America's Frackers Should Fear A New Dawn For Iranian Oil Jul 14, 2015 Put aside the debate on whether the Iran nuclear deal is “good” or “bad.” Even if the U.S. Congress ends up voting against the deal, the hardliners will not be able to cobble together the two-thirds majority needed to overcome a veto by President Obama. Likewise, approval by the U.N. Security Council appears to be a given. The deal will happen. More Iranian oil will flow. Over the short run the impact to the oil markets will be minimal — with no more than 500,000 barrels per day of additional volumes likely over the next year. But over the long run, once the global supermajors step in to orchestrate a first round of megaprojects, the impact could be huge — on the order of 3 million bpd of additional supply. The winners: the biggest of Big Oil. Royal Dutch Shell , BP , Total , PetroChina , Eni , Statoil , Rosneft — all those outfits willing and able to take on megaprojects. Other winners: Schlumberger SLB -0.98%, Halliburton HAL -1.48% and the service providers that will sell Iran boatload after boatload of new gear. The losers: America’s independent shale drillers. Even at todays’s oil prices, Iran’s reserves of conventional oil remain highly profitable. In a head-to-head competition America’s tight oil frackers just won’t be able to compete. “Right now clients are looking to stress test their business assumptions,” says Dennis Cassidy, co-head of oil and gas consulting at AlixPartners. “The question is: can we weather $45 oil?” The good news is, they’ll have some time to prepare. Oil prices plunged temporarily this morning on news of the deal, but reversed just as quickly once knee-jerk traders realized that just because a deal got signed doesn’t mean Iran can open the spigots. Front month WTI now trades at almost $53 per barrel while Brent is at $58. So when will more Iranian oil begin to flow? Could be as early as December (but more likely by the end of the first quarter of 2016) once the International Atomic Energy Agency has conducted its initial inspections and reports back on Iran’s compliance. At that time, sanctions could be lifted. Before sanctions, in 2011, Iran was producing 3.65 million bpd. Now that’s down to 2.85 million bpd, according to Energy Aspects. Will Iran be able to regain that 800,000 bpd of output? Iran’s Oil Minister Bijan Namdar Zanganeh has said that they could do an additional 500,000 bpd as soon as sanctions are lifted. This would initially come from the sale of what’s estimated to be some 20 to 30 million barrels stored on tankers. But that floating storage won’t last for long. According to a recent report from Richard Mallinson, analyst at Energy Aspects, Iran cut output from its three largest fields — Ahwaz, Marun and Gachsaran — by about 600,000 bpd to satisfy sanctions conditions. He figures that Iran will be able to gradually bring those fields back to full production, adding some 350,000 bpd in 2016. Another 250,000 bpd chunk of production will come from the start up of three smaller fields. Mallinson cautions that Iran’s aging fields face significant decline rates on the order of 10% a year, implying that by the end of 2016 Iran will likely have added no more than 400,000 bpd on top of today’s output — with the caveat that much of that addition will be in the form of less valuable natural gas condensate rather than crude oil. Consultancy WoodMackenzie figures that Iran could goose output by 600,000 bpd by the end of 2017. In the grand scheme of things 500,000 bpd is not a lot of additional volume — about half of 1% of global supply. And it’s especially modest when you consider that the world’s oil companies need to add about 5 million bpd of new production just to offset natural decline rates. Do we really need to worry about other producers making room in the market for Iran? No; low prices will take care of that. By the time Iran can ramp up in 2016 it is likely that U.S. oil production will finally have rolled over and maybe even declined by that much. So which oil giants are best positioned to jump on reopened Iranian opportunities? Probably the ones who were the last to leave when sanctions were put in place. According to a report by the Congressional Research Service, China’s CNPC only pulled out of the $4.7 billion South Pars: Phase 11 gas and condensate project in 2012. In 2011 Russia’s Tatneft signed a preliminary deal to develop the Zagheh oil field. In 2010 Royal Dutch Shell and Repsol finally backed out of South Pars Phases 13 and 14. While Statoil in 2006 gathered seismic data on the Khorramabad field. Statoil was also the operator on South Pars phases 6, 7 and 8. Earlier, Shell was working on the Soroush and Nowruz fields, while Eni developed the Darkhovin oil field and South Pars 4 and 5. France’s Total developed Doroud and Balal oil fields back in 1999. In June, execs from Shell and Eni visited with oil ministers in Tehran to discuss opportunities. The ante for Shell will likely involve paying Tehran the $2 billion it still owes from past shipments of Iranian oil received but still unpaid for. Despite its strained relationship with the west over recent decades, Iran (in contrast to monopolistic Mexico, for example) has a long history of working in partnership with big oil companies. Now it needs its old friends to return. According to CRS, Iran will require about $140 billion in new investment by 2020 just to keep oil production steady and balance out natural declines. That’s a lot of capital and a lot of work to be done. The time may come to fret about Iranian barrels swamping oil markets and bankrupting America’s frackers. But not yet.
