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FEATURE: Iran pushes for a 2021 oil comeback, but sanctions will be hard to shake

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FEATURE: Iran pushes for a 2021 oil comeback, but sanctions will be hard to shake

Highlights

Budget targets 2.3 million b/d in oil sales

Politics could complicate sanctions talks

Rouhani pressed to clinch deal before election

Tehran — With an eye on US sanctions relief once US President-elect Joe Biden takes office, Iran's leaders have ordered its oil sector to prepare to ramp up production and exports in 2021.

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The government has scant time to lose. Iran will hold its next election in June, and the coming months will be the last chance for term-limited President Hassan Rouhani and his moderate allies to show the country they can lead it back from years of deprivation, without kowtowing to long-time adversary the US.

Many analysts expect the two sides to pursue a quick interim deal to waive some sanctions, after Biden is inaugurated on Jan. 20.

That could unlock a portion of Iran's roughly 2 million b/d of shut-in crude exports, but a full agreement is likely to be more complicated, due to political considerations in both countries, as well as the time needed to bring Tehran's elevated low-enriched uranium levels back into compliance with the nuclear deal.

S&P Global Platts Analytics forecasts 160,000 b/d year-on-year volume growth in 2021 and another 700,000 b/d in 2022, with "significant upside risk of a speedier return," given conciliatory indications from both the Biden camp and Iran's Supreme Leader Ali Khamenei, who has ultimate authority over policy.

"While the US may seek a comprehensive deal before hardliners likely win in June elections, H2 2021 onwards remains a more likely timeline for notable sanctions relief," Platts Analytics said in a note.

Raring to pump anew

Iranian officials, for their part, are calling on the country's oil industry to press ahead with capacity increases.

Formerly OPEC's second largest crude producer, Iran has seen its output crushed by sanctions to about 2 million b/d in recent months – a 30-year low and half its peak levels from 2008, according to Platts' OPEC production survey.

Its oil exports have likewise cratered, with state-owned National Iranian Oil Co. resorting to clandestine ship-to-ship transfers, cloaked sailings, barter trades and front companies to evade sanctions and sell its barrels, market sources say.

The country exported around 585,000 b/d of crude and condensate in November, up about 95,000 b/d from October, according to Sara Vakhshouri, who heads the consultancy SVB Energy International and closely tracks Iranian production.

Rouhani has submitted to parliament a budget for the coming Iranian year that starts March 20 with assumed oil sales nearly four times higher, at 2.3 million b/d.

Long-term, oil minister Bijan Zanganeh has outlined a 20-year strategy to raise crude output capacity to 6.5 million b/d.

For the Rouhani administration, boosting production is an existential matter.

"We should be a big exporting power on the international level," Rouhani said in a televised speech Dec. 9. "If Iran had been capable of exporting 10 million [b/d] in 2011, 2012, they wouldn't have been able to impose sanctions on us... We must do something so that big powers cannot impose sanctions on us in the future."

Stumped by Trump

To grow its oil sector, however, Iran badly needs cash.

The signing of the nuclear deal in 2016 with then-US President Barack Obama was a breakthrough for Rouhani, and Iran's oil production improved over two years as its customers -- primarily in Asia -- returned.

But international investment mostly failed to materialize amid doubts over whether Washington and Tehran could make the fragile deal hold, as well as conservative-led delays in implementing a new contract model that would make Iran's oil sector more attractive to foreign companies.

Then Trump's election was a gut punch, as the president, who campaigned on ripping apart the nuclear deal, withdrew the US from the agreement in mid-2018 and reimposed sanctions.

Since then, Iran has watched its oil market share be claimed by Arab rivals Saudi Arabia, the UAE and Iraq, as well as Russia.

Starved of foreign expertise and advanced technology, Iran has relied on domestic firms to rehabilitate fields and maintain operations, with mixed success, and much infrastructure has deteriorated from years of underinvestment.

Getting to a deal

Rouhani is ineligible for the June 18 presidential election, as he will have served the maximum two terms.

He and his moderate faction will be challenged by conservatives and hardliners firmly opposed to rapprochement with the US, in addition to a restless population that has organized several street protests -- some of which security forces have responded to with deadly force -- over a lack of economic development.

To get full sanctions relief, Iran will have to convince Biden that it will return its uranium stockpile to acceptable levels, credibly mothball its nuclear program and end support for proxy groups that the US has accused of terrorism.

Biden, who said he favors restoring the nuclear deal, also must persuade a skeptical US Congress that it will help stabilize fractious Middle East tensions.

A potential thaw in relations between long-standing enemies Saudi Arabia and Israel in an alliance against Iran could impact deliberations, and the Trump administration has intensified its "maximum pressure campaign" in his final weeks in office.

Iranian government spokesman Ali Rabiei said Dec. 8 the anticipated windfall from a relaxing of sanctions would be spent on developing infrastructure, creating jobs and supporting small businesses.

Rouhani and his successor will need to deliver on that pledge quickly.