Tuesday, May 28, 2013

With oil production capacity declining, Iran is becoming marginalized

Facing concerns about dwindling oil production capacity (ability to supply incremental amounts of crude into the market) Iran responded back in April with a statement that the nation has plenty of spare capacity and is simply dealing with weak global demand.
FARS: - "The current capacity of Iran's crude oil production is 4.2 mb/d and we are currently supplying oil as much as the world market needs," [Iranian Oil Ministry Spokesman Alireza Nikzad Rahbar] said.
According to Iranian officials the demand weakness in global crude markets is mostly due to slowing economic growth in the US - driven by US budget cuts.
FARS: - According to Khatibi, following the failure in solving budget issues, the US administration has decided to reduce its expenditures, which in turn can have an impact on
economic growth and oil demand by the country.

... "These days those negative factors including slowdown in oil demand growth and worsening economic outlook in industrial countries especially the US are prevailing in the market," he added.
The statement basically says that Iran can provide all the extra crude the world needs, and would have produced more if it wasn't for the faltering US economy. But all this wonderful rhetoric aside, does Iran really have the capacity to produce 4.2 million barrels of oil per day (mb/d)? According to JPMorgan, the nation's current capacity is actually closer to 3.3 mb/d. Moreover, the capacity is expected to continue its decline.

Source: JPMorgan

The sanctions have curtailed Iran's ability to apply some of the more modern techniques to improve oil field capacity. The nation's industry continues to rely on re-injecting natural gas back into the huge but aging fields to maintain pressure. Over time this traditional extraction technique will result in falling yields.

In spite of Iran's problems, OPEC's capacity is expected to continue to rise. Nations such as Iraq will more than compensate for Iran's dwindling capacity (chart below). In the end Iran is becoming increasingly marginalized as an oil producer, both within OPEC and outside - particularly as North American production ramps up. And unfortunately in this increasingly competitive energy supplier environment, it will be Iran's ordinary people who will feel the brunt of the nation's capacity constraints.

Source: JPMorgan

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