1 Department of Real Estate and Construction Management Thesis no.302
Real Estate & Finance Bachelor of Science, 15 credits
Finance
How Will An Ease of Sanctions Against Iran Affect The Oil Markets
Author: Supervisor:
Farhad Tatar
Fanny Gustafsson Stjernborg Stockholm 2015 Inga-Lill Söderberg Nicolaus Lundahl
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Bachelor of Science thesis
Titel How Will An Ease of Sanctions Against Iran
Affect The Oil Markets
Authors Farhad Tatar and Fanny Gustafsson Stjernborg
Department Real Estate and Construction Management
Bachelor Tesis Number
Supervisor Inga-Lill Söderberg and Nicolaus Lundahl
Keywords Sanctions, Oil, Iran, Oil Embargos
Abstract
This study intends to explore and analyze the oil market, including a description of the market itself, its players, macroeconomic aspects, developments and trends that have historically been identified in the industry. Furthermore, based on the background of the global oil market and the later described question of this paper, the aim is to explore the role specifically Iran will have as a major player in the global markets given a potential subsequent removal of its current oil
exporting sanctions. The underlying factors for the aspect of focus in this report are due to the ongoing talks between the European Union, United States, UN and Iran in regards to a final agreement of Iran’s nuclear program. Iran has recently received extensive attention due to the known oil reserves the country has in storage. In the case of a removal of the sanctions, the crude oil production capacity and sale of its stockpiles could potentially see Iran have a significant impact on oil supply and most importantly become a long-term player in the global oil markets.
This study contributes to a deeper understanding of the Iranian oil industry but more importantly the role Iran will play in the global oil market with the removal of their sanctions.
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Acknowledgement
We would like to thank Michael Hsueh, Marcus Svedberg, Per Jönsson, Jawad Ghaderi, Chris Glaas and Nick Lundvall who took their precious time to communicate their views and opinions, which in turn contributed valuable additions to the result of our thesis.
Finally, we would like to send our gratitude towards our supervisors, Inga-Lill Söderberg and Nicolaus Lundahl who have given us much appreciated advice and guidance throughout the process of our thesis.
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Examensarbete
Titel How Will An Ease of Sanctions Against Iran
Affect The Oil Markets
Författare Farhad Tatar och Fanny Gustafsson Stjernborg
Institution Institutionen för Fastigheter och Byggande
Examensarbete nummer
Handledare Inga-Lill Söderberg och Nicolaus Lundahl
Nyckelord Sanktioner, Olja, Iran
Sammanfattning
Denna studie avser att undersöka och analysera oljemarknaden, inklusive en beskrivning av marknaden, dess aktörer, makroekonomiska aspekter samt utveckling och trender som historiskt har identifierats i branschen. Dessutom, baserat på bakgrunden av den globala oljemarknaden och den senare beskrivna frågeställningen, är syftet att utforska vilken roll Iran kommer att ha som en viktig aktör på den globala oljemarknaden med tanke på en eventuell hävning av
nuvarande oljeexportsanktioner. De bakomliggande faktorerna för fokus i denna rapport grundar sig i de pågående samtalen mellan EU, USA, FN och Iran i fråga om en slutlig överenskommelse om Irans kärnenergiprogram kommer att ske. Iran har nyligen fått stor uppmärksamhet på grund av de kända oljereserverna som landet har. I frågan om att en hävning av sanktionerna mot Iran skulle ske, kunde produktionskapaciteten av råolja och försäljning av deras lager potentiellt göra att Iran skulle ha en betydande inverkan på oljeutbudet på marknaden och en chans att bli en långsiktig aktör på den globala oljemarknaden.
Denna studie bidrar till en djupare förståelse av den iranska oljeindustrin, men främst den roll Iran kommer att spela i den globala oljemarknaden vid avskaffandet av sanktioner mot dem.
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Förord
Vi skulle vilja tacka de som har tagit sig tiden att ställa upp på intervju för arbetet och vidare delat med sig av synpunkter där de på så sätt har bidragit till studiens resultat. Vi vill rikta detta tack till Michael Hsueh, Marcus Svedberg, Per Jönsson, Jawad Ghaderi, Chris Glaas och Nick Lundvall.
Slutligen vill vi rikta ett stort tack till våra handledare Inga-Lill Söderberg och Nicolaus Lundahl som gett oss idéer och råd kring vårt tillvägagångsätt när vi skrivit arbetet.
