The second-biggest source of additional oil production after the United States in 2023 might come as a surprise – not Russia, Saudi Arabia, the new hotspot of Guyana, or recently unsanctioned Venezuela but Iran. Or maybe, as one of the world’s oldest oil powers, Iran’s prominence should be expected. Either way, Iran’s oil resurgence, and whether it continues, is a critical market and political development.
Iranian Export Surge
Iranian Oil Minister Javad Owji said November 1 that Iran’s oil production had reached 3.4 million barrels per day, up from 3.1 mb/d in September and an average 2.55 mb/d in 2022. The figure cited by Owji is above the 3.1 mb/d assessed by OPEC in its November oil report, but it’s clear that Iran’s output has risen significantly from its average of 2.6 mb/d in the first quarter of 2023 and 2.7 mb/d in the second quarter.
As usual, Iran’s production surge is a result of geopolitics rather than geology. The United States appears to have eased sanctions enforcement to serve three goals: to keep up economic pressure on Russia and support the G7 price cap on Russian oil exports; to moderate oil prices in a quest to tame inflation and help President Joseph R. Biden Jr.’s reelection prospects; and to offer Tehran some inducement for further talks following August’s prisoner release deal and the slowing of Iranian uranium enrichment.
Iran’s only paying customer for some time has been China, primarily independent Chinese refiners around Shandong, which have less to worry about from U.S. pressure than other buyers. Nearly all Iranian exports are rather transparently labeled as from Malaysia, from whom China now “buys” far more oil than the country produces. Iranian oil is sold on arrival in China at a discount of about $13 per barrel to Brent, the international benchmark, while oil of comparable quality from Oman achieves a $5 per barrel premium and Russia’s Far Eastern ESPO blend sells at a discount to Brent of $0.50 to $1 per barrel.
But recently, the circle of Chinese buyers seems to have widened, as they have gained comfort in the blunter teeth of U.S. sanctions, even though imports of discounted Russian oil have also increased. Between 1.45 mb/d and 1.8 mb/d of Iranian oil went to China in October, a sharp rise from the year’s 1.05 mb/d average, which itself was 60% above pre-sanctions levels in 2017, when Iran had a much wider circle of buyers. Now, besides China, small amounts of Iranian oil go to the regime of President Bashar al-Assad in Syria, which has credit lines and is unlikely to pay, and Venezuela, where Iranian oil is blended with Venezuelan heavy oil to create a more sellable grade, with Caracas paying in kind with fuel oil and heavy crude oil.
Iran’s export surge has been facilitated by clearing out its backlog of 78 million barrels in floating storage, most of which now seems to have been sold. Iran still has more than 100 million barrels in onshore tanks. Exports averaged 1.39 mb/d between January and August and have run at 1.5 mb/d since then. The surge to China therefore required a contribution from storage.
Iranian production capacity of 3.8 mb/d before former President Donald J. Trump’s “maximum pressure” sanctions campaign has probably dropped to about 3.2 mb/d, around current output levels. With some effort and investment by domestic players, Iranian production could rise to 3.6 mb/d. The managing director of the National Iranian Oil Company, Mohsen Khojasteh-Mehr, said production would reach 3.5 mb/d by March 2024, the end of the current Iranian calendar year.
The National Iranian Oil Company and domestic private or quasi-private players are working to sustain output at legacy giant fields, such as Marun, while boosting smaller fields, such as Shadegan, where some new wells and maintenance activities could add 26,000 b/d; the startup of the Sepehr and Jofair fields at an initial 20,000 b/d; the offshore Resalat oil field, where Iran seeks a gain of 33,000 b/d; and the development of Sohrab by Dana Energy, a private company, which is expected to yield 30,000 b/d. It is seeking to develop the deeper, high-pressure Khami reservoir, which is oil and gas bearing in numerous fields but requires more advanced technology.
Iran is not short of additional hydrocarbon resources. In November 2019, Iran unveiled Namavaran oil field, a giant heavy oil find with 53 billion barrels in place – though then-Oil Minister Bijan Zanganeh said just 2.2 billion barrels would be recoverable – extending across several fields in Khuzestan province, Iran’s oil heartland.
Iran more recently announced significant oil discoveries at Genaveh and Tangu near Bushehr on the Gulf coast and Hirkan in Golestan province on the Caspian coast. Owji said these fields contain 2.6 billion barrels, or roughly 2% of Iran’s current official reserves. Tangu and Genaveh have been known structures for many years, though they have not been fully proved up or exploited. But Hirkan is particularly interesting, as no oil fields were previously known in that part of the country, even though they exist offshore in the Caspian and further north in Turkmenistan.
Iran also recently progressed in natural gas, announcing in October a large discovery at Lamerd in southwestern Fars province said to hold 22 trillion cubic feet (about 2% of Iran’s official reserves) and another at the Cheshmeh Shoor gas field in Khorasan. And it recently expanded the Shourijeh gas storage facility near the major northeastern city of Mashhad, which should help ease perennial winter shortages.
Challenges Remain
Still, the Iranian petroleum industry remains in a shaky state. The need for more investment and access to equipment and technology is acute, but with Russian firms occupied at home, the Chinese showing no great urgency, and everyone else deterred by sanctions, it is unlikely. Even in the event of some diplomatic breakthrough, Western oil companies have been disappointed before and are unlikely to rush back to Iran. And in gas, the growing maturity of Iran’s key field, South Pars, is a threat to domestic supply security. Pressure is in decline, and the field needs compressors, a high-specification item not easily obtained abroad. Iran can now manufacture many components of compressors itself, but it does not have the facilities or experience to design and build the large, heavy platforms South Pars will require.
The Israel-Hamas conflict complicates the immediate outlook. First, the Biden administration doesn’t want to be seen as going easy on Iran, which backs Hamas even if it is not directly linked to the atrocities of October 7. So, aided by an agreement between the Venezuelan opposition and the government of President Nicolás Maduro, Washington has temporarily eased sanctions on Caracas, which could bring back up to 250,000 b/d of oil output. That would also cut Venezuela’s need for Iranian help in blending and exporting its heavy crude.
Tougher sanctions enforcement isn’t apparent in the numbers yet, but it could dial back Iran’s export surge, particularly if the bigger Chinese buyers are again deterred.
Iran has called on fellow members of the Organization of Islamic Cooperation to impose an oil embargo on Israel, but Israel is a small oil importer and gets very little of its supplies from these countries. Moreover, there is no appetite within OPEC for any kind of repeat of the famous 1973 embargo, and Gulf Arab states aren’t inclined to support Iran, nor is Iran itself about to threaten its recent recovery of exports. A wider war is the greatest nightmare for all concerned – Tehran, its Gulf Arab neighbors, the United States, and the region’s main oil customers – with only Russia likely to profit. That appears unlikely for now. The recent Chinese-mediated agreement between Saudi Arabia and Iran to normalize relations provides a crucial guardrail against a broader conflagration.
So, for now, Iran’s oil export surge is likely to be dialed back but not entirely reversed. That sustains the soft global market where crude prices are down almost $20 per barrel since September. Combining these lower prices and discounts with higher export volumes suggests Tehran’s monthly revenue is up about 30%. But a fundamental recovery of its industry has as usual to await political realignment.
