Sanctions on Iran over its nuclear plans are already hitting oil production in the Islamic Republic and a fall in its output and exports is likely to accelerate, industry analysts say.
Global oil flows are realigning even though a European Union ban on imports from Iran does not come into effect until July, the International Energy Agency (IEA) said in its monthly Oil Market Report on Friday.
Oil industry analysts forecast Iranian oil output will fall by as much as 9 percent this year to an average of around 3.3 million barrels per day (bpd).
Iranian oil production has fallen over the last two years by more than 250,000 bpd, or 6.6 percent, and could lose more than 300,000 bpd this year and a further 200,000 bpd in 2013, Vienna-based consultants JBC Energy estimate.
Oilfield output naturally declines over time at rates varying from 5 percent to as much as 10 percent a year unless there is major investment to improve recovery rates.
“Oil production will plummet at a pace close to natural decline rates, while the placement of exports will be so difficult that stock-builds, or deliberate output cuts might follow,” said JBC Energy managing director Johannes Benigni.
Robin Mills, an energy strategist based in the United Arab Emirates, projects a slightly smaller fall in Iranian output but said Iranian production was going to fall because the country's oil industry was not getting enough investment.
Almost all the international oil companies and large industry service firms have been forced out of Iran by sanctions over the last few years.
“For several years now there’s been no real foreign investment to speak of,” said Mills.”Longer term, the picture for oil output is pretty bleak, without foreign investment.”
The IEA cited some industry estimates that up to 1 million bpd of Iran’s 2.6 million bpd of exports could be replaced by alternative supplies once EU sanctions begin.
Senior traders at large oil companies said this estimate looked high but agreed that Iranian output and exports were likely to decline substantially under almost any scenario.
Benigni said sanctions on Iran were likely to last years.
“The most likely outcome is that sanctions will be in place for years, making the operation of the country’s hydrocabon industry a rather challenging task,” he said.
The IEA said Iran could be forced to place unsold oil in floating storage or even shut in production later this year.
“International sanctions targeting Iran's existing oil exports do not come into effect until July 1, but they are already having an impact on crude trade flows in Europe, Asia and the Middle East,” the agency said.
Although the EU imported only around 600,000 bpd of Iran's oil last year “broader U.S. and EU economic sanctions on Iran's Central Bank could be more pervasive if they successfully block the predominant channel for oil payments to Iran,” it said.
“European customers have already curtailed imports of Iranian crude and Asian buyers are lining up alternative sources,” it said, adding European customers were likely to look to Russia, Iraq and Saudi Arabia for replacement barrels.
China, the single largest buyer of Iranian crude, accounting for about 550,000 bpd or about 20 percent of Iran’s exports, was probably taking about half its 2011 volumes during the first quarter of 2012, although this was probably largely due to a dispute over prices in term contracts.
“Although China has strongly opposed sanctions, the state oil companies’ bargaining position with (Iran) has clearly been strengthened by the international measures,” the IEA said.
“China has stepped up purchases of Saudi crude, reportedly buying an additional 200,000 bpd in recent months, though some of these extra volumes may be destined for newly completed (Chinese) strategic storage.”
Oil analysts say China may recently have increased its onshore oil storage capacity by around 20 million barrels.
China was buying more Russian crude and Angolan oil. India has also increased purchases from Saudi Arabia and agreed with Iran to pay for 45 percent of its crude purchases in rupees.