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Table of Contents
1 Introduction ... 7
1.1 Problem ... 7
1.2 Purpose ... 8
1.3 Restriction ... 9
1.4 Assumptions ... 9
2 Theoretical Framework ... 10
2.1 Previous Studies ... 10
2.2 Market Theories ... 10
2.2.1 Law of Supply ... 10
2.2.2 Law of Demand ... 11
2.2.3 Economic Sanctions ... 11
2.2.3.1 The Triadic Sanctions ... 11
3 Methodology ... 12
3.1 Qualitative data ... 12
3.2 Quantitative data ... 14
4 Global Oil Market ... 15
4.1 OPEC ... 15
4.1.1 OPEC Production ... 17
4.2 US and the Shale Oil Revolution ... 19
4.3 Oil Reserves ... 22
4.3.1 International Oil Companies and National Oil Companies ... 22
4.4 Sanctions Against Libya ... 24
4.5 Iran ... 27
4.5.1 Sanctions Against Iran ... 27
4.5.2 Iran’s Oil Reserves and Stockpiled Inventory ... 29
4.5.3 Iran Oil Production and Export – A Roller-Coaster Ride ... 30
4.5.4 Foreign Investment in Iran’s Oil Fields ... 34
4.6 Global Market Outlook ... 36
5 Results ... 38
5.1 Qualitative Data ... 38
5.1.1 Key Factors Determining the Current Oil Market... 38
5.1.2 Iran Potential Influence and the Importance of Foreign Investment ... 39
5.1.3 Long Term Outlook – Iranian Oil Perspective ... 41
6 Analysis ... 43
6.1 Key Factors Determining the Current Oil Market... 43
6.2 Iran Potential Influence and the Importance of Foreign Investment ... 44
6.3 Long term Outlook – Iranian Oil Perspective ... 45
7 Conclusion ... 47
7.1 Further Studies ... 48
8 Bibliography ... 49
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1 Introduction
Oil has been used by humans for thousands of years, and is today one of the world’s main energy resources [1]. Throughout the history, human development has led to a dependence on the availability of energy, whereas oil has become increasingly important. Despite the fact that oil has been debated for years, oil continues to be the most consumed commodity in the world[1]. The debate takes its starting point in the question about whether the crude oil in the near future will reach its absolute production peak and thus contribute to a decrease in production, which in turn would result in major effects on the global economy [2]. Today, oil is the world’s most traded commodity, and became the first commodity to trade more than $1 billion per day [3]. The industry is capital intensive with high fixed costs, and recent volatility in oil prices has had severe effects on the profitability of the industry, the resource holding nations and their belonging companies [4].
Various historical events have shown that oil has played a key role in power relations between different nations [5]. An example of this is when the US invaded Iraq in 2003, where one of the objectives of the invasion supposedly were related to securing Iraq’s oil fields and resources [6].
Alan Greenspan, former Chairman of the US Federal Reserve stated in 2007, “I am saddened that it is politically inconvenient to acknowledge what everyone knows: the Iraq war is largely about oil” [7]. Another example is when sanctions were imposed by the UN against Libya in 2011 and 2014. Libya was formerly governed under Muammar Gaddafi. The entire power at that time was under Gaddafi and Libya rapidly became one of the richest countries in Africa in terms of GDP [8]. This was largely thanks to the extensive oil resources that the country had in its power. During his time as leader, Gaddafi made many enemies, among them the US and Israel, due to heavy support to militant groups around the world [8]. The revolution led the Security Council of the UN to adopt a resolution in 2014 to condemn the Libyan illicit crude oil export [9]. Similarly to Libya, numerous governments and multinational entities have also imposed sanctions against Iran. These sanctions, imposed by the US and the EU to name a few, have focused on both Iran’s financial sector and its energy sector [10]. In both the Libyan and the Iranian cases of imposed sanctions, the economy of these countries have taken an extensive hit, and it clearly indicates how oil resources can be used as a tool of empowerment by other governments such as the US and EU.
1.1 Problem
As previously mentioned, sanctions against oil-rich countries such as Libya and Iran have had a huge impact on global oil markets. When these sanctions further on have been removed, there
8 has been a notable effect on the supply of oil in the market and the oil price itself. The main focus of this study is to see how this type of situation have and will affect the market based on the current sanctions against Iran. Iran is the world’s fourth largest holder of crude oil reserves as well as the second largest holder of natural gas reserves [10]. Despite the volume of these reserves, there has been a significantly large decline in Iran’s oil production in recent years, as well as slowing growth in natural gas production. The sanctions imposed against Iran have proven to have huge impact on the country’s energy sector, and have resulted in numerous events that in turn have led to the oil production declining [4]. Right now, discussions are ongoing about a possible easing of sanctions and as of July 30, 2015 a final decision will be made [11]. If a complete sanction removal is made, Iran will have access to supply an already over- supplied market and the oil they already have stockpiled will be available for export [12].
Therefore it is most interesting to analyze how this will affect the global oil market and also Iran’s ability to become a significant player in the market.
1.2 Purpose
The purpose of this study is to explore how a potential removal of sanctions against Iran’s oil export will affect the global oil market and its supply of oil. This study is conducted in order to better understand how an already over supplied market will be affected by the removal of Iran’s sanctions. We are hoping to identify any possible outcomes as a result of this. The study will be based on a qualitative analysis with quantitative data. The outcome of the qualitative analysis will be based on interviews conducted with bankers, professors, students and other personnel with a strong knowledge about the oil markets. The outcome of the quantitative data will be based on the major player in the oil market in terms of production and reserves but also how previous removals of oil embargos against resource holding nations such as Libya have affected the global oil market.
Based on the purpose of this study, the following questions were formulated:
- How will the potential removal of oil sanctions against Iran affect the supply on the global oil market?
- Will Iran be a large enough oil producer in order to be a significant long-term actor on the global oil markets?
