The U.S. Energy Information Administration released its Short Term Energy Outlook yesterday. There’s a bombshell on page 4. EIA now forecasts that total Iranian oil production is set to decline by 850,000 b/d by the end of 2012. Here it is word-for-word:
EIA expects Iran’s crude oil production to fall by about 850 thousand bbl/d by the end of 2012, and by an additional 200 thousand bbl/d in 2013, from its previous output level of 3.55 million bbl/d at the end of 2011. Iran’s output decline began to accelerate during the last quarter of 2011 and has continued. EIA believes that this acceleration reflects a lack of investment, which is needed to offset natural production declines. A number of foreign companies that were investing in Iran’s upstream have halted their activities as a result of previous sanctions against Iran that have made it difficult to do business with the country. EIA expects that the forecast decline in Iran’s output will be offset by increased production in other OPEC member countries.
Just this morning, the International Energy Agency released its monthly assessment. It too has a bombshell. IEA now thinks Iranian oil exports have already declined by 1 million b/d this year. Overall production is said to be 3.3 million b/d, down from 3.5 million b/d at the end of 2011. Exports have shrunk to only 1.5 million b/d. And where are all those extra barrels of oil going? Tankers supposedly took on 10 million more barrels last month, according to the IEA. Total oil now held at sea could be as much as 42 million barrels, says Bloomberg’s IEA report summary. “About 17 supertankers and seven Suezmaxes are holding crude, with another estimated 25 million barrels being kept in onshore tanks, the report showed.”
Taken together these assessments are considerably worse than my grim survey for Tehran Bureau. Overall production has only declined 200,000 b/d, meaning Iran is on track to face the shut-in dilemma mentioned yesterday on this blog. But a loss this big–and this early in the year–suggests sanctions are locked in ahead of the deadlines set by the U.S. and EU. The EU ban is already in place. Asian customers are buying less Iranian oil in order to avoid U.S. sanctions.
It’s hard to overstate what this means for Iran, the market, and the sanctions regime. For Iran, additional field declines could ultimately push exports below the 1 million b/d mark unless the regime starts rationing oil at home. Oil fields have a shelf life, remember. They need new tricks like technology or more drills in order to keep pumping at a sustained rate. Iran has neither. Even if the EIA’s doomsday estimate doesn’t materialize in full–and Iran loses only 400,000 b/d in overall production–we’re still talking about a serious loss not including the pending reinsurance ban, which could force South Korea and other countries to halt imports entirely.
Market fundamentals also look to be easing at the worst possible moment for Tehran. Global demand growth is now expected to rise by ~810,000 b/d this year. Europe’s unresolved economic crisis, China’s slowdown, high gasoline prices, and uncertainty about the U.S. recovery have all sucked some optimism out of growth forecasts. At the same time, North American production is surging. Non-OPEC output is on pace to match this year’s rise in demand. Elsewhere, Saudi Arabia remains committed to balancing the market and replacing Iranian crude if necessary. Saudi production declined slightly last month but, with inventories swelling around the world, there’s little doubt the market is well supplied. “The second half of the year could see a further easing in fundamentals, despite seasonally higher demand,” OPEC said this week.
Ideally, Iran’s losses will change the atmosphere of ongoing nuclear talks, just as they were designed to do. New incentives should be tabled if a lack of investment slashes Iran’s oil production. Lifting sanctions would permit new investment inside the country; revoking the threat of being cut off from the U.S. financial system would allow foreign companies to return to Iran’s aging fields. The U.S. and others could also offer greater access to advanced oil recovery technologies. That should be more appealing than the airplane parts currently on offer.
Iran would still have to come clean on the nuclear file, of course. But–for the first time–we might see the P5+1 offer deal sweeteners rather than just relief from further punishment. A comprehensive settlement would naturally make Iran more attractive for businesses since the threat of war would subsequently recede. If all sides act with the positive intentions, it could even become a springboard for normalizing Iran’s economic relations with the world.
This post probably rings triumphant or too optimistic for some readers. This isn’t my intent. Even if sanctions prove “crippling,” we don’t know yet whether it’s enough to change minds in Tehran. We can add up barrels and dollars and estimate what Iran stands to lose. But we don’t know for sure what the nuclear program is actually worth to the Supreme Leader. In only a few more months, the trajectory of negotiations should tell us.