NEW OIL DEALS AHEAD: IRAN MAY BE READY FOR TALKS ON FREEZING OPEC PRODUCTION

Large oil exporters are far from being satisfied with the market developments, with the oil barrel price moving around USD 50. Venezuela faces imminent economic catastrophe, other oil-dependent economies face cash shortage or domestic problems and express hope in a higher price of about USD 70 per barrel by the end of the year. Iran, the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC), was more than reluctant to join a previous attempt in April to stabilize production. Nevertheless, it seems Tehran is ready to change its stance. As informal OPEC talks are scheduled September 26-28 in Algiers during the Energy Forum, attended also by Russia, Iran looks ready to discuss the freezing of production. Iran circulated a letter to OPEC members, saying it would attend the informal talks. OPEC’s regular summit is scheduled in November in Vienna.

Let’s recall that in April, Tehran refused to attend the OPEC talks in Doha, Qatar as Saudi Arabia was calling for a unanimous freezing at the level of January output, Iran claiming it first has to reach the pre-sanctions production level. Since the lifting of Western sanctions in January, Iran has boosted the oil production and exports so currently it is in a different position than the one in April. Tehran insisted it will be ready for joint action once it regains the pre-sanctions output of 4 million barrels per day (bpd). According to OPEC figures, it pumped 3.6 million bpd in July.

Following a recent visit paid by the Venezuelan oil minister Eulogio del Pino to Tehran, he stated that Iran will soon reach the pre-sanctions level of production and will be ready to cooperate with the other oil exporting countries. According to analysts, Iran pumped 3.55 million barrels of crude a day in July, by almost a quarter more than in January, and targets 4 million barrels in 2017 and 4.8 million barrels a day by 2021. On the other hand, Iran’s crude oil exports in the first five months of 2016 surged from 1.2 to 2.6 million barrels per day.

However, the issue of freezing the production level by OPEC countries and non-OPEC participants like Russia is not an easy task. Russia wants first of all to see an OPEC internal agreement before committing to anything. As Iran’s openness to the idea is becoming a reality, sources say negotiations are already ongoing in drawing up acceptable agreement. “The difficult question for all will be defining the freeze - at what level of production? Agreeing a number may be a challenge - unless they all agree to allow some form of flexibility,” a senior industry source said. The spectrum of oil exporters is large and has recorded various developments. Outputs in Saudi Arabia, Iran and Russia reached record levels since April, while Nigeria and Libya registered the lowest levels. Hence, reaching a real deal may not be that easy, despite the change of attitude from Tehran.

Ahead of the meeting in Algiers, in his first official trip as OPEC’s new secretary-general, Mohammad Sanusi Barkindo, is expected to travel to Tehran and Qatar next month to discuss freezing production, but mainly to push for more coordination within the cartel, sources say. As Barkindo met in August with Venezuelan oil minister Eulogio del Pino, it seems efforts to forge a common position of OPEC countries are ongoing, success is nevertheless in doubt.

EFFORTS AND PROJECTS

In its effort to boost output, Iran plans to implement various strategies and projects. The National Iranian South Oil Company (NISOC) wants to implement USD 645 million projects to increase oil recovery rate at the oil fields. Some fourteen projects are envisaged for the construction of gas injection stations. During March-June the company injected some 36 million cubic meters of gas into the fields to increase the recovery rate. The steps are needed as some 80% of the operational oil fields in Iran are in the second half of their lifetime. Let’s note that NISOC is operating 80% of Iran’s oil and 16% of the gas production. Iran holds the world’s second largest gas and fourth largest crude oil reserves globally. Iran has proven oil reserves of 158 billion barrels. Another priority in investments is related to the construction of liquefied natural gas (LNG) export facilities, as it has the potential to become a LNG top exporter following technological investments.

Thus, investments are a top priority, after years of Western sanctions. Analysts say some USD 100 billion is needed for the petroleum industry. New deals are expected soon, this year and next year. Tehran officials are working on the Iran Petroleum Contract (IPC) for three years already, the basic contract form for future deals, and it should be completed by year end.

China and Russia are to be the main partners, for the time being. According to a NIOC release, Iran plans to grant the development of two major oil fields to Chinese companies CNPC and Sinopec, in line with Tehran’s strategy to promote economic relations with Beijing. CNPC is to be awarded the development of the second phase of the North Azadegan project, while Sinopec will be awarded the development of the second phase of the Yadavaran project. Both projects are in Iran’s south-western province of Khouzestan. A Chinese delegation is expected in Tehran to come to finalize negotiations.
On the other hand, according to Iranian oil minister Bijan Zanganeh negotiations are ongoing between Iran and Russia for oil swap. Zanganeh said several domestic and foreign companies have launched talks with National Iranian Oil Company (NIOC) over oil swaps among Caspian littoral states. “The capacity exists for a maximum swap of 150 thousand oil barrels per day,” underlined Zanganeh stressing “the process would boost Iran’s market share since the replacement is delivered to customers in the Persian Gulf.”

Even the non-oil trade is increasing, according to Iran Customs Administration, reaching USD 35.8 billion in five months since March, with exports up to USD 19.1 billion. Main exported items were gas condensate (USD 3.27 billion) and LNG (USD 1.94 billion), having China on the top of customers.

STRATEGIC POSITIONING

Closeness to Beijing and Moscow is obvious for Tehran. China is the largest trade partner, while Russia is improving ties by the day. The access granted by Iran to Russia to use the Hamadan airbase in order to bomb targets in neighbouring Syria , although temporary, proves bilateral relations are better. Analysts point lately to a kind of strategic alliance between Russia, Turkey and Iran that could change the dynamics of energy. Latest developments, such the coup in Turkey, the mending of fences between Moscow and Ankara and the improved relations between Tehran and Moscow, have paved the way for new strategies in the region. Some say all three countries may be willing to get over the differences on Syria’s Bashar Assad and rather focus on strategic interests. After all, Russia and Iran have huge oil and natural gas reserves, whereas Turkey controls the Bosphorus. By the way, talks on the Turkish Stream project have been resumed, envisaging the transport of 63 billion cubic metres of gas per year.
However, such a ‘partnership’ is not yet sealed. In the future, if concluded one way or another, it may change dramatically the world energy map. Meanwhile, a first step to consolidate the axis may be the coordination between Russia and Iran for the talks in Algiers in September, on freezing the oil output. Let’s just wait and see.

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