflation. We are paying for our excesses. We are paying for the excesses we should have paid for in 08.

    This is a long term and gradual process. We may see an event with a significant drop or we may not but the trend is down and there will likely not be a recovery at this point. We will have destroyed too much infrastructure to return to the rate of growth we have seen in previous years. We are not going to see China build out a modern civilization again. China is not going to become a western consumer nation. Limits will not allow this. We live on a finite planet and will see no more China’s. India is screwed if she thinks she can replicate China.

    We are done and rolling down the slope of collapse of modern man. The time frame is wide open because like peak oil it will be the review mirror that tells us what broke that made the collapse process a collapse event.

  17. Davy on Sun, 24th Jan 2016 5:30 am 

    “Norway’s Biggest Bank Demands Cash Ban”

    “The war on cash is escalating faster than many had imagined. Having documented the growing calls from the elites and propagandist explanations of the “benefits” to their serfs over the last few years, with China, and The IMF entering the “cashless society” call most recently, International Business Times reports that Norway – suffering from its own economic collapse as oil revenues crash – has joined its Scandi peers Denmark and Sweden in a call to “ban cash.””

    “These limits are broadly called “capital controls.””

    “The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.”

    “And the benefits of a cashless society to banks and governments are self-evident:
    1. Every financial transaction can be taxed.
    2. Every financial transaction can be charged a fee.
    3. Bank runs are eliminated.
    In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.”

    “But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.”

    “So, when the dust has settled who ultimately benefits by this war on cash – government and the central banks, pure and simple.”

  18. makati1 on Sun, 24th Jan 2016 5:44 am 

    Ralph, spending money on new stuff does not cut oil use. All that new stuff takes many barrels of oil to make, deliver and repair. Cutting use is not using a car at all, or, at least, cutting miles traveled, not changing brands.

    Also, a new furnace is nice, but cutting the thermostat setting to 60F or lower works also and costs nothing.Anything over 50F will keep the pipes from freezing. THAT is the important temperature. Sweaters, insulated underwear, etc. uses body heat to keep warm, not oil. If your setting is above 60F, you are wasting oil.

    Insulation is the only good oil savings that you mentioned. But, you are at least trying. Most are not.

  19. joe on Sun, 24th Jan 2016 7:59 am 

    I like this word ‘recovery’. Don’t they mean the prices mixed with wage stagnation that sucked the life out of the China boom? Recovery will push millions of people into poverty, just as they begin to see some light. Conversely, those who have worked through the great recession will see prices rise way in front of them as ‘recovery’ increases inflation, but wages remain the same. It’s a perfect limits to growth issue. Wage rises mean the rich getting slightly poorer. Commodity price recovery without wage rises causes a recession and the rich get poorer.

  20. joe on Sun, 24th Jan 2016 8:06 am 

    I like the idea that banks think people won’t use anything as cash. If they get rid of paper and metal money, banks will be done for. Services will be exchanged between people as barter, and gold will make a big come back, thus, rendering banks pointless and costly.
    Cut my grass, I paint your house. People will come to hate banks, and government much more than they do now.
    Ideas like 100% tax collection is simply economic facism. People don’t like facism ‘man’.

  21. makati1 on Sun, 24th Jan 2016 5:33 pm 

    joe, the banksters have not thought the problem thru to the end game. Barter/trade will come back with a vengeance. The game will end when the system shuts down for hours or days due to storms or other unforeseen events (Hacking?) and nothing can be bought or sold. There may be a lot of banksters hanging from trees.

    As for the current events in the FSA, the elite are deliberately destroying America from the inside. Their dream requires the playing field to be leveled so that a one world currency can be implemented and, eventually, a one world government. I think they are too late on that last part of the plan. It seems that the world is fragmenting even more because of their mismanagement, not consolidating.

  22. PracticalMaina on Mon, 25th Jan 2016 9:10 am 

    Makati, If Ralph sold his 35 mpg car used to someone with an older 20mpg car that was at the end of life and recycled, and purchased a new smaller, more efficient car, with less raw material. Wouldnt that constitute an increase in efficiency? People with the capability to purchase a new electric vehicle are displacing one less fuel efficient vehicle, when he gets his leaf some cheap guy like me will scoop up his small commuter. (I’m skeptical about global stability so I will go for less expensive and less technical investments.) Every day everything we do consumes some level of energy input, if we get enough people with spendable income to support green technology or green practices, the more hedged we will be for the future.

    How can we not come up with one truly green battery that doesn’t rely on elements we need to mine. There is a Japanese company working on a better lithium ion that is more recyclable, “Dual carbon battery”.

  23. Davy on Mon, 25th Jan 2016 9:42 am 

    Practical, you bring up a great point I have often mentioned. What is the real efficiency value when considering new buildout cost and lifecycle costs. My pont has often been on the macro and micro that many times new product or new infrastructure is not the best option even if it appears there is savings. The best option is always lifestyle and attitude changes then the physical changes. Software trumps hardware most of the time.

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