Oil traders look to Iran’s market return

As Iranian and western negotiators hunkered down for talks on Tehran’s nuclear programme in Geneva last week, oil traders and analysts went into their own war rooms – estimating the speed and quantity of oil the country can bring back to the market should sanctions be lifted. A rapid return of Iranian barrels could push Brent below $100 a barrel and force Opec countries to confront the US shale revolution, which has been kept at bay by production shortfalls in Iran and elsewhere in the cartel.

Two post-sanction scenarios are dominating discussions: the Iraqi model, where production has only recently recovered to 1990 levels, a decade after the end of the Iraq war, and the Libyan model, where production returned to 1.4m b/d within months of the end of the country’s civil war in 2011. The key variable is the way production was shut in. In an orderly shutdown, wells are plugged and equipment left in place, with minimal geological damage to the fields. The other extreme is Iraq where fields were abandoned in the face of military invasions and suffered physical damage.

Most analysts think Iran falls into the first category. No bombs have fallen on the country, and the sanctions programme was well telegraphed, giving the government plenty of time to adjust down production as it lost markets. Robin Mills, head of consulting at Dubai-based Manaar Energy, says: “0.8m b/d could return within one to three months as long as the shutdown was orderly.” He says production could even receive a boost from the long downtime: “The shut-in would have allowed pressure to recover in some of the fields.” Set against this optimism are two local factors. Iranian oilfields are said to have particularly rapid decline rates, meaning additional wells will be needed if production is to return to pre-sanctions levels of around 3.6m b/d quickly.

Most Iranian fields also require unusually large volumes of gas injection, to force oil to the base of reservoirs where it can be sucked up by wells. One reservoir engineer said Iran’s domestic oilfield services industry would be challenged to do this quickly. Fereidun Fesharaki, the Iranian-born chairman of FACTS Global Energy said to have good intelligence from Tehran, says the national oil company has continued to drill wells during sanctions. Mr Fesharaki says the government has a detailed plan to raise production and suggests exports will rise by 1.3m b/d to 2.2m b/d within 90 days of sanctions being lifted.

But many traders are wary of trusting any intelligence from Tehran, however good the source. “Iran is a black box. We don’t know which fields have been shut in and when, so it is impossible to really know when production will return,” said one. And in the absence of detailed information, different analysts within the same organisations are coming to different conclusions.

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