Framework Nuclear Deal Could Be Good News For Iran's Oil Sector

Apr 4, 2015

The framework nuclear deal reached with Iran this week could have an enormous impact on the global oil market. Sanctions, which have crippled the country's oil exports, could be lifted if a final nuclear agreement is signed at the end of June between Iran, the U.S. and five other world powers.

Cliff Kupchan, a senior Iran analyst at the Eurasia Group, says oil exports brought in about 40 percent of the government's revenues. He says since sanctions were tightened in 2012, Iran's oil exports have fallen by almost a half.

"That's roughly now about 1.2 million barrels a day that's off market ... it's a lot of money, about [$]1.6 billion a month in oil revenue that they're being denied," he says.

That oil could hit the global market again if a final agreement with Iran can be hammered out. But there is already a glut of crude on the market.

Michael Levi, an energy specialist at the Council on Foreign Relations says any additional source of oil is going to keep the prices low, which will make it tougher on oil producers. But he says the oil industry has time to prepare for Iranian oil coming on the market again.

"There is a sense that this will come back on over time if a deal is reached, and there's some sense out there of the pace which it might come back on," Levi says. There are going to be surprises, he adds, "but this might not be as big of a shock to the system that people imagine."

Suzanne Maloney, an Iran specialist at the Brookings Institution, says even if a final deal is signed at the end of June, don't expect an extra million barrels of oil a day to immediately flood the global market.

"I think that what we're likely to see is a considerable time lag between any deal that may be signed in late June or in the weeks thereafter and a significant return of Iranian crude to the market," she says.

Maloney says it could be several years before Iran is back up to full speed — producing roughly 2.5 million barrels of oil a day.

"It will take some time for the regulatory framework to be devised to permit and unravel the sanctions," she says. Iran will also have to wait some time, she adds, "to conclude some purchases and also to re-expand its production because a number of wells were shut in as a result of the shrunken export markets."

The timing and phasing of sanctions relief will depend largely on whether Iran sticks to commitments made in a final agreement. Levi says it will take more than just lifting sanctions on oil to get companies to do business with Iran again. There's a complicated network of financial sanctions that also will need to be lifted in order for Iran to attract investors.

"The oil and gas industry will certainly be interested in returning to Iran, but I suspect they will take their time to do that," he says. If you make big moves and put in big investments, Levi says, and "all of a sudden there is a conflict between Iran and the West and sanctions are reimposed, you are in deep trouble."

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Transcript

ARUN RATH, HOST:

The framework nuclear deal reached with Iran this week may have huge implications for global war and peace. But already people are worrying about the implications for global markets. You see, Iran sits on the fourth-largest oil reserves in the world, and if sanctions get lifted, that could dump a lot more oil into an already saturated market. NPR's Jackie Northam reports.

JACKIE NORTHAM, BYLINE: The lifting of the sanctions, if and when it happens, is critical to Iran's oil industry. Cliff Kupchan, a senior Iran analyst at the Eurasia Group, says oil exports brought in about 40 percent of the government's revenues. He says since sanctions were tightened in 2012, Iran's oil exports have fallen by almost a half, crippling the economy.

CLIFF KUPCHAN: That's roughly now about 1.2 million barrels a day that's off market. It's a lot of money. It's about $1.6 million a month in oil revenue that they're being denied.

NORTHAM: That oil could hit the global market when there's already a glut of crude. Michael Levi, an energy specialist at the Council on Foreign Relations, says any additional source of oil is going to keep the prices low, which will make it tougher on producers.

MICHAEL LEVI: There is a sense that this will come back on overtime if a deal - if a final deal is reached. And there's some sense out there of the pace at which it might come back on. There's obviously going to be surprises, but this might not be as big of a shock to the system as a lot of people imagine.

NORTHAM: Suzanne Maloney, an Iran specialist at the Brookings Institution, says even if a final deal is signed by the end of June, don't expect an extra million barrels of oil a day to immediately flood the global market.

SUZANNE MALONEY: I think that what we're likely to see is a considerable time lag between any deal that may be signed in late June or the weeks thereafter and a significant return of Iranian crude to the market.

NORTHAM: Maloney says it could be several years before Iran is back up to full speed, producing roughly two-and-a-half million barrels of oil a day.

MALONEY: It will take some time for the regulatory frameworks to be devised to permit and unravel the sanctions, particularly on the European side. And then we'll have to wait some time for Iran to begin to conclude some purchases and to re-expand its production, because a number of wells were shut in as a result of the shrunken export markets.

NORTHAM: The timing and phasing in of sanctions relief will depend largely on whether Iran sticks to commitments made in a final deal. Michael Levi says it will take more than just lifting sanctions on oil to get companies to do business with Iran again. There's a complicated network of financial sanctions that also will need to be lifted in order for Iran to attract investors.

LEVI: The oil industry will certainly be interested in returning to Iran. But I suspect they will take their time to do that. If you make big moves and put in place big investments and all of a sudden there is a conflict between Iran and the West and sanctions are reimposed, you are in deep trouble.

NORTHAM: Levi says Iran may also try to lure new investment to develop its national gas reserves, some of the largest in the world. Jackie Northam, NPR News, Washington. Transcript provided by NPR, Copyright NPR.