Iran nuclear deal complicates oil and gas markets for EA producers

Signing of the nuclear deal between the “world” and Iran will gradually put the Persian country back into the global free trade, including oil and gas.

New capital inflows into the Iranian energy sector will gradually put more oil and gas into already over-supplied international markets. This will effectively delay or even reverse the anticipated crude oil price recovery.

While the Iranian development is quite welcome by consumers, it becomes a predicament for oil and gas investors including aspiring producers of East Africa.

For various reasons unrelated to Iran, oil prices are already below the price range of $60-70 per barrel widely considered to be a “new normal” range taking into account ongoing supply-demand dynamics.

Iran is not just any oil producer. It was the first significant oil producer in the Middle East well before Saudi oil came out of the ground.

Before the economic sanctions by the US in 1979, and later the nuclear-related sanctions of 2012, Iran was home to most of the major oil firms. Iran is a mature oil producer with “easy” low-cost oil and gas.

The country has the fourth largest oil reserves in the world after Venezuela, Saudi Arabia, and Canada. It produced 4.4 million barrels per day (mbpd) in 2011, dropping to 3.6mbpd in 2014 due to economic boycotts.

With the prevailing low oil prices, investors will prefer to put their capital in the low cost developed basins of Iran as opposed to the high cost greenfield developments in many parts of the world where commercial and political risks could still be higher.

High level investors have already been visiting Teheran over the past few months when it became apparent that a nuclear deal was imminent.

The new threat to East Africa is that more capital will be queuing to enter the more familiar and mature low cost basins of Iran which have been substantially “de-risked” by the nuclear deal.

This is in contrast to the higher cost prospects in Africa where commercial and political risks still abound.

The other significant threat is the new level of oil and gas global oversupply that will gradually be increased by Iranian production.

Future oil and gas exports from East Africa will definitely be targeting Asian markets, which are the same markets that Iran will target. It shall be an increasingly tight competition for the lucrative Asian market share. And the lowest delivered cost will carry the day.

At this point it is interesting to note that oil and gas have become a “buyers market” which is not uncommon in situations of surplus supply.

Nigerians with their superior quality crude oil and low production costs are having problems placing their cargos in Western markets and are now pondering entering the Asian markets.

Nigeria is even exporting some high grade crude to Venezuela to upgrade the quality and value of that country’s heavy and raw oil.

The re-emergence of Iran into high-end oil and gas markets will, therefore, only complicate an already serious oversupply in the global market where price discounting is becoming a common marketing tool.

The assumptions that many of us made in support of an early oil price recovery are becoming weaker by the day. It was assumed that the high cost of US shale oil would fall with reduced price realisation.

The reality is that the Americans have over the last six months improved their production technologies and efficiencies and are now producing more oil from fewer wells at lower unit costs.

Ever resilient Russians

It was also predicted that Russians would cut production because of Ukrainian-related economic issues. In reality the ever resilient Russians have proven that they can sustain and even increase production.

They are also eyeing the same Asian markets targeted by East Africans. The new reality is that the global oil price recovery may take much longer unless a geo-political incident of significant magnitude occurs to upset supplies.

This is the new reality that East Africans should be internalising. It cannot be business as usual in respect of oil and gas.

New more creative options should not be ruled out by East African producers. Such include the maximisation of local demand for oil and gas. Meeting the local and regional captive demand is better than targeting unpredictable global markets.

For instance, Ugandans made a wise decision to target local demand through refining. They will never go wrong on this choice. Tanzanians, on the other hand, have done the same through increased local power generation from natural gas.

Kenyans should consider local refining of its crude for better returns to investors and the country.

Kenya will have a ready market of about 100,000bpd of oil products in another five years. It is a guaranteed market within our control.

Today it is the Iranian nuclear deal, tomorrow it may be peace deals in Libya and Iraq enabling more oil to flow into global markets. The situation will not be any better for East Africans.