Tehran Recovers
The Limits of Iran’s Oil Rebound

In the run-up to the lifting of Western sanctions following the nuclear deal, Iran was optimistic that it could quickly return its oil output to pre-sanctions levels, and even boost them beyond. And over the first half of the year Tehran has surprised many in its ability to follow through on the first half of that promise—with production once again above 3.5 million barrels per day, the petrostate is back to where it was before 2011 sanctions were put in place.

Iran doesn’t think the job is done yet, but as Bloomberg reports the task ahead is going to be significantly more difficult than what it has already accomplished in 2016:

“They have surprised most market participants with the speed they’ve been able to resume production,” said Antoine Halff, a senior fellow at the Center on Global Energy Policy at Columbia University in New York. “But to exceed pre-sanctions levels would require investment and technology and that’s a much longer-term proposition.”

Returning to world markets after more than three years of isolation, Iran is seeking more than $100 billion of investment from international partners to rehabilitate its oil industry and ultimately reclaim its position as OPEC’s second-biggest producer. Still, companies are waiting for Iran to approve the contract model to be used in deals and for clarity on remaining U.S. sanctions before re-entering the country. […]

Iran will need billions of dollars of investment and foreign technology to boost reservoir pressure to expand capacity at its aging wells, which were already suffering output declines before sanctions took hold, according to the IEA. Even with an influx of investment, an increase to 4 million barrels a day won’t happen before 2021, the agency predicts.

Iran, like so many other petrostates sitting on maturing conventional oil fields (we’re looking at you, Russia) is going to have to run something of a Red Queen’s race, having to work harder to maintain production levels. To increase output beyond its current capabilities is going to require some massive investments in new projects and new infrastructure to support those operations, and that process is undoubtedly going to take longer to complete—and is fraught with many more complications—than the remarkable recovery Iran has completed over the past six months.

But whatever technical issues might await Tehran in its quest to claw back market share, you can’t fault it for ambition. And that’s going to come as less than welcome news to the rest of the world’s oil producers. The actions of a post-sanctions Iran effectively sank a tentative deal to set an upper limit on oil production, and their intent to keep upping the ante will continue to undermine OPEC’s already fractured cohesion.

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