9 1.3 Restriction
Oil is an extremely complex commodity. The study therefore focuses on players that we believe are more important and has the biggest influence on the supply of oil in terms of the relevant suppliers:
- OPEC - The US
Oil price volatility is subjected to many different factors and we have therefore decided to exclude the following factors in our thesis:
- US dollar exchange rate - Financial Markets
Various sanctions and oil embargos have been imposed on nations throughout history. However in this study we decided to focus on Libya only as they are a member of OPEC and with a production capacity almost similar to that of Iran.
1.4 Assumptions
In order for this study to be relevant we decided to include the following assumptions:
- US will keep producing oil no matter the outcome of sanctions - OPEC quota level will remain unchanged
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2 Theoretical Framework
2.1 Previous Studies
A study conducted in November 2008 by the two economists Dean DeRosa and Gary Clyde Hufbauer for the National Foreign Trade Council established that removing US sanctions against Iran alone is not sufficient in order to generate economic gains for the Iranian economy and developing its oil production. Iran would further need to implement policies that would attract foreign investment by IOC’s in Iran´s energy sector. For instance, it was observed in the study that even though sanctions were removed by the US against Libya in 2004, the lack of foreign investment hindered the production and expansion of Libya´s natural gas.
Another aspect covered in the study was how Venezuela managed to attract significant amount of investment at that time from IOC’s which through minority collaboration contracts with PDVSA (Venezuela’s national oil firm) lead to the development of Venezuela’s oil fields.
However, after 2005, through a mixture of higher taxes, legislation and new contractual agreements, the IOC presence diminished and the Venezuelan energy sector was nationalized.
This led to a decrease in Venezuelan oil production by approximately 2% in 2006 and 2007.
2.2 Market Theories
Given the complex nature of oil there is no economic theory that can determine the rationale behind the level of supply on the global oil market as well as the volatility in oil price movements.
Additionally, it is even harder to find a viable economic theory that truly reflects the span of this study. Therefore in order to get a better understanding of the production, supply and demand of oil, the economic theories we examined further were law of supply, the law of demand. These theories will serve as basis for our result and conclusion and help give a better interpretation of the analysis.
2.2.1 Law of Supply
The law of supply states that as prices increase producers and suppliers are more eager to sell their product because as the production increases so will the marginal costs of the producers.
Hence, suppliers are more willing the produce when they better can cover their costs [13].
11 2.2.2 Law of Demand
The law of demands states that, all else being equal, when the price of a product increase the demand for the product decrease and when the price of a product decreases the demand will increase. Therefore one can say that the correlation between price and demand is negative. [14]
2.2.3 Economic Sanctions
Economic sanctions are in short, trade barriers in the form of import and export restrictions which are used to modify other states / countries political choices. The theory of economic sanctions we looked closer at is Triadic Sanctions. [15]
2.2.3.1 The Triadic Sanctions
Triadic sanctions distinguishes itself from dyadic sanctions in the way that it is not only a sender and a receiver, the receiver of the sanctions does not have to be the target but can be a potential sender. [15] The sender can through triadic sanctions punish a third party, considered the target.
For instance, foreign companies and foreign investors doing business with Iran would be considered the receivers of the Iran Sanctions Act (ISA). This could in theory damage Iran’s economy even further as the US threatens to terminate business alliances with companies that continue to invest or trade with Iran. The triadic sanctions can create multilateral cooperation which in turn would enhance the effects of the sanctions. [15]
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3 Methodology
Not a lot of research has been done in this field before. An Iranian ease of sanction is something current without any books discussing the outcome on the effects on global oil markets. Therefore a lot of our research is based on interviews conducted with people of different background;
bankers, students and professors in order to get a better and a wider view on the development of the global oil markets. The other basis we included as part of our research was previous historical removal of sanctions that somehow has effect global oil markets. We have also conducted quantitative research based on oil related books, publications and studies conducted by BP and IEA. The qualitative method will be analysed and together with the quantitative sources studied in order to help answer the thesis and questionnaire.
3.1 Qualitative data
Because of the fact that the oil market is a complex phenomenon dependent on many factors, information from experts about the market is needed. Therefore we decided to collect our data thru semi-structured interviews with selected people that have proper knowledge about the macroeconomic aspects of the oil market. Semi structured interviews are often based on specific theme with some key question, but the number and order of questions may vary from interview to interview depending on how the interview turns out. [16]
The interviews conducted are a vital part of the analysis. The interview questions were sent out in advance to the candidates giving them a chance to prepare which we believe will increase the quality of the answer and hence our analysis. At the same time it would be easier for the candidates to understand what type of questions they will receive and not be put on the spot.
Ideally, all interviews would have been conducted face-to-face, however due to geographical differences; the majority of the interviews were conducted by phone and email. The standard of the question are set to the level of competence of the person being interviewed. Common for all the interviews are both fact and opinion based in order to get a wider and deeper analysis of our study. We want to analyse the differences and similarities of the answers in order to get a deeper understanding of the effects of sanction removal on global oil markets.
Common questions asked,
- In what way can Iran affect the global oil markets (in terms of supply, oil price)?
- How many barrels of oil will Iran be able to produce when sanctions are lifted?
13 - What is the status on the current oil fields of Iran? How long time will it take before Iran
can reach previous production levels?
- How do you believe OPEC quota will change if Iran starts producing more oil?
