Does the extended agreement with Iran make oil companies shiver?
- Written by Victor Lupu
The extended agreement reached on April 2 in Lausanne regarding Iran came as a surprise, as the deadline for an understanding had already been exceeded. A comprehensive nuclear agreement is to be reached by June 30 so that its implementation could start, as well as the inspections agreed upon for a 25 years period. Euphoria – this is how the agreement was welcomed both in Iran and in several western countries. But for some uncertainty lies ahead. The recent move might add more pressure on international oil prices as Iran could increase its crude exports. In a blink of an eye, the very next day after the Lausanne agreement, the Brent oil declined almost 4 percent, below USD 55/barrel.
The world market is flooded with oil offers, some 2 million bpd. It is probable that Iran could put on the market some one million bpd and thus pressure might increase. Since 2012, when the EU sanctions were put in place, Iran’s exports have fallen by 1 million bpd from 2.5 million bpd (1% of the world market) and Tehran might want its place back, as its economy is dependent on oil exports. It is also thought that Iran has accumulated reserves of up to 30 million barrels and is waiting for the moment to get the crude on the market.
A market under high pressure and lowering prices may be to the liking of importing countries eyeing economy boost, but for certain it’s the oil companies that feel uncomfortable.
However, there’s good news as well. Sort of. According to international analysts, it may take some time until restrictions against Iran are lifted and its exports get enhanced. Some of them say Iran could not increase production by more than 0.5 million bpd by the end of 2016. Even before the western sanctions became active, its oil output was on the downturn (4 million bpd in 2007 and 3.5 million bpd in 2011). It seems oil companies from Europe, the Russian Federation and China are interested in returning to Iran, but the same analysts bet it could take some years of planning and continuous efforts to make things work. Currently the world market is ambiguous and volatile. On one hand oil supplies are increasing in the US, on the other hand uncertainty comes from conflicts like Libya and Iraq. Iran, as a regional power and a top four country in terms of proven reserves (after Saudi Arabia, Venezuela and Canada) is expected to reach out for more exports and influence. Its largest buyers are Asian countries with high rates of growth like China, Japan, India, South Korea and Turkey. If higher oil production is reached, it may not be long until it challenges the leadership of Saudi Arabia (its regional foe) in OPEC, along with Venezuela and Iraq, some analysts say.
The situation in Yemen tells a different story. Its own proved reserves are about 3 billion barrels of oil and 17 trillion cubic feet of gas. Nevertheless it counts for just some 0.2 percent of world output with an average production in 2014 of about 130,000 bpd. But the dangers coming from the conflict do not refer to Yemen itself, but to its strategic position in the Bab el-Mandeb strait. No less than 3.8 million barrels have passed through the strait in 2013. If it becomes an uncertain route – that is a heavy blow for maritime transporters. On the other hand, Saudi production may be put in peril. Let’s see what it’s all about. On March 26 a Saudi-led coalition of some 10 countries (Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain, Qatar, Jordan, Morocco, Egypt and Sudan) began bombing Yemen, saying it was targeting the Houthis and their allies, which include forces loyal to Yemen’s former leader, Ali Abdullah Saleh, strikes carried in support of the ousted president Abed Rabbo Mansour Hadi who had fled the country. Saudi Arabia and Yemen accuse Iran of supporting the Shia rebels in Yemen. Iran and the Houthis deny that Tehran arms the rebel movement. The Saudis have fought the Houthis before, in 2009. The situation in Yemen is a complex one and involves not only Houthis, but important interests coming from Al-Qaeda and even ISIS. Al-Qaeda in the Arabian Peninsula (AQAP) – is seen as the most lethal of the jihadist groups, and a haven for Saudi jihadists.
Oil markets have yet to react. The US crude prices have slumped back to USD 49 a barrel, while the world benchmark North Sea Brent crude oil rose by more than 7 per cent by the end of March to USD 59.19, but then plunged back to USD 56.41. For the time being, although the fighting is going on by air hits, it looks like the security of oil supply in the peninsula is not put at risk in such a way to affect the world markets. But uncertainty reigns in the country from the political, social and economic points of view. In the energy field, Yemen has recently begun producing natural gas - some 300 billion cubic feet a year, 90 per cent being exported via the Balhaf LNG terminal. The terminal loaded 6.1 million tonnes of LNG in 2014, i.e. less than 3 per cent of the global market.
There are more than ten oil and gas concessions currently in production in Yemen with Total of France the only major oil company operating currently. Total is also the operator of the Balhaf LNG terminal. Other foreign companies operated in Yemen, such as DNO (42.8 percent owned by RAK Petroleum), OMV (having IPIC as shareholder), as well as Occidental Petroleum, Nexen (China) and Korea National Oil Company. Nexen has put an end to the operations at the East Al Hajr field in January following direct threats and decided to give up its licence; the same did DNO, TransGlobe and Dove Energy. Most analysts say the air military intervention of Sunny countries led by Saudi Arabia (which provided 100 aircraft) has little chances to destroy the Houthi forces, as long as they are supported by Iran and that, in order to achieve its goals, the intervention might need land forces – which would complicate things even more and would lead to heavy casualties. But reports say the Houthis have missiles capable of hitting up to 500 kilometres inside Saudi Arabia and they are prepared to block access to the Bab al-Mandeb strait.
The problems for the regional developments, as well as for the international developments in the field of oil markets, are related to the arch rivalry between Saudi Arabia and Iran, and to the Sunni-Shia struggle.
Speculations go as far as saying forces loyal to Tehran could enforce themselves in creating internal instability in Saudi Arabia itself with unknown consequences. The worst-case scenario: Saudi forces fight Iranian troops, should Tehran decide to march in. After all, Tehran is eager to take revenge against Saudi Arabia for mastering the fall of oil prices. Sources say it will operate through Hezbollah allies on the ground inside Saudi Arabia.
Drawing the line, we dare say we are witnessing two different developments. If Iran gets to the oil markets most chances point to an even more volatile oil price. On the other hand, the developments in Yemen bear with them the risk of involving the Arabian Peninsula into a military conflict that could block the Bab al-Mandeb strait, or even draw Saudi Arabia into an era of attacks coming from the terrorist groups in Yemen. Even worse, a potential conflict with Iran is not excluded. For the time being, it seems analysts are rather relaxed. One specialist with a top western bank envisages the world oil market in motion. In May or June the market could tighten and this might