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Iran supply problems add to fears of oil hitting $200 a barrel

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The Times
May 7, 2008

Iran supply problems add to fears of oil hitting $200 a barrel

The Iranian petroleum industry needs foreign investment and, despite the country’s vast oil and gas reserves, is struggling to maintain production levels, according to industry experts.

Although Iran is Opec’s second-largest exporter, production at the country’s leading oil and gasfields is believed to be falling by as much as 10 per cent annually because of a lack of investment and expertise.

David Kirsch, an oil analyst at PFC Energy in Washington, said: “It’s an ageing oil producer heading into plateauing production, with many fields in decline.

“The Ministry of Petroleum there has said it needs $9 billion [£4.6 billion] a year to invest in its upstream operations, yet the national Government allows it to retain only $3 billion. It is capital-starved.”

Oil prices hit a record $121 a barrel yesterday, after the release of a report by Goldman Sachs which said that a lack of new crude supply growth, combined with soaring global demand, could push oil prices as high as $200 a barrel as part of a “super-spike” over the next two years. Arjun Murti, a Goldman Sachs energy analyst, said in the report: “The possibility of $150 to $200 per barrel seems increasingly likely over the next six to twenty-four months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty.

“The core of our super-spike view has been that a lack of adequate supply growth coupled with price-insulated non-OECD demand growth [is forcing up prices],” he said.

Iran holds the world’s second-largest reserves of oil and natural gas. With Qatar, it shares the world’s largest gasfield, South Pars.

To maintain its present capacity of about four million barrels of crude oil per day — representing about 5 per cent of daily global output — Iran is pinning its hopes on the development of huge new fields and is in talks with big Western oil companies, including Shell and Total. However, those companies are under mounting political pressure from the United States to withdraw from those negotiations.

In the circumstances, Iran is being forced to rely increasingly on the National Iranian Oil Company, which has a reputation for poor project management. Shell said that it had not decided whether to proceed with an investment in the South Pars gasfield, despite a June deadline.

The production challenges in Iran reflect similar problems in countries including Russia, Venezuela, Nigeria and Mexico. Even Saudi Arabia, the world’s largest producer, recently lowered its long-held aim of boosting production to 15 million barrels per day to only 12.5 million.

In Iran, soaring domestic demand for oil and gas — which is growing at 8 per cent annually — has created a previously unthinkable situation, Mr Kirsch said. He said that if Iran could not resolve its production problems, it could become a net importer of oil and gas by 2015.

Most of Iran’s oil and gasfields are concentrated in the southwest of the country and along the Persian Gulf. A lack of export pipelines has led Iran to look towards liquefied natural gas, which can be exported on ships.

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