Below is the list of candidates interviewed:
Nick Lundvall
Holds an MSc in Business and Economics at Stockholm School of Economics, Stockholm Sweden. Former Investment Banking Analyst at Morgan Stanley, part of the Oil and Gas team.
Nick has been involved in several Oil and Gas M&A in Europe. He is currently an Associate within Growth Equities at General Atlantic.
Chris Glaas
Chris Glaas is a Managing Director at Morgan Stanley focusing on commodities trading.
Jawad Ghaderi
Holds an MSc in Political Science and Government at Copenhagen Business School, Copenhagen, Denmark. Jawad has during his studies researched and analysed political, social and economic issues in the Middle East. He has during his time as a student done significant research about Iran and the Strait of Hormuz. He currently works for the foreign ministry of Denmark at Riyadh, Saudi Arabia.
Per Jönsson
Per Jönsson is contributing editor at Utrikespolitiska Institutet focusing on Middle-Eastern conflicts, in particular Iran. Per holds a Bachelor in Modern History and Political Sciences.
Marcus Svedberg
Marcus Svedberg is Chief Economist at East Capital. He has significant knowledge about global macro and commodities outlook. Marcus was formerly Chief Analyst at Stockholm Institute of Transition Economics (SITE). He holds a MSc in Political Economy at London School of Economics.
14 Michael Hsueh
Michael Hsueh is a Vice President at Deutsche Bank focusing on the commodities market.
Michael holds a BSc from Stanford University and an MSc from Leonard N. Stern School of Business at New York University.
Because of the conversation and interviews held with the above listed candidate we were able to make our own analysis and further draw conclusions on how the removal on sanctions against Iran would affect the global oil market.
We wanted to interview the bankers Michael Hsuesh, Chris Glaas and Nick Lundvall as they are up to date with the current events of the oil market. They are familiar with the key drivers of the oil price and the supply oil. How do they think that market will react if Iran will be able to increase its production and hence, its export?
We wanted to interview Marcus Svedberg and Per Jönsson as they have a more general view of the political situation between the largest oil producers in the world. Per Jönsson is further an Iran relation expert and we believe that he has a different take on the current market outlook compared to the bankers. This in turn will give a wider aspect to our conclusion.
Jawad has studied Iran and Iran military for many years. We wanted to interview him because he is familiar with Iran strategy and means of how to become a global powerhouse with connections to the nuclear program Iran has built over the past decades.
3.2 Quantitative data
To get a clearer view of our result and the correlation between different factors that could have an impact on the oil market, we have collected historical and contemporary quantitative data about oil prices, production, exportation and reserves. These have been compiled in graphs and analyzed in order to understand the potential effects an ease of sanctions would have. We have collected the data from earlier studies, research, websites and databases.
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4 Global Oil Market
The global oil market is an ever-changing market that is extremely complex. It is sensitive to changes in price, supply and demand, new technologies to extract oil, political decisions, etc. In the following chapter the key market players are presented with a focus on their production and reserves historically, the oil market of Iran and Libya is further examined with regards to their sanctions. Table 1.0 shows the 15 largest market players in terms of reserves and production.
Table 1.0: 15 Largest Oil Reserve Holders and Producers by Country in 2013 (Million Barrels)
Country Reserves % of Total Production (bbr/day) % of Total
Venezuela 298 350 17,7% 2,6 3,0%
Saudi Arabia 265 850 15,8% 11,5 13,3%
Canada 174 318 10,3% 3,9 4,6%
Iran 157 000 9,3% 3,6 4,1%
Iraq 150 000 8,9% 3,1 3,6%
Kuwait 101 500 6,0% 3,1 3,6%
United Arab Emirates 97 800 5,8% 3,64 4,2%
Russia 93 028 5,5% 10,8 12,4%
Lybia 48 472 2,9% 1 1,1%
US 44 180 2,6% 10,0 11,5%
Nigeria 37 140 2,2% 2,32 2,7%
Kazakhstan 30 000 1,8% 1,8 2,1%
Qatar 25 063 1,5% 2 2,3%
China 18 084 1,1% 4,2 4,8%
Others 147 106 8,7% 23,14 26,7%
Total World 1 687 891 100,0% 86,8 100,0%
OPEC 1 214 233 71,9% 36,8 42,5%
Non-OPEC 241 896 20,3% 36,1 41,6%
Source: BP Statistical Review of World Energy 2014 [17]
4.1 OPEC
The Organization of Petroleum Exporting Countries (OPEC) was founded in 1960 by Iraq, Iran, Saudi Arabia, Venezuela and Kuwait [4] [18]. The cartel has since then expanded and currently consists of 12 member states [19]. Initially, OPEC struggled to dictate their terms, especially the
16 supply of oil since they were not in charge of their own production fields [18]. In the beginning of the 1970’s, oil prices were extremely low, close to 10$/barrel and at the same time International Oil Companies, IOC’s, (Exxon, BP, Shell, Chevron to name a few) had production policies that gave the resource holding countries minimal returns [4]. This in turn led to a re- nationalization of the member states oil assets with Libya taking the lead in 1971 plundering BP.
Table 1.1 shows which year each member state nationalized their oil production.
