Iran: Years needed to squeeze high-cost producers

Iran's oil minister Bijan Namdar Zangeneh said Opec members who believe higher-cost production can be squeezed out of the market by lower oil prices in a matter of months are mistaken. The process will take years, he said.

In a wide-ranging interview with Argus , Zanganeh also said Iran would be able to restore production to 3.8mn b/d within two months of the lifting of sanctions. The country's third-quarter production, according to its own data, was 3mn b/d.

He also said plans are still in place to unveil Iran's new upstream contract model and the fields to which it will apply in London in February.

Opec members agreed yesterday to hold their production ceiling at 30mn b/d, a level well below actual production and well above the forecast call on Opec crude, despite a 30pc fall in the price of crude since the summer and further sharp falls in the wake of the meeting.

Zanganeh said most member countries believe that a significant volume of higher-cost production will be forced out of the market inside six months, when Opec is next scheduled to meet. Asked if he agrees with this analysis, he said: "No, I do not — it is a very risky issue." And asked how long would be needed to significantly reduce shale oil production, he said: "It needs years, not months."

But the minister said it had been important to preserve the unity of Opec and reassess the market in a few months' time.

Indicating again that he is taking a longer term view of the structure of the oil markets, Zanganeh said: "It is very important for Opec to preserve its market share but it is not a matter of shock. It does not need shock therapy. Gradually we should do it. Not by shock to the market and shock to Opec members' revenues..."

Iran's economy is under severe strain because of US and EU sanctions. But Zanganeh indicated that Iran is able to ride out a period of low prices. The country's budget assumes an oil price of $70/bl for next year. The minister said: "We have managed with lower prices and lower revenue… We have lost 60pc of revenue before. And we can manage it. We prefer a higher price but it is not a matter [that will] change anything in Iran… we are allocating close to 30pc of our total oil revenue to a petroleum fund. If we reduce it, it means we have no change in the net revenue of government. But it is not good for Opec."

On Iran's return to the market when sanctions are lifted, Zanganeh said: "We have capacity of 4.4mn b/d, but we can produce 3.8mn b/d after two months." Fields have not been damaged by being shut in because of sanctions, he said, although he conceded that the condition of some infrastructure may have deteriorated.

Longer term, he said that within four years Iran could produce 4.7mn b/d of crude and 1mn b/d of condensate.

Zanganeh said Iran will offer discounts to crude buyers if competing producers do so. But when it comes to regaining market share after the lifting of sanctions, he is confident Iran will not need to offer incentives. "I do not think that we need to give any incentives to our historical customers. We had many traditional customers and they are ready to purchase — we do not need to give them any incentives. Because of the sanctions and limitations against us they have limited their purchase. After the lifting of the sanctions I am sure that they will return to us and purchase the oil, because no-one in the world wants to rely on one or two producers. All consumers want to diversify their source of supply."

On the motivation for attracting foreign investors into upstream production in Iran, Zanganeh stressed that the main prize is management skills and transfer of technology, particularly for enhanced oil recovery projects, rather than finance.

The minister would not be drawn on whether the timing of the delayed presentation of Iran's new upstream contract model — now set for London in February — is directly related to progress towards the lifting of sanctions.

He said the aims of the event are to explain the model and introduce the projects that are on offer to foreign oil companies. He reiterated that fields on offer will include some of the country's largest onshore producers, including the 800,000 b/d Ahwaz, 500,000 b/d Marun, 130,000 b/d Bibi Hakimeh, 500,000 b/d Gachsaran, and the 200,000 b/d Agha Jari.

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