Can Iran Reach 8mb/d Oil Output?
Iran is currently under US oil sanctions. Some OPEC and even non-OPEC oil producers are determined to take Iran’s share of the oil market.
Is it possible for Iran to bring its oil output to 8 mb/d? Is the ground prepared for such production levels?
A panel at the 5th annual Iran Petroleum and Energy Club (IPEC) Congress was focused on the issue of “8 mb/d oil output: a must, dream or reality?”
Oil Peak Uncertainty
Reza Dehqan, deputy minister of petroleum for engineering and development, said the 8mb/d figure was just symbolic in order to let discussions start.
He said uncertainty revolved around future oil peaks, adding: “Numerous statistical data is available in this regard and some forecasts show that an oil peak will materialize between 2030 and 2050.”
Dehqan said oil peak was once determined based on the countries’ oil production capacity, adding: “Today, the criterion for oil peak is demand for oil. In light of developments transpiring the world in recent years and climate change, global demand for oil has declined.”
Enhanced energy efficiency lower petrochemical output of plastic materials, replacement of fossil fuels with solar and wind energy and electrification of cars constitute the most important factors that have lowered global demand for oil, said Dehqan.
Touching on the decline in renewable energy production costs, he said: “Statistical data shows that production costs for once-expensive solar energy have declined somewhat. Estimates also show that by 2040, electric cars would constitute half of light vehicle sales.”
Oil Off the Line?
Based on figures provided by Dehqan at the panel, there was speculation about a halt in oil supply in coming years, in which case oil producers would no longer be able to generate wealth from their fossil energies.
Dehqan dismissed such speculation, saying: “I don’t say that oil supply is forecast to stop, but its supply rate will decline. Therefore, many international companies involved in the petroleum industry have already embarked on their serious move towards renewable energies and it seems that by 2050, the world will see a shift in demand from fossil energies, particularly oil, to renewable energies because there is nothing to worry about in terms of limited supply of renewables.”
Ali Akbar Vahidi Al-Aqa, who currently chairs an energy consulting firm, said international companies’ shift to renewable energies indicated the commercial nature of these companies.
He said: “They take into consideration their maximum profits. Therefore, a decline in the oil share of the energy mix does not mean any reduction in oil demand in coming years
State-Oil Financial Relations
Financial relations between the state and the oil sector have long been discussed. Oil experts and officials lay emphasis on the necessity of amending these relations; however, there are buts and ifs due to the Iranian economy’s intertwinement with oil and the budget’s dependence on oil.
One of the panels held during the 5th annual congress of "Iran Petroleum and Energy Club" (IPEC) was focused on this issue.
Profit-Based Relation
Mohammad-Reza Kasiri, director of oil and gas governance plan at the Governance Think-Tank of Sharif University of Technology, said the financial relationship between the government and National Iranian Oil Company (NIOC) was a conceptual design comprised of four dimensions.
He said: “The regime of financial contract between the government and NIOC, NIOC’s financial management and governance, the transparency and accountability of the financial regime and the legal framework of this financial relationship constitute the four dimensions.”
Kasiri said one of the major problems currently faced with by NIOC was the government’s interference with industrial affairs through a complicated mechanism. He added that a more transparent mechanism would facilitate NIOC’s task.
“Non-attractiveness of the current financial relationship for the investor, lack of a proper model for monitoring the costs and financial shortcomings are other challenges faced with by NIOC under the current circumstances,” he added.
Kasiri said NIOC’s share of total oil and gas revenue stood at 14.5%, taking into account development, production, preservation and exploration costs. He added that under the current circumstances, the share must be increased to 26%.
“It means that NIOC lacks sufficient resources for development, and many projects have been restricted due to financial shortcomings,” said Kasiri.
He said: “If we want to preserve the current trend, NIOC would need at least 26% of oil revenue. Of course, it does not mean that this sum must be the budget of NIOC; rather it is necessary to maintain the current trend.”
Kasiri referred to the financial relation between 25 national oil companies (NOCs) and governments across the world, saying they are generally classified under revenue-based and profit-based categories in light of the motivation of NOCs for investment, containing costs and enhancing technology.
“The profit-based model suits Iran better. Based on this model, the NOCs’ costs are deducted and the remaining profit will be divided between the government and the NOC,” he said, noting that it was currently difficult for Iran to implement this model.
Kasiri said, at present NIOC is following a revenue-based model. “Under this model, the government first takes its own share of production without interfering with the details of costs. Currently 85.5% of [Iran’s] oil revenue is given to the National Development Fund of Iran (NDFI) and the government.”
He said access to sources of financial and income, as well as transparency is requirements for the commercialization of an NOC.
“After the adoption of Article 12 of Law on Removing Obstacles to Competitive Production and Upgrading Financial System, the financial burden on NIOC has been partially relieved because NIOC would not support such investment with a 14.5% share,” said Kasiri.
National Missions
Mehdi Mir-Moezzi, CEO of Pasargad Energy Development Company, gave his nod to the model suggested by Kasiri.
He said: “Commercial activity is profitable everywhere in the world and it is taxed. That’s a principle. That is while we want to forget about these issues and apply our own self-made methods, which would get nowhere.”
Mir-Moezzi said NOCs had a “national” mission to accomplish.
“Financing other sectors of the economy and energy, supply of commodities and services and creation of job opportunities are the missions of NOCs,” he said, adding that NOCs are “drivers of business activities”.
Mir-Moezzi said NIOC was the most powerful NOC to pursue national missions.
He added: “All NOCs allocate part of their activities to trade missions.”
Integration a Must
Mohammad Mehdi Rahmati, a deputy head of Persian Gulf Petrochemical Industries Company, stressed the need for the predictability of oil and state budgeting.
He said: “That constitutes one of the major challenges to the financial relationship between the government and oil. In other words, oil output and price are not predictable in the budget. That is while in recent years, the only problem with the oil budget pertained to its price.”
8mb/d Output, a Dream?
Dehqan said: “Given the conditions prevailing in global markets now, would it be realistic to move towards 8mb/d oil output. If the answer is positive, is it achievable?”
Ali Kardor, former CEO of National Iranian Oil Company (NIOC), said an 8mb/d oil output seemed unrealistic under the current status of Iran’s petroleum industry.
“However, given Iran’s oil production capacity, this figure would not be an unrealizable dream,” he said.
Saleh Hendi, director of exploration at NIOC, said in order to estimate Iran’s achievable oil production capacity, depending on the number of reservoirs, economic policymaking and other items; a variety of targets may be considered.
“However, what is certain is that maximizing the oil production would be a must, and moving towards such objective must become possible,” he said.
Mahmoud Mohaddes, director of exploration and production at Dana Energy, said speaking about such output levels would require a realistic analysis of oil.
He said: “I personally favor increased production, but the 8mb/d figure has not been studied. Oil reservoirs must be studied comprehensively because the reservoirs data and conditions can tell us about their capacity.”
Mohaddes said Iran would need at least $250 billion in investment in order to significantly increase its oil output.
Meantime, he added, access to modern technologies, skilled manpower and active oil companies would be other requirements to realize this goal.