American Oil and Gas Reporter - August 2015 - 40

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40 THE AMERICAN OIL & GAS REPORTER

disruptive to the market?
"There is an understanding of what Iran
is capable of doing in terms of production
and exports, and then there is a question
of what Iran's re-entry strategy is," Webster continues. "Everyone is parsing
through each data point and statement to
separate the signal from the noise regarding what exactly Iran plans to do."
Webster remarks that the worst case
scenario would result if the United States
does not lift its crude oil export ban and
Iran makes a hard re-entry into the market,
which could drive down prices substantially. While consumers might appreciate
those low prices in the short term, Webster cautions that in the long term they
could result in a tighter oil market and higher prices, because "lower prices will chill
investment more than they have already."
In late July, Webster estimated the most
likely scenarios included:
* The treaty passing Congress, though
with lots of discussion;
* An additional 100,000-200,000 barrels of oil a day entering the market over
the next few months; and
* An additional 400,000-500,000
bbl/d going on the market within 12-18
months, depending on when the agreement
is implemented.
"That will bring prices down a bit. Then
the next question is figuring out the secondary effects that will have on the market,"
he says. "Iran may have a lot of oil in reserves, but if it is going to maintain a high
level of production, it will need to bring in
new contract structures that will draw investment. That has to happen before there
is any change in Iran's production trends."
Webster says American producers
should expect to experience the direct impacts of Iran's re-entry in the first half of
2016, "especially if Iran's oil comes into
the market the same time that the world
is starting to go through its refinery maintenance season, which generally brings
down demand first in the United States,
then in Europe, then in Asia."
Key Triggers
Séverine Saint Hubert, communication
manager for global research and analytics
company, Aranca, says its investment research practice believes incremental Iranian production entering an already oversupplied world oil market likely will
curb any oil price increase over the next
6-12 months. In addition, China's economy-the global growth engine for oil demand-is slowing. Consequently, Saint Hubert says Aranca expects the global oil
market to be sufficiently supplied-if not
oversupplied-for three-five years.
According to Saint Hubert, Aranca
agrees that Iranian oil is not expected on

the global market until second quarter
2016. In addition, she says, Iran will
need considerable time to reach peak
production, since it will have to ramp up
operations and attract investors. Nevertheless, she notes that Iran has 158 billion barrels of proved reserves-the fourth-largest
in the world.
There does seem to be conflicting estimates regarding next year's global oil demand, Saint Hubert comments, which also
could affect pricing. This includes:
* The International Energy Agency
has forecast a slowdown in the growth of
global oil demand from an average of 1.4
million barrels a day this year to 1.2 MMbbl/d in 2016.
* The Organization of Petroleum Exporting Countries estimates oil demand
will increase 1.28 MMbbl/d this year
and by 1.34 MMbbl/d next year.
* EIA forecasts are largely in line with
OPEC's, projecting an increase in demand
growth from 1.3 MMbbl/d in 2105 to 1.4
MMbbl/d in 2016.
Overall, Weissman says the scenario
creates additional downside price risk for
the U.S. oil industry. "Oil prices likely will
continue to decline, and it will take even
longer for them to recover," he projects.
"Oil and gas have a very tough year ahead
of them. I imagine we won't start recovering until 2017, because Iranian oil on the
market will create a very high-risk period for the industry."
But even that brings the seeds for later
recovery, Weissman adds. The abundance
of oil will be good news for net oil importers,
especially emerging countries such as China and India, which are among Iran's customers. "This will give consumers more
spending power and could boost the total
global economy," he suggests.
IHS's Webster offers several recommendations for U.S. oil and gas companies over the coming months:
* Prepare for price volatility;
* Work with suppliers to lower costs,
which many companies have succeeded in
doing already;
* Look at hedging, when possible; and
* Be open to storing oil, as it may
have greater future value than it has in the
past.
Webster also advises oil and gas stakeholders work with their local and national leaders to provide clarity on industryrelated legislation and regulations, when
possible.
"Anything that can be made clear, such
as the hydraulic fracturing rules, would be
useful for producers," he comments. "The
American oil and gas industry can react
and adapt quite quickly, but especially so
if it knows what is going to happen
next."
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American Oil and Gas Reporter - August 2015

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