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Iran and Saudi Arabia to Increase Crude Oil Production in 2016

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Dec. 14 2015, Updated 9:20 a.m. ET

Iran crude oil production 

Iran’s Ministry of Petroleum reported that its oil sanctions might be removed by the first week of January 2015. The easing of sanctions would mean Iran could scale up crude oil production by 0.5 MMbpd (million barrels per day) to 1 MMbpd in the next six months to one year. Meanwhile, Iran produced 2.8 MMbpd of crude oil in November 2015.

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Iran’s peak production and crude oil reserves 

Iran’s production peaked at 5.5 (million barrels per day) during the late 1970s. However, war and lower investments in Iran led to a drop in Iran’s crude oil production. Since 2011, crude oil production in Iran has fallen due to Western oil sanctions. The OPEC (Organization of the Petroleum Exporting Countries) member nation has 10% of the global crude oil reserves and 13% of OPEC’s crude oil reserves. 

Why oil companies are investing in Iran

Companies like Royal Dutch Shell (RDS.A), Total (TOT), and Lukoil PJSC are interested in investing in Iran to scale up the country’s production. In fact, 137 companies, including BP (BP), Daewoo International Corporation, Statoil, and Schlumberger (SLB), participated in the two-day conference held by the Ministry of Petroleum on November 28, 2015. The conference highlighted the big incentives and long-term contracts for oil companies investing in Iran.

Companies investing in Iran have the advantage of the lowest break-even and production costs and a strategic location advantage. Iran has the lowest production cost at just $10–$