Iran sanctions relief: Impact on the oil industry

The lifting of Iran’s sanctions has been anticipated in the market for a long time. The current climate of heavily depressed oil prices has created a challenging business environment for oil companies, so there are many questions regarding the impact that Iran’s oil supply coming online will have.

Consultancy A.T. Kearney outlines the three biggest effects on the oil industry.

1. Increased supply in an oversupplied market

If estimates of Iran increasing its oil production to 800,000 barrels per day in 2016 come to fruition, along with potential growth of 6 per cent per year until 2020, what will that mean for an already oversupplied market? Potentially, there may not be a major impact on price. In a tight market, we may well see dramatic price shifts, but as we’re currently in an oversupplied one, we might not see any dramatic shifts.

In this context, relative to the oil price shift in 2014, the market today has a less-sensitive cost curve (as the most expensive developments are already profitable). Therefore, an additional source of lower-cost supply will have much less impact on price than in the tight market mid-2014.

Another important impact will be to increase the time it takes for oil prices to recover, so expect “lower for even longer” oil price scenarios with new Iranian production in the market.

2. Increase in foreign investment

The past few years have witnessed a wave of new reserve findings in Iran, which is significantly above the Middle East average. However, until now, the country has not been in a position to fully exploit these reserves due to limited access to external upstream technology and expertise.

The end of the sanctions will open up a wide range of investment opportunities for international oil companies and other foreign investors, particularly if the Iranian government approves the new Integrated Petroleum Contacts, which operate like joint ventures with a potential duration of 20 to 25 years. Access to outside technology and expertise will significantly increase chances of heightening production and is likely to be welcomed.

3. Effect on oil companies

If we look at the effect of ramped up production from Iran on oil companies, coupled with the effect of Iraq’s growing output and the foreseeable increase in Libya’s production, today’s situation of oversupply in the market may remain for yet some time.

There are, however, ways to mitigate the impact. From an upstream perspective, companies must leverage opportunities to reduce costs and improve efficiency, particularly with relation to external costs. This can be done effectively through taking advantage of overcapacity currently experienced by oil field service providers and engineering, procurement and construction providers, as well as materials management with historically low prices of key commodities such as iron ore.