Iran Will Be A Great Player, But Could Take Time…

UBS | Given the re-emerging importance of Iran, we spent time digging into the operating environment in Iran and speaking with oilmen on the ground there. Our conclusion is that Iran does want to return to its “rightful” place as OPEC’s “2nd largest oil producer” behind Saudi Arabia. However, it is likely it could take time before a major production ramp occurs. The IEA forecasts an increase of 600,000 b/d by YE -‘1 6 versus Iran’s forecast of 1.2 MMb/d. So far an additional 300,000 bbls have entered the market since the start of the year (IEA). We believe with limited oil service technology and slowly entering outside capital it will be challenging for Iran to ramp production quickly. The first round of blocks for auction is expected in May -16 (or later).

Iran’s near -term challenge is under -investment & lack of oil service technology

We believe the two biggest issues for the country will be the lack of quick financing and just as importantly the lack of oil service technology. Currently, the US oil service companies cannot operate in Iran and the oil service technology available in the country today or available from non -US sources is limited. The bulk of the high spec ification technology rests with the U.S. companies and without a significant influx of technology (artificial lift, chemicals, MWD, LWD, etc) we think it is likely to be challenging for the country to sharply ramp production quickly. Additionally, given oil prices and the lack of financial success in Iraq, it will be interesting to see how aggressive the European and Asian IOCs (who can enter Iran) bid auction blocks. It is believed of the fields that 30% are conventional which Iran is able to develop, but 70% are mature fields which would likely need foreign oil companies and oil services to drive growth.

Iran versus Iraq…. Compare and contrast

(1) Iran is a more established country both in terms of its society and oil industry. Iran has a much higher level of infrastructure (roads, pipelines, etc) than Iraq and the populace tends to be well educated. (2) There are far less safety concerns in Iran, such as ISIS in Iraq. (3) The government is believed not to have the corruption issues as reported in Iraq. (4) The contract structure is expected to be “risk adjusted” with a fee multiple for higher risk fields as well as for beating production goals. We believe the contract structure will be the critical driver of how quickly the oil cos come back.