Post-sanctions Iran initially won’t shake markets up, executive says

Iran’s resumption of oil and gas exports, once sanctions are lifted under the recently negotiated nuclear limits agreement, probably won’t flood global markets initially, the chief executive officer of Crescent Petroleum forecasts.

Majid Jafar said Iran Petroleum Minister Bijan Zangeneh has said he wants to increase the country’s crude oil production to more than 4 million b/d in the near future, and plans to unveil National Iranian Oil Co.’s new petroleum contract in late August.

“I think Iran can achieve this, but it won’t be easy—and it won’t have as big an impact as it might have had in the 1990s when there weren’t so many other options,” Jafar said during a July 22 address at the Atlantic Council.

NIOC reportedly is trying to reform its contract terms to attract new outside investment, but faces considerable challenges similar to other countries in the region that have state-owned oil companies, Jafar explained. “Success won’t be about having a better financial return, but about realigning national interests with investors’ needs,” he said.

The country also does not appear likely to have a major immediate impact on global natural gas markets despite its having 1,201 tcf of proved reserves, the second largest amount globally, Jafar said. “It’s not the same as oil,” he said. “The problem is making a price decision. Iran’s biggest problem is that it spends time negotiating with itself. Nobody is willing to take responsibility, so it tends to negotiate unrealistic contracts.”

Both gas export agreements that it negotiated since 2000—one of which was with Crescent—wound up in arbitration, he noted. “The fact that domestic gas prices are subsidized also doesn’t help,” he said. “It also makes it very unlikely that Iran will start to compete with Russia in supplying gas to Europe. It will need to improve its policies and institutions first.”
State monopolies
Other Middle East producers will need to adjust to new global market realities resulting not just from North America’s unconventional production renaissance, but also from consumer countries’ declining demand growth, Jafar said. “National oil companies are dominant,” he said. “This has led to large, and in some cases politicized, state monopolies.” Sanctions caused only about 1 million b/d of Iran’s production plunge from 6 million b/d to 3 million b/d, he suggested. Outmoded policies and priorities caused the rest, he said.

“The Middle East’s market share does not reflect its resource holdings,” Jafar said. “It’s politically unstable, but government policies need to be reformed, particularly subsidies which benefit the very wealthy the most and divert revenue from more important areas. Not reforming subsidies amid very low prices means we’re consuming too much of our own energy. It also undermines efficiency.”
He said the region’s oil-producing countries fall into one of two broad countries: those with savings, mainly along the Persian Gulf, and those without, primarily failed states like Iraq, Libya, and Yemen. “Their economic growth is worse than their importing neighbors like Egypt and Lebanon because oil prices fell so far in the last year,” Jafar said.

Encouraging Middle East producing countries to achiever their energy potential is still very much in the US interest, he said. “The focus should be on governance, not just politically but economically,” he said.
“What happened in the last year was about more than North American shale oil,” Jafar said. “There were other factors, principally a reassessment of China’s future demand. The Saudi Arabians have bad memories of the 1980s when they chased production, and prices collapsed anyway. Now, they seem to be asking why they, as the lowest-cost producer, have to be the first to cut production.”

Jafar said that after 45 years, Crescent, which is based in Sharjah, has moved from a worldwide focus to one on the Middle East. Part of the company has moved into infrastructure, including ports and power. “We’re very committed to the region,” Jafar said. “I’m very optimistic about its prospects going forward, but there are huge risks, along with opportunities.”

Contact Nick Snow at nicks@pennwell.com.

by By Nick Snow of OGJ Washington