Moody's: Iran Faces Significant Hurdles Boosting Production

A new report suggests volumes of Iranian crude coming onto the market over the next few years could be limited. 

New York-based bond rating firm Moody's Investors Service (Moody's) Monday released a new report suggesting Iran's return to global oil markets could be stymied by production hurdles.

The lifting of sanctions against Iran sees that country increasing production and sending that crude into the global oil market, but Moody's says the country faces "significant" technical and political hurdles in terms of ramping up production after 2016, not least of which being that the new flow arrives at a time global crude markets are oversaturated.

Earlier this month Russia and Saudi Arabia agreed to freeze their oil output in an attempt to stabilize prices; but that deal does not yet include Iran.

As such, Moody's forecasts that Iran will add its long promised 500,000 barrels per day (bpd) to the global oil market in 2016, putting further downward pressure on prices.

However Iran's ageing oil infrastructure, which Moody's say requires capital investments in the range of $150 billion-$200 billion to modernize, will prevent the country from increasing production much beyond that. 

"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 Waheed Sheikh, a Moody's Associate Analyst.

"Integrated oil companies will need to cut capital spending through at least 2016."

On the political side, Sheikh says: "Iran will try to increase exports to China, but regional rivalries could hinder this effort, with Saudi Arabia currently China's largest crude supplier.

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

Additionally, oil companies in the U.S. are prohibited from investing in Iran as the United States maintains primary sanctions on the country related to terrorism and ballistic missile development.

Moody's notes that Iran this month also holds elections that will decide whether hardline conservatives or reformists come to power, which could influence whether Iran pursues rapprochement with the U.S.

In December 2015 Ship & Bunker reported on the evolution of the Iran sanctions regime, noting that European oil companies will be able to work in Iran, while US companies will be "sidelined."