Tougher times await oil producing countries as Iran hits market

For the first time since the nuclear deal with the West was implemented, Iran has exported a crude oil shipment to Europe, but, experts believed that the country’s coming into the market, would further affect the declining crude oil prices and increase the ever rising global glut.

IRNA News Agency quoted Deputy Oil Minister Rokneddin Javadi, as saying the shipment was the first in five years and marked “a new chapter” in Iran’s oil industry.

The International Atomic Energy Agency’s (IAEA) recently announced that Iran met its initial obligations under the terms of the nuclear deal, enabling the implementation of the agreement and lifting of the sanctions on Iran.

But analysts believed that the more oil Iran exports, the more likely prices will drop even more.

Reason is that Iran has relatively low production costs compared to other countries, but another slump in prices would put its plans at risk.

The international oil market has been suffering since the summer of 2014, losing more than two-thirds of its value. OPEC countries have flooded the market with a production ceiling of 30 million bpd – with no signs of cutbacks. Oil prices recently fell to $28 a barrel – a 13-year low.

Iran is aiming to increase output by close to 1.5 million barrels by the end of 2016, taking daily production to 4.2 million, Iran’s oil minister Bijan Zanganeh told CNN in an exclusive interview.

UBS analysts Giovanni Staunovo and Dominic Schnider stated: “The increase of Iranian oil production could not have come at a more unfavorable point in time with the oil market oversupplied amid renewed economic concerns (particularly related to China) darkening the outlook for oil demand growth.
“With market participants likely opting for the worst outcome, which would swell the global oversupply even further, lower prices are required to shut-in production from non-OPEC countries, particularly the U.S. These adjustments are likely to (contribute to) even more company defaults related to oil, as well as less investment spending across the oil sector.”

Meanwhile, more oil and gas companies are expected to succumb to stress in the sector, which will drive transactions in 2016, after global deal volume and value fell short of expectations in 2015, dropping by 33 per cent and 17 per cent respectively year-on-year.

According to Ernest and Young (EY’s) global oil and gas transactions review 2015 finds that deal volume was down in nearly all sub-sectors in 2015 compared to 2014, most notably in oilfield services (OFS), where deal activity decreased by almost 40 per cent from 320 to 193, and in upstream where deal volume dropped from 1,467 in 2014 to 910 in 2015, a 38 per cent decline.

The report made available to The Guardian on Monday, stated that in Africa, total transaction volume and values in Africa were at their lowest levels since 2010. Upstream deal value dropped by 33 per cent from 106 to 74. The total deal value dropped by 67 per cent from US$10.8 billion to $3.6 billion. Downstream deal saw an uptick in activity with six deals recorded compared to no recordings for 2014.
Claire Lawrie, Africa Energy Sector Lead at EY, says:

“The reduced upstream transaction activity was due to a number of factors, such as relatively high capex African projects being seen as less economically attractive in the low oil price environment; lower capital spend available to companies for deals or projects; large gaps between buyer and seller deal value expectations; lack of social and regulatory stability in some African countries; and traditional international investors focusing on their projects at home.”

“The six downstream transactions in Africa during 2015 were a marked increase from the prior year. These transactions were primarily in West and Southern Africa. Given the growing interest in the continent, we expect a moderate increase in downstream deal activity during 2016,” adds Lawrie.

Andy Brogan, EY Global Oil & Gas Transaction Advisory Services Leader, says:
“Declining crude prices coupled with an uncertain outlook challenged transactions in 2015. Now, with greater consensus around a ‘lower for longer’ outlook shrinking the valuation gap between buyers and sellers, we’ll likely see more deals come together this year.