Iran sits atop the world"s largest hydrocarbon reserves and is located on the energy corridor route. However, in the aftermath of the 1979 Islamic Revolution, the United States has been using every tool at its disposal to keep Iran from becoming a key energy player.
Morteza Behrouzifar, researcher at the Institute for International Energy Studies (IIES), says due to Iran"s geopolitics, young and educated population; foreign companies would be beneficiary to any interaction with Iran.
"Iran Petroleum" has conducted an interview with Behrouzifar on the impact of shale oil in global oil markets and the impact of technological development on oil and gas production, as well as foreign companies" interaction with Iran.
For nearly a decade now, unconventional reserves have turned into a serious rival to conventional oil producer in the market, significantly affecting oil prices. Even the Charter of Cooperation recently signed by OPEC and non-OPEC partners was an instrument to prevent a serious oil price fall as shale production is becoming economical. Is that true?
I would like to start with one decade ago when shale production became economical and started impacting global oil prices. In fact, following the 1973 oil shock, the US embarked on policymaking with a view to reducing its own dependence on the Persian Gulf oil. To that end, the US enhanced its oil and gas production capacity and used various tools like granting tax exemption to oil and gas production companies. That was exactly when the US started studies on shale oil and gas production. Even at that time shale production was under way, but not enough to alter the result of the game. In other words, shale oil and gas were no game changers in the 1970s and 1980s. However, over 45 years the US managed to identify its domestic reserves and develop necessary technologies. By using such incentives as tax exemption, energy producers were encouraged to embrace non-conventional reserves development. In early 21st century, unconventional oil and gas production in the US increased significantly to become economical. At the beginning, shale oil production at $70 to $80 was competitive, but with technological developments and scientific progress over recent years, shale may be competitive with $30 oil in some areas. Therefore, the global increase in oil prices would not affect US unconventional reserves development and recovery at least for now.
What is the share of shale oil production in the US now?
In 2005, the US oil production level stood at 6.9 mb/d. In 2018, the figure (including crude oil and gas condensate) reached 16 mb/d thanks to shale oil production. The US crude oil and gas condensate production is forecast to reach 18 mb/d in 2019. Therefore, in case oil prices fall below $50 you cannot expect the removal of 2 mb/d of US oil from the market. That"s not the case. If you look at the rig count in the past 10 to 15 years, you will see that in certain periods 2,000 rigs were operating simultaneously, most of them doing vertical drilling. Now with technological progress, most drillings in the US are horizontal now. The US is improving its knowledge on horizontal drilling; therefore, the decline in rig count does not mean a decline in shale oil production. Rather it means that due to technology development and improvement the quality and method of drilling has altered.
How long can shale owners continue to supply?
China holds the most unconventional oil and gas reserves in the world, particularly shale gas. But its production stands very low. The technology required for shale oil and gas production is so sophisticated that the countries with such reserves can rarely engage in production and rival the US in shale production. However, the expectation is that shale development technology might spread in other countries like China or South America, in which case we will see oil and gas production increase. Naturally it can affect global oil and gas prices and even change current projections about global oil and gas demand.
I remember in 2004, we drafted a report at IIES about global gas markets. We had predicted that the US would become the largest LNG importer in the world in 2014 and US LNG production would increase so much that even Canada would not be able to meet its needs completely and that the US would have no option but to import LNG. In the year when we were preparing this report lots of licenses had been issued for the construction of LNG terminals to import this product into the US and some of these terminals had been completed. The US was about to become one of the largest LNG importers in the world. But with the development of shale technology, the trend changed. In 2017, the US gas production stood at about 735 bcm with gas consumption at 740 bcm. This gap was eliminated in 2019. The US is now an LNG exporter and will soon become one of the influential LNG players in the world.
Is it the same with oil? Can we expect the US to become a large oil exporter to affect global oil prices?
No, that"s not so when it comes to oil. At least estimates show that the US will continue to import crude oil. The US is consuming nearly 20 mb/d of oil, while it is producing 16 mb/d oil and condensate. But the US is in the oil market and is trading oil. It is noteworthy that until several years ago, US oil companies were not authorized to export oil, but they are now engaged in oil trading thanks to shale. Current estimates show that US shale oil production would not exceed 20 mb/d. Therefore, there is no mid-term expectation for the US to become an oil exporter. Although the US is not yet a net oil exporter, it can disturb the markets.
Does it mean that the OPEC+ deal would not be a game-changer in the oil market at least for now?
In the next decade, hybrid and electrified cars are expected to grow in number. That would be a game-changer in the oil market. Europe is currently making significant investment in renewables. However, we know that about one billion people in the world have access to renewable energies. In case this technology is developed in all countries, we can expect a decline in energy consumption level in the transportation sector.
Oil prices have not changed significantly in the past one month despite the Strait of Hormuz and Strait of Gibraltar oil tanker incidents, and US sanctions against Iran and Venezuela. In case the market conditions were normal and OPEC producers were not sanctioned would prices be on the decline again?
Look at the oil market. Iran and Venezuela are under sanctions. Libya and Nigeria are facing challenges in production. Even Saudi Arabia has cut its output. In case all member states were producing normally oil prices would be much lower. Now certain issues have transpired the Persian Gulf. The situation has become somewhat tense, but it would not let oil prices fall significantly. Meantime, oil prices have not grown significantly. Under conditions when shale oil production is even economical at $30 a barrel in some zones, I think if OPEC and non-OPEC producers agree on cutting 4 mb/d from their production we can then expect that the downward trend of prices be overturned. Iran sits atop the world"s largest conventional oil and gas reserves. It would be important for us to be a major player in the market. That would be possible only if our production increases significantly, which is impossible under the present sanctions.
I would like to reiterate here that after the 1979 Islamic Revolution, the US never allowed Iran to become the energy hub of the region. It used every tool at its disposal so that Iran could not become a key energy player. If you may recall, after the JCPOA (Iran"s nuclear deal with six world powers) was signed, Iran was said to be the largest market to have opened its doors to the world after the collapse of the USSR. The Iran market was projected to attract $1 trillion in investment over five years thanks to favorable conditions. Iran is among the most populated countries in the region. Its population is young and educated. The country is located at the intersection of the region. Therefore, foreign companies interacting with Iran will be beneficiary.
Courtesy of Iran Petroleum