For months, outside observers have worked hard to predict how much oil sanctions will cost Iran and global markets. The International Energy Agency (IEA) now says Iranian exports are down 1 million b/d. The U.S. Energy Information Administration (EIA) predicted that Iran could lose between 800,000-1 million b/d depending on the completeness of the EU ban on tanker reinsurance. And OPEC, in a most revealing move, just recently took the extraordinary step of publishing data provided by states and secondary sources, presumably because official Iranian data is bogus. In OPEC’s June report, for example, Iran claimed production was 3.76 million b/d. Secondary sources estimated that total production was 600,000 b/d short of that mark.
Last month I wrote a company-by-company, country-by-country breakdown of which refiners and states were preparing to slash imports from Iran. The survey relied on interviews with executives and spokesmen, as well as official statements from governments, and data provided by international organizations like the IEA and EIA. My conclusion, which you can read in full at Tehran Bureau, was grim. But these miserable forecasts have yet to change the tone inside Iran. Rhetoric there remains defiant. And so it seems a good time to review what Iranian officials are saying about the industry, its predicament, and its long-term prospects.
There’s no better place to start than with Iran’s Oil Minister, Rostam Qasemi. On June 24, he told the Iranian Student News Agency that, “The European Union cannot cause any problem for the country’s oil industry by imposing sanctions on Iran’s oil, nor prevent its progress.” The EU has banned the import of Iranian crude beyond July 1. European insurers will also stop covering tankers that carry Iranian oil after that date. Regarding the implementation of sanctions, he admitted that many were already in place: “The West’s sanctions against Iran have started earlier and at this particular date [July 1] they will only become formal,” he said.
Iran’s Oil Minister has consistently said that his country will find a way around sanctions. He claims oil sales and government revenues will be unaffected. Qasemi did, however, bemoan the lack of development in Iran’s oil and gas fields recently. According to Mehr, a semi-official news outlet, Qasemi told the Majles on June 24 that “we face exorbitant backwardness in the development of shared oil and gas fields compared to the countries that we share the fields with, and we are exploiting very little from those fields.” Although a full transcript is unavailable, he reportedly said that a lack of investment and technology were to blame for underdevelopment.
The EIA agrees at least with this assessment. Production from aging fields is declining rapidly. This has as much to do with sanctions as it does Iran’s poor contract terms and pervasive corruption, which forces companies to pay extra under the table while profiting less above the table. The threat of war makes Iran even less appealing. State audits regularly blame foreign contractors for sluggish returns rather than the terms they’re forced to accept. The end result is underdevelopment that could handicap Iran’s oil sector for years.
In an interview with Iran’s Shargh newspaper on June 26, Qasemi said the IEA’s numbers were flawed. “Those are their figures,” he said. “For the moment, our exports haven’t gone down a lot.” (The IEA thinks Iranian crude exports may already be down 1 million b/d.) When asked about Iran’s increasing reliance on tankers for storing oil offshore, an issue this blog has touched on before, Qasemi said, “we don’t have a lot of oil [stored] at sea—we are transporting our oil with our own tankers” to other countries.
For weeks now, Iran has routinely shut off transponders that allow independent sources to locate tankers. The IEA said recently that Iran may have up to 42 million barrels of oil in floating storage. Good estimates are hard to come by but it’s hard to imagine Iran has avoided storing oil on tankers if some sanctions are in place, as even Qasemi admits. A Reuters report from June 27 claimed that Iran doubled its floating storage in the past month. It now holds at least 14 million barrels of oil offshore, by their count.
On June 26, National Iranian Oil Company (NIOC) Chief and Deputy Oil Minister Ahmad Ghalebani admitted to Bloomberg that Iranian exports would likely decline by 20-30 percent in the second half of 2012. The IEA pointed to preliminary data in its most recent report, saying that Iranian exports were already down 40 percent. According to Ghalebani, who spoke to reporters on the sidelines of a Moscow energy conference, Iran will use the shortfall as an excuse to shut in production, pursue maintenance projects, and repair fields.
IRNA—Iran’s official state news agency—naturally quoted Ghalebani at his most optimistic. He reportedly told the conference that Iran expects to boost oil production by 28 percent soon—to 5.1 million b/d by 2015. Exports are expected to rise from 2.2 million b/d to 3 million b/d as a result. (Ghalebani did not mention current oil export levels.) NIOC is also planning to produce more natural gas although there’s no way new gas exports to Pakistan and India can compensate for lost crude sales to Europe and Asia.
This may indeed be the regime’s plan but it shouldn’t be taken seriously. Many of these projects now rely on the auctioning of rial-denominated bonds to raise money. Any international company that can avoid U.S. and EU sanctions–which already prohibit a variety of commercial activity in the oil sector–will not run the risk of buying bonds in a currency suffering from wild inflation. The official exchange rate stands at 12,260 rials to the dollar but this could change with little warning.
Simply keeping old fields pumping at a consistent rate isn’t cheap. But doing that and dramatically raising production by almost 30 percent looks to be impossible for Iran unless it changes its contract terms, thus bringing in foreign talent and technology, and/or reaches a settlement on the nuclear issue that lifts sanctions. We should not expect Iran’s terms to change any time soon because they greatly benefit the Revolutionary Guard’s commercial interests. Companies affiliated with the IRGC often receive multi-billion dollar contracts regardless of their competency and capabilities. The end result is a stunted industry, a wealthier military, and a squandered national inheritance.
Iran’s editorial pages have been extremely consistent in the month leading up to the EU and U.S. sanction deadlines. Columnists for official and semi-official news outlets argue that the EU will not dare implement sanctions. And, if they do, the price of oil will naturally skyrocket to $150 a barrel, these authors claim. Europe’s crude oil benchmark is up 5 percent today on news of a Eurozone bank capitalization deal. It’s now hovering around $94-95 a barrel with sanctions expected to be fully implemented this Sunday. But that’s still down ~$34 since this year’s high in March, when traders thought the market was especially tight, and before it was known just how full global inventories actually were. As I wrote last month, “There is no guarantee that high prices will insulate Iran from sanctions.” Iranian oil may be precious–but it’s not that important if the global economy remains shaky, demand growth stays modest, other producers pump extra barrels every day, and inventories stay high or are tapped to make up for lost Iranian supplies. (Update: Brent closed at $97 today—up $5.59 or 6 percent.)
The 2012 U.S. elections also factor into many editorials. These authors believe President Obama needs to sideline Israel in an election year, so that they do not attack Iran and drag him into another war in the Middle East. Americans aren’t eager for another conflict. I don’t think this administration wants one either. But the U.S. is still scheduled to conduct its largest-ever military exercises with Israel in October. Combined forces will bring together anti-missile units during Austere Challenge 2012 and focus on the interoperability of systems that provide a multi-layered defense against incoming short- and long-range missiles. Thousands of American troops will participate. Over the past year, the U.S. has also beefed up its presence in the Gulf, tailoring it to the Iranian threat by deploying new and advanced stealth fighters and more minesweepers.
Obama already has a Nobel Prize. Do they give awards for having a world-class poker face?