Table 1.1: Which Year Did They Nationalize? OPEC Reclaim Assets
Country Year Companies Plundered
Kuwait 1977 Tecaco, Chevron
Libya 1971 BP, Occidental
Iraq 1972 Exxon, BP, Shell
Iran 1973 BP
UAE 1973 BP, Total, Shell
Nigeria 1974 BP
Saudi Arabia 1976 Texaco, Chevron, Exxon, Mobil
Venezuela 1975
Qatar 1977 Shell
Source: Deutsche Bank [4]
Today, OPEC is considered to have the most influence on the supply of oil in the global oil markets with approximately 42% of the world’s production [17]. Given the amount of oil reserves the member states hold, c.1214 billion barrels, they account for 72% of the world’s total reserves [17]. Hence OPEC has a significant impact on the pricing of crude oil.
According to OPEC’s Statue their mission is formulated as the following [20]:
“To coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry”.
Since the founding of OPEC, the organization has been successful in dictating the terms of the production volume related to each of their member states, maintaining the cartels collectivity and efficiency [21].
17 4.1.1 OPEC Production
OPEC and its member countries produce approximately 42% of the world’s production as previously mentioned. Through its total production OPEC tries to maintain a target price on oil [22]. In order to decide at what level production should be and if the market is over or under supplied, OPEC considers the stockpiled storages, future demand and the current oil price during their meetings [22] [4]. Figure 1.0 below shows the average million amounts of barrels per day that were produced by OPEC in relation to the rest of the world. Between the years 2000 and 2013 OPEC maintained a production level of over 41% of the total oil production. However in 2014 and the first quarter of 2015, OPEC has seen its market share decrease to approximately 39%.
Source: BP Statistical Review of World Energy 2014 and U.S. Energy Information Administration [17] [23]
What is worth noticing is the fact that OPEC and its member states are the only ones not operating at full capacity whereas all the other resource holding countries in the world operate under maximum capacity [4]. Table 1.2 shows the latest data for OPEC crude production and its spare capacity in relation to March supply figures. As illustrated, the country with the highest spare capacity as a percentage of OPEC total spare capacity is Saudi Arabia with 64.2%, followed by Iran with 23.2%.
20%
25%
30%
35%
40%
45%
50%
55%
0 10 20 30 40 50 60 70
OPEC Rest of the World OPEC % of total
million barells/day
Figure 1.0: OPEC Crude Oil Production in Relation to Rest of the World
18 Table 1.2: OPEC Crude Production (Million Barrels/Day)
Country
Jan 2015
Supply Feb 2015
Supply Mar 2015 Supply
Sustainable Production Capacity
Spare Capacity vs Mar 2015
Supply
1Q15 Average
Crude Supply
Algeria 1,10 1,10 1,12 1,14 0,02 1,11
Angola 1,77 1,79 1,80 1,80 0,00 1,78
Ecuador 0,56 0,56 0,56 0,57 0,01 0,56
Iran 2,82 2,84 2,79 3,60 0,81 2,82
Iraq 3,44 3,32 3,67 3,73 0,06 3,48
Kuwait 2,80 2,80 2,80 2,82 0,02 2,80
Libya 0,34 0,29 0,48 0,50 0,02 0,37
Nigeria 1,87 1,83 1,79 1,92 0,13 1,83
Qatar 0,67 0,67 0,67 0,70 0,03 0,67
Saudi Arabia 9,69 9,71 10,10 12,34 2,24 9,84
UAE 2,84 2,84 2,84 2,90 0,06 2,84
Venezuela 2,40 2,38 2,40 2,49 0,09 2,39
Total OPEC 30,29 30,13 31,02 34,51 3,49 30,49
(excluding Iraq, Nigeria, Libya and Iran) 2,47
Source: International Energy Agency [22]
According to EIA, spare capacity is defined as [24]:
“The volume of production that can be brought on within 30 days and sustained for at least 90 days”
OPEC spare capacity can be seen as a powerful tool in order to establish balance on the market [4]. The idea behind spare capacity is that OPEC can help with the supply of oil if demand suddenly peaks or if there is a disruption in production by any of the other non-OPEC producers [22]. Saudi Arabia is the member state that has had the greatest share of the total OPEC spare capacity with an average of 1.5-2 million barrels per day over the last 10-15 years [22] [17]. Figure 1.1 shows the relation between OPECs spare capacity and WTI crude oil prices.
19 Source: U.S. Energy Information Administration [25]
As demonstrated, during 2003-2008, a period of which OPEC spare capacity was low and restricting its production capabilities, oil prices increased. This is because a strong increase in demand cannot be offset by the relatively low OPEC spare capacity and therefore oil prices include a higher risk premium [22] [25]. Because OPEC has such a large market share, significant oil price reactions can occur when events entailing actual or future potential oil supply losses take place [25].
Even though OPEC has managed to control production and maintain specific targeted prices, over the years, some member states have not always operated in line with targeted production capacity. An example of a similar event was when onshore parts of the Nigeria Delta were forced to close due to sabotage or the sanctions against Iran limiting its access to capital investments and the western oil market [22].
4.2 US and the Shale Oil Revolution
The US is today among the major players in the oil industry. Its beginning can be traced back in the 19th century with the discovery of several oil wells in the Californian region. From there, the oil industry had experienced a sharp growth in the US which led to oil becoming the dominant fuel in the 20th century and an integral part of the American economy [26].
In 2013, US were the third biggest producer of oil in the world, behind Russia and Saudi Arabia [17]. Figure 1.2 represents the total shares in oil production from the three top producers and the rest of the world.
0 20 40 60 80 100 120 140
0 1 2 3 4 5 6 7
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
OPEC Spare capacity WTI Crude Oil Price
Figure 1.1: OPEC Spare Production Capacity and WTI Crude Oil Prices
Spare capacity < 2,5 million barrels per forecast million barells/day
20 Figure 1.2: US Oil Production Market Share 2013 vs. Q1 2015
Source: BP Statistical Review of World Energy 2014 and U.S. Energy Information Administration [17] [23]
However, among the three countries, it is the US that has experienced the strongest growth in production during the last decade. From 2008 to 2013, the production went from 4.9 million barrels per day to 7.5 million barrels per day, representing over 53% growth over the 5-year period, setting new records in production since 1989 [27]. Since then, growth in oil production has been evolving at an even higher pace despite the recent events in the oil industry such as the sharp fall in oil prices due to a mismatch between supply and demand. By February 2015, oil production in the US reached 9.3 million barrels a day, the closest to its record high in 1970 of 10 million barrels a day [23]. Figure 1.3 represents the evolution of the US oil production from 1920 to 2015, with data gathered on a monthly basis.
Source: U.S. Energy Information Administration [23]
However, forecasts in the US oil production are highly debated and are projected to decrease in 2015 after a last increase in the second quarter of the same year reaching 13.65 million barrels a
0 2,000 4,000 6,000 8,000 10,000 12,000
Figure 1.3: U.S. Field Production of Crude Oil 13.1%
12.9%
10.8%
63.2%
10.4%
11.6%
15.5%
62.5%
Saudi Arabia
Russia
US
Rest of the world
2013 Q1 2015
thousand barrels/day
21 day [28]. Based on the Energy Information Administration, US oil production growth is forecasted at 530 000 barrels per day by the end of 2015 in order to meet the recently increasing demand.
Finally, due to the sharp growth experienced during the last years, studies have shown that in the short term, the US will become the biggest oil producer, overtaking Russia and Saudi Arabia [29].
Conversely to the growth experienced by the US the last couple of years, imports of oil and petroleum products have declined. As can be seen in figure 1.4, since 2008, the country has been less reliant on imports due to higher national production, which explains the fall from 400 million barrels per year to 252 million barrels per year [23].
Source: U.S. Energy Information Administration [23]
There are today several means for oil extraction. Among these is the shale oil, which is the name given to the oil obtained through the process of heating an oil shale, a sedimentary rock rich in organic material called kerogen. Shale oil production is considered today as a high potential energy that could revolutionize the world’s energy markets over the next decades and could reshape the global economy [30]. Shale oil could lead to lower oil prices, higher global GDP, increase energy security and many others things.
In the US, shale oil production has been growing from 111 000 barrels per day in 2004 to over 550 000 barrels in 2011, representing an increase of 26% per year [30]. Estimates suggest that the growth in the shale oil production will continue at a slower pace reaching 1.2 million barrels per day by 2035 [31].
50,0000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 500,000
Figure 1.4: U.S. Imports of Crude Oil and Petroleum Products thousand barrels/day
22 4.3 Oil Reserves
Oil reserves have constantly been debated and peak theories have been discussed. When will we run out of oil? Who sits on the majority of the reserves? Some dictate that the oil reserves will decrease over time whilst others new methods used for exploration of oil such as shale oil production, will stabilize the amount of reserves produces even in the future [21]. Figure 1.5 shows the distribution between oil reserves in the world from 1993 to 2013.
Source: BP Statistical Review of World Energy 2014 [17]
As shown, Middle East has had the majority of the oil reserves, up to 63.6% dating back to 1993.
However, new discoveries are constantly made and therefore the distributions of reserves are forever changing.
4.3.1 International Oil Companies and National Oil Companies
IOC (International Oil Company) mainly consists of Western listed oil companies, for example BP, Exxon, Shell among others [4]. NOC (National Oil Company) refers to oil companies that are majority or fully owned by the government, such as Saudi Arabia’s Aramco, Iran’s NIOC and Kuwait’s KOC [4]. The history of the IOC’s date back over 100 years. They have helped shape our societies and influenced geopolitics, GDP growth, antitrust laws to name a few. NOC’s on the other hand have emerged from nations having their own large reserves however before they were nationalized they were controlled by IOC’s dating back to before World War II [4]. OPEC was founded as basis of the consortiums that was created by the western IOC companies [19].
For example, Saudi Aramco can be called a subsidiary of Chevron whom controlled the majority of production back in 1933 [4]. Today they are the world’s largest oil company, with production Figure 1.5: Distribution of proved oil reserves in 1993, 2003 and 2013
23 capacity of c.12 million barrles/day and oil reserves of roughly 313 billion boe [4]. In terms of oil reserves, there is a significant difference between the two. Looking at figure 1.6 one can clearly see how the reserve distribution across world’s largest IOC’s and NOC’s is in favor for resource holding nations such as Middle Eastern countries, Russia and Venezuela.
Source: Deutsche Bank [4]
The study was conducted in 2010 and Deutsche Bank estimated that NIOC (The National Iran Oil Company) would be the largest oil and gas reserve holder in 2012. Translating this into reserve life, looking at figure 1.7 the NOCs clearly have a much longer anticipated reserve life of oil and gas.
Source: Deutsche Bank [4]
0 50 100 150 200 250 300 350 400
NIOC PDVSA Saudi Aramco Qatar Iraq NOC ADNOC KPC Gazprom Exxon Shell BP Chevron Total ENI Petrochina Rosneft Petrobras Statoil Lukoil Sonatrach
Figure 1.6: IOC and NOC Oil and Gas Reserves End 2012E
0 50 100 150 200 250 300 350 400 450 500
PDVSA Iraq NOC Qatar NIOC ADNOC KPC Saudi Aramco Shell ENI Exxon Chevron BP Total Statoil Gazprom Rosneft Petrobras Lukoil Sonatrach Petrochina
Figure 1.7: IOC and NOC Oil and Gas Reserves End 2012E billion boe
billion boe
24 PDVSA, the Venezuelan national oil company almost has 10 times amount of reserve life in comparison to Shell, the largest IOC reserve holder. The demand for oil has for the past decade been steady and is believed to increase annually by 1.2% on average until 2025 reaching 105 million barrels/day [31]. For as long as the supply of oil is moving in line with the demand and there is no shortage of production the industry, power between NOC’s and IOC’s are fairly balanced. However, shortage of oil globally would clearly see the NOC’s favoring by this having the majority of the reserves [4].
4.4 Sanctions Against Libya
Part of OPEC since 1962, Libya has been a major player in the oil industry, with the largest amount of proved crude oil reserves in Africa, and the ninth largest globally. The economy of the country is highly dependent on the production of oil and natural gas, which accounted for nearly 96% of the total government revenue [32]. However, within the last few years, Libya experienced some turning points starting in 2011 with the Arab Spring which was followed up with widespread protests in 2013.
The Arab Spring, name given to the uprising popular rebellion movements, had a significant impact on Libya, and in particular, on Libya’s oil industry. In addition to the Saudi Arabian peninsula, the Arab Spring swept into Northern Africa, which led to a bloody civil war in Libya between loyalists and rebels across the country. The civil war caused the disruption in production and exportation of oil and gas which the country is highly dependent on [33]. Such a disruption was due to an oil and gas embargo the European Union used on Libya in order to press for a solution to the crisis in the country [34]. The sanction led to an asset freeze on all the country’s energy companies.
Prior to the civil war in 2011, the country was producing 1.65 million barrels of oil each day, and its production had increased for most of the previous decade, from 1.4 million barrels per day in 2000 to 1.74 million barrels per day in 2008. Since then, oil production in Libya was held at a constant level. Exports also had experienced a continuous increase from 2002, from 983 000 barrels per day, to 1.4 million barrels per day in 2010. Nevertheless, during civil war, production and exports in Libya fell to almost zero due to the embargo set by the EU and to foreign oil companies fleeing the country. These include the French Total, the Italian ENI, the Spanish Repsol and the American Occidental [35]. The fall in production/export and the escape of foreign companies had a severe and profound effect on the country’s economy and on the oil prices [32].
25 Regarding the country’s economy, the International Monetary Fund estimated that, following the civil war, the country had lost half of its total output due to the non-ability to produce and export oil and to the sharp fall in foreign direct investment (FDI) as shown in figure 1.8 [36].
Source: World Investment Report, KNOEMA [36]
Concerning the prices of oil, as the situation in Libya worsened, the prices became more volatile and started to rise significantly until reaching a high in April 2011 [37]. However, when Bin Laden was killed in May 2011, it marked a turning point in the Arab Spring and in the oil prices.
Indeed, the latest started to decrease until reaching a low in September 2011. Figure 1.9 represents the evolution in oil prices during the period September 2010 – January 2012 and Libya’s total production of oil during that time.
0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2012
Figure 1.8: FDI Inflows in Libya USD million
26 Source: Bloomberg and U.S. Energy Information Administration [32]
In late December 2011, after the civil war, sanctions from the EU were cancelled and foreign oil companies had return to Libya promising to return to pre-crisis level of production [35]. From there, the country announced that it would resume production and exportation of oil and gas.
Several investments were made at that time in order to restore ports that were dramatically damaged [32]. From there, the country has been able to catch up in terms of production and exportation, which significantly helped the country to get out of the period of crisis. Production of oil rose to 1.4 million barrels per day in only a few months, level close to the pre-war’s level of 1.65 million barrels per day [32]. Exports of oil followed the same path, and increased from 372 000 barrels per day in 2011 to over 1.4 million barrels per day in 2012.
However, two years after the outbreak of the civil war, Libya experienced another crisis in the oil sector. Even though this crisis wasn’t as severe as the previous one, it affected the oil industry in a negative way. The crisis was related to protests at major oil loading ports in central and eastern regions of the country, which caused a sharp deterioration of the security environment at oil facilities and the full or partial shut-in of oil fields linked to ports [32]. This led to a sharp decrease in oil production, from 1.4 million barrels a day in 2013, to 300 000 barrels a day in the beginning of 2014 [32]. In addition to the decrease in oil production, the country also experienced a fall in foreign direct investment as shown in figure 1.8 [36]. Due to a lack of data, information regarding exports of oil from Libya from year 2013 is not given. Figure 2.0 shows the total export of oil from Libya on a yearly basis from 1986 to 2012.
0 20 40 60 80 100 120
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15
Libya WTI Oil Price
Figure 1.9: Libya Crude Oil Production in Relation to WTI Oil Price million barrels/day
27 Source: U.S. Energy Information Administration [32]
4.5 Iran
4.5.1 Sanctions Against Iran
Iran is a signatory to the Nuclear Non-Proliferation Treaty (NPT), which prohibits the country from developing or acquiring nuclear weapons and requires International Atomic Energy Agency safeguards on any program claimed to be non-defense nuclear program [38]. However, in 2003, violations of the treaty were reported, which led to sanctions imposed to Iran from the UN, the EU and the US. From there, the country was imposed to increasing sanctions with broader scope in an effort to hinder Iran’s overall economy. Indeed, the new sanctions were targeting entities such as banks, transport and energy companies [38]. Such sanctions largely meant freezing the assets of the entities and prohibiting all transactions with them. Thus, it is understandable that these sanctions had significant impacts on the country’s economy.
Regarding the financial/banking sector, the US was the first to persuade foreign banks to cease dealing with Iran by attempting to convince them that the country was using the international financial system to fund terrorist groups and acquire weapons [39]. The US efforts were fruitful as it managed to convince the EU and other countries to cease dealing with Iran. Thus, a total of 80 foreign banks had decided to cut all activities with Iran. In parallel to the sanctions imposed on Iran, the US also imposed sanctions to foreign banks that were dealing with Iran although they agreed not to [39].
0 200 400 600 800 1,000 1,200 1,400 1,600
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Figure 2.0: Exports of Crude Oil From Libya thousand barrels/day
28 In parallel to the financial sector, sanctions were imposed on the all trading and investment with Iran. Indeed, this major sanction, set in 1995 and strengthened up in 2010, was a ban on US trade with and investment in Iran. The ban was related to several products/goods. Among these were the oil transactions, which prevented any trading of Iranian oil. EU countries quickly followed the ban in 2012 when no EU refineries were reported to have imported Iranian oil [39].
Furthermore, the ban also targeted transshipment and brokering. All transshipment of goods across Iran and any activities by US persons to broker commercial transactions involving Iran were banned. Similarly, the EU banned Iran Air Cargo from accessing to EU airports. However, there were certain products that were allowed to be traded with Iran, such as food and medical products.
Another major sanction was imposed on the energy sector in Iran, called the Iran Sanctions Act (ISA). The intent of such sanctions was to put pressure on Iran’s economy and to deny Iran the financial resources to further its nuclear programs [39]. This sanction included a ban of investing more than $20 million in one year in Iran’s energy sector, a restriction in sales of gasoline and related fuels of $1 million, a ban of selling any piece of equipment or service to Iran which could help the country make or import gasoline and all purchases of oil or other petroleum products from Iran were forbidden as well.
All of these sanctions have contributed to the country’s acceptance of restriction on expanding its nuclear program in exchange of sanctions relief, called the Joint Plan of Action (JPA). Under the JPA, Iran agreed to scale back some of its nuclear activities in exchange for some sanction relief [10]. The plan was first supposed to last six months, but the countries involved decided to extend it due to tough negotiations. The objective of the plan is to insure that Iran’s nuclear program is peaceful.
However, although the JPA has led to a certain relief in Iran, the sanctions previously presented have taken a toll on Iran’s economy. Indeed, regarding the growth of the country, Iran experienced for the first time in two decades a contraction in GDP of 5% in 2013 and a rise in unemployment reaching a 20% [38]. Relative to the oil industry, the JPA had a negative impact on oil exports and production, which severely impacted the country. Oil exports fell by 60%
from 2.5 million barrels per day in 2011 to 1.1 million barrels per day in 2013 [10]. Oil production crumbled to 3.2 million barrels per day in 2013, of which 2.8 million barrels per day of crude oil, whereas, in 2011, total oil production was around 4.2 million barrels per day, 1
29 million barrels per day more than in 2013 [10]. The country’s currency also experienced a significant depreciation. On the unofficial market, the rial dropped by 56% [39]. Such a drop led to a jump in inflation during 2011-2013, which was evaluated at approximately 45% in 2013 [39].
The sanctions relief of the JPA enabled to restrain the inflation down to 30%.
4.5.2 Iran’s Oil Reserves and Stockpiled Inventory
As mentioned previously, Iran is the world’s fourth largest reserve holder of oil, with an estimated 157 billion barrels as of January 2015 [40] which represents almost 10% of the world’s oil reserves and 13% of OPEC proved oil reserves [41]. Figure 2.1 is a map that demonstrates the geology of Iran oil fields.
Source: Deutsche Bank [4]
The two regions of which Iran has most of its oil production and reserves located are the Arabian and Zagros Basin and together hold over 90% of the proven reserves [4]. Only 30% of Iran reserves are located offshore whilst the majority, over 70% is explored on onshore fields.
Figure 2.1: Iranian Oil Fields
