Lewes, DE -- (SBWIRE) -- 07/28/2014 -- While the November 2013 interim nuclear agreement was a positive development for Iran, it does not allow for additional oil sales. Based on the assumption that the current international sanctions regime remains in place, production will stay close to its current 3.3-3.4mn barrels per day (b/d) level in the short-to-medium term. Upside risk to production and exports exists from a hypothetical lifting of sanctions. However, a significant ramp-up in production and exports to pre-sanction levels would take (at the very least) three to four years from when sanctions are lifted. Years of underinvestment, maturing oil fields and a lack of field and well maintenance has damaged fields, possibly permanently destroying some of the country's production capacity. Gas production has been slowly edging higher. However, similarly to oil, a lack of access to capital and technology will prevent production to ramp-up sufficiently to meet galloping demand. This will translate into increasing gas shortages.
We highlight the following trends and developments in Iran's oil and gas sector:
>> The country's oil reserves have increased in the past two years. In 2013, Iran's oil reserves were estimated by the Energy Information Administration (EIA) at 155.5bn barrels (bbl), a 1.1% increase from the 2012 figure of 151.1bn bbl. While there is strong upside risk to oil and gas reserves, the crude export restrictions, the subsequent decrease in demand for Iranian oil, added to the lack of access to capital to develop more challenging fields mean that Iran has a limited capability to convert new discoveries into producing assets. Hence, while reserves could increase further, this will not necessarily translate into field development and increased production.
>> Iranian oil production and exports have fallen substantially since 2011, on the back of ever-tightening sanctions against the current Iranian government. We estimate that crude (including lease condensates) production in 2013 fell from 4.05mn b/d in 2011, to about 3.13mn b/d in 2013. We estimate that of the 3.13mn b/d produced, about 400,000-500,000b/d were condensates. We estimate that Iranian 2013 crude exports (including condensates and all other liquids) most likely hovered around 1.8mn b/d, down from 2.7mn b/d in 2011. Our calculations lead us to estimate that the country exported some 1.1-1.2mn b/d of crude in 2013 (excluding condensates and other liquids).
>> At present, we are forecasting oil production (including condensates) of approximately 3.3mn b/d for 2014. Making the assumption that the current international sanctions on the country remain in place, we expect production to remain at around that level throughout our forecast period. While the November 2013 interim nuclear deal reached in Geneva is a positive development, we have not yet reached the point at which we can factor into our forecasts a return of significant volumes of Iranian crude to the market: the agreement does not lift sanctions on Iran's oil exports and does not allow for additional Iranian oil sales.
>> Downside risk to oil consumption exists from the country's decision to reduce subsidies on gasoline, diesel and CGN in April 2014, as a response to increasing pressure on the government budget (see 'Fuel Price Hike To Have Regional Impact,' May 2). The cost of gasoline has increased from 4,000 Rial per litre (USD0.16) to 7,000 Rial per litre (USD0.27), an increase of 75%, while gasoline sold outside quotas rose to 10,000 Rial per litre (USD0.39).
>> Over the near term, we see Iranian gas production increase at an average rate of 2.5-3% per annum to reach 180bn cubic metres (bcm) by 2018. Although Iran has the capability to produce more gas, webelieve that the current sanctions regime will block access to capital and investment required for production growth to average beyond 3% per annum, with notably delays on the South Pars Gas field developments.
>> Gas production will therefore not ramp-up at the speed required to satisfy domestic demand. This will lead to a situation whereby gas shortages are likely to occur in the coming years. We note that, in the case where sanctions are lifted, immediate additional gas supplies would likely go towards the domestic market and for re-injection into oil fields. As a result, it is unlikely that Iran would become a significant gas exporter within our forecast period, which runs until 2023.
>> Iran is reportedly eyeing its first gasoline export hub in the southern Iranian city of Bandar Abbas, near the Persian Gulf, amid Western sanctions against the country. The Bandar Abbas and Persian Gulf Star refineries are expected to have a total production capacity of 50mn litres of gasoline per day. Gasoline produced at the two refineries will meet Euro-4 and Euro-5 requirements. Four oil refining projects are underway in Iran, which are expected to boost the country's gasoline production capacity to 144mn litres,according to Farhad Ahmadi, the managing director of National Iranian Oil Engineering and Construction Company.
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