Could Iran Raise Its Oil Production To 6 Million Bpd?

The unsuccessful attempts by OPEC+ to reach a deal on output cuts increase the risk of creating a supply squeeze in an already tight market, which could potentially send oil prices sharply higher. Consumers are beginning to keenly feel the effects of higher oil prices, with 4th of July gasoline prices in the U.S. set to be the highest for the holiday weekend in seven years while prices are forecast to rise even higher later in the summer.

The latest OPEC+ spat has shifted focus from yet another oil price wildcard: Iran official return to the oil markets. 

After a three-year layoff, Iran could be poised to officially rejoin the ranks of oil exporters--maybe as early as 2021--if Tehran and Washington are able to strike a new nuclear deal and Iran returns to the Joint Comprehensive Plan of Action (JCPOA).

How much could a new nuclear deal boost Iran’s oil production? More importantly, will investors start flocking to a post-sanctions Iran?

After all, Iran’s oil minister Bijan Namdar Zanganeh is on record saying that his biggest dream has always been to increase Iran’s oil output to six million barrels per day; earn $2 trillion through oil exports over the next two decades and use the income to invest in the country’s development.

Obviously, such a level of production would cause considerable jitters in the delicately balanced oil markets. OPEC+ has already fired a warning that the markets could see another oversupply as early as April 2022, with an overhang swelling to 181 million barrels by the end of the year.

But how realistic are Iran’s oil ambitions and how much do the oil bulls need to worry about another large producer potentially muddying the waters for everybody?

Stalled nuclear deal

So far, the prospects of that happening soon are rather bleak with the White House warning that the lack of a nuclear monitoring agreement between Iran and the UN nuclear watchdog is likely to impact negotiations in Vienna.

White House Press Secretary Jen Psaki says Washington remains optimistic but has admitted that there could be major challenges on the road to getting an agreement if Iran continues to refuse to renew an agreement with the International Atomic Energy Agency for inspections of its nuclear sites. Although the Biden administration is putting on a brave face and saying that the election of a hard-liner as Iran's president won't affect prospects for reviving the faltering 2015 nuclear deal with Tehran, prospects of a deal just got a lot tougher after incoming Iranian President Ebrahim Raisi rejected a key Biden goal of expanding on the nuclear deal if negotiators are able to salvage the old one.

Last year, Biden rejected former president Donald Trump’s decision to withdraw from JCPOA or the 2015 nuclear deal which critics say is inadequate in stopping Iran from eventually acquiring nuclear weapons. Negotiations kicked off in early April, but that has not stopped Tehran from increasing its uranium enrichment program and passing a new law to limit IAEA inspections. The Islamic Republic initially allowed limited monitoring to go on for another three months until May 24 but has rejected a new agreement with the IAEA to continue monitoring its activities related to JCPOA.

To make matters worse, Raisi is likely to raise Iran's demands for sanctions relief in return for Iranian compliance with the deal, with he himself already subject to U.S. human rights penalties.

The Biden administration is unmoved by an impending Raisi presidency, with officials insisting that terms for a new agreement remain unaltered. Washington is leaning on the fact that the final say lies with Iran's Supreme Leader Ayatollah Ali Khamenei, who signed off on the 2015 deal known as JCPOA.

Not everybody is so sanguine.

Karim Sadjapour, a senior fellow at the Carnegie Endowment for International Peace who has advised multiple U.S. administrations on Iran, says the Biden team has its work cut out:

"I don't envy the Biden team. I think the administration now has a heightened sense of urgency to revise the deal before Raisi and a new hard-line team is inaugurated." 

Life after a new nuclear deal

On the other hand, OilPrice.com contributor Simon Watkins  makes a strong case of Iran eventually accepting a new nuclear deal thanks to its tenuous economic situation.

Watkins argues that it’s completely irrelevant who occupies the post of president of Iran because ‘‘...all serious political and religious authority is entrusted to the Shia clergy, which makes all key decisions for Iran, provided that they have been approved by the foremost religious leader--the Supreme Leader himself.’’ More importantly, he points out that Iran’s foreign currency reserves have greatly dwindled and currently stand at around US$10 billion, down from US$114 billion just before the U.S. withdrew from the JCPOA in May 2018 while the country’s gold reserves are now insignificant. Watkins reckons that the rate of foreign currency-denominated capital flight out of Iran is running at ~US$4-4.5 billion per month, meaning the reserve could run out in under three months.

So, what happens when Iran finally bows under pressure and agrees to put pen to paper on a fresh nuclear agreement?

Maybe nothing much, at least in the short-or medium-term.

It’s an open secret that Iran has been flouting U.S. sanctions by applying several cloaking methods to evade detection and sell its crude oil to China. 

OPEC estimates that Iranian crude production in February clocked in at 2.14 million b/d, a 190,000 b/d increase from a 30-year low of 1.95 million b/d in August. Still, that’s a long way off the 3.48 million b/d Iran pumped in 2016 and 3.79 million b/d in 2017.

But here’s the kicker: Some tanker tracker sources--which rely on satellite imagery to follow global oil shipments--are suggesting that Iran’s oil exports are already fairly high, meaning we may not see a huge increase even if sanctions are lifted.

Iran's crude and condensate exports were estimated at 825,000 b/d in Q1, a considerable improvement from 420,000 b/d in Q3 2020 but a far-cry from the 2.125M b/d the country exported in 2017. You can bet that China is more than happy to take the bulk of this crude, especially given the fact that Iran sells it to Chinese refineries at a steep discount to Brent crude. 

As for boosting its oil production, let’s just say that hopes for rapidly ramping production from the current 2.4mb/d to 6mb/d is wishful thinking.

Over the past four decades, Tehran has miserably failed to adequately re-invest its oil income into its production capacity or diversify its economy. In fact, since the 1979 revolution, the Islamic Republic has never at any point in time been able to produce more than 4 million bpd.

To complicate matters further, foreign investors have mostly stayed away from Iran’s economy in the four decades since the Islamic Republic was established. In sharp contrast, foreign investments--mostly oil-related-- in its Arabian peers including Saudi Arabia totaled more than $170 billion from 2006-2012, and have continued to grow at an annual clip of 10 billion dollars since. 

Part of the problem here is that the state-controlled economic model wastes more than $50 billion a year on oil and gas subsidies to keep its citizens docile. The result is that Iranians enjoy the cheapest gasoline and electricity prices of anywhere on the globe, but have to contend with high unemployment and inflation due to an economy that relies too heavily on petrodollars.

There’s little reason to believe that Raisi’s administration will do much to reform the economic model given the latest spate of populist promises of even more subsidies.