Sunday, July 1, 2007

The Coming Iranian Oil Crisis

The current gasoline crisis in Iran is only a preview of what’s ahead for the country’s oil industry. The country’s economic health depends on oil production and oil exports, yet the production at oil fields are depleting at an alarming rate. The effect of production depletion on oil exports in the next 5-7 years will be phenomenal.

· The production at a typical oil field is diminished by 8% annually.

· Without any new fields coming on stream, the annual oil production in the country is diminished by 8% due to the normal depletion of the oil fields.

· The local demand for oil also is growing at a rate that in effect takes away another 2% of the annual production.

· With no new oil fields, and no increase in the productivity of the existing fields, the depletion in production and the increase in local consumption will combine to translate into a 10% reduction in the volume of oil exports annually.

· With Iran producing some 4 million barrel a day (b/d), this reduction translates to a loss of 400,000 b/d.

· If the increase in the price of oil Iran can charge its customers does not keep pace with the 10% decline in the volume of oil production, then the revenues generated by oil exports will also decline.

Before we get to oil pricing, let’s examine what it takes to make additional production capacity on line to partly compensate for the 10% decline in the current production.

· The typical cost of bringing a new oil field into full production in the Middle East, averaging for both onshore and offshore varieties, is about $7,500 per barrel a day, with the cost in Iran estimated to be around $7,700 per b/d.

· At $7,500 per b/d cost, the cost of replacing the 400,000 b/d depleted each year with new production capacity will be more than $3 billion annually.

· In the past decade, the typical contracts signed with foreign companies for investment in new fields has called for 60% foreign share in each project.

· The amount of foreign investment needed to maintain the production at current levels will be close to $2 billion annually.

· Considering the fact that its takes at least 5 years (typically longer in Iran) for a drilling investment to start production, Iran would need an immediate $10 billion in foreign investment, now and not in future, to maintain the current production levels.

The reality on the ground is that foreign oil companies are pulling out of Iran. The Japanese pulled out of the critical Azadegan fields, and Toatl and Shell also pulling out gas projects. With the current political climates created as the result of Iran’s standoff with the West over its nuclear program, no significant foreign investment in oil and gas industry is expected. Iran analysts increasingly estimate zero foreign investments in foreseeable future.

Without the 60% share of foreign investment, Iran would need to raise locally $15 billion for new oil fields. Added to this, is the urgent need for additional refineries to meet the current gasoline demand, which the analyst estimate at another $15 billion.

$30 billion in urgent investment to keep the current oil production and to meet the current gasoline demands with no foreign capital and with no foreign know-how can not and will not happen.

In the past two years, Iran has missed it OPEC oil production quota by some 250,000 b/d. If we calculate the average export price of Iranian crude at $54/b, the country has forfeited some $5 billion a year for not being able to meet its OPEC quota. For a government that depends on oil export revenues, forfeiting $5 billion a year in hard currency can only show the depth of the crisis on hand.

Iran produces 4 million b/d of oil. Its local consumption needs are 1.6 million b/d. The balance, 2.4 million b/d, goes for export. Without investments in new production capacity, the country will loose 400,000 b/d in production, and with local demand not decreasing, it will mean 400,000 b/d decreases in exports. At the current rate and in the current political atmosphere, Iran will run out of oil export by 2014. The country is facing an oil crisis of unbearable proportions.

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