Oil ‘El Dorado’ Iran can double output by 2020, former Eni CEO says

GRANT SMITH

LONDON (Bloomberg) -- International oil companies will rush back to Iran after the removal of sanctions, helping the OPEC member double production by the end of the decade, according to former Eni SpA CEO Paolo Scaroni.

The country can restore production to 1970s levels of 6 MMbpd by 2020 as its “plentiful” and inexpensive reserves draw in foreign oil explorers despite the risk of sanctions being restored, Scaroni said. The flood of Iranian oil into a global market that’s already oversupplied will keep crude prices low for the rest of the decade, he said.

“Iran is one of three or four countries which are part of the ‘El Dorado’ of oil in the world,” Scaroni, now deputy chairman of NM Rothschild & Sons Ltd., said by phone from London Wednesday. “In a world of oil prices that are low and will become probably even lower, it is important to produce oil cheaply—and this is the case for Iran for sure.”

Iran and six world powers reached an accord on July 14, after almost two years of talks, that will remove sanctions on its oil industry if the country scales back nuclear activities. Royal Dutch Shell Plc, BP Plc and Rome-based Eni are among companies that have expressed interest in returning if restrictions are lifted.

Eni worked under Scaroni’s management on several oil and gas fields in Iran—South Pars, Darquain, Dorood and Balal—before starting withdrawal in 2010. He was among a handful of oil company chiefs who met with Iranian Oil Minister Bijan Namdar Zanganeh in Vienna in December 2013, shortly after the nation reached an interim accord granting some sanctions relief. Scaroni stepped down as CEO in 2014.

Remaining Risks

Bank of America Corp. predicts that investments by foreign oil firms in Iran will be “limited” this decade, capping the country’s potential output by 2020 at 4.5 MMbpd, head of commodities research Francisco Blanch said in a report.

The risk of sanctions being re-imposed on Iran if it violates the terms of the nuclear pact will lead companies to focus on renovating and restoring output at existing fields—so-called “brownfield” sites—rather than investing in new projects, Scaroni said.

To attract investment Iran will need to improve the terms of its oil contracts, which in the past left the burden of any cost overruns with foreign companies, Scaroni said. Adopting similar contracts to those offered by Iraq, where companies are paid a per-barrel fee for boosting output from fields, would be successful, he said.

Iran pumped 2.85 MMbpd of crude in June compared with an average of 3.63 million in 2011, the year before the imposition of sanctions, according to data compiled by Bloomberg. The nation produced 6 MMbopd in 1974, five years before the revolution, the data show.

“What could Iran produce if there is no embargo, no sanctions and the contractual terms are attractive?” Scaroni said. “I believe that Iran could easily go back to the 6 MMbopd it was producing before the revolution.”