Iran's return to oil markets could be stymied by output hurdles: Moody's

Russia, Saudi Arabia agreed Feb 16 to freeze their oil output in an attempt to stabilise prices

Iran’s return to the global oil market would add supply to an oversaturated market, but the country faced challenges in ramping up production, Moody’s Investors Service said in a report released on Monday.

While Russia and Saudi Arabia have agreed to freeze their oil output to stabilise prices, that deal doesn’t yet include Iran. Moody’s has forecast that Iran would add at least 500,000 barrels per day (bpd) to the global oil market in 2016, putting more pressure on prices.

However, Iran faced significant hurdles in boosting production meaningfully beyond those levels, said the report, Iran’s Ability to Boost Oil Production Faces Technical and Political Hurdles.

To raise production, Iran has to regain its customer base, attract investment to upgrade its oilfields and successfully navigate a range of political risks. “Iran will try to increase exports to China. But, regional rivalries could hinder this effort, with Saudi Arabia currently being China’s largest crude supplier,” said Waheed Sheikh, a Moody’s associate analyst.

“China will likely maintain its crude import policies rather than risk damaging ties with either country.”

Another hurdle for Iran was its aging oil infrastructure, which experts said required $150-200 billion in capital to modernise.

“Many integrated oil companies are simply unable to invest right now because low oil prices have weakened their earnings and pushed their cash flow deeper in the red,” said Sheikh. “Integrated oil companies will need to cut capital spending through at least 2016.”

In addition, oil companies in the US have been prohibited from investing in Iran, as the US maintains primary sanctions on the country related to terrorism and ballistic missile development.

Iran’s failure to comply with these sanctions or with the P5+1 nuclear agreement — signed by China, France, Germany, Russia, the UK, and the US — represented a political risk, as do parliamentary elections set to take place in Iran this month. These elections would decide whether hardline conservatives or reformists win, which could influence whether Iran pursues rapprochement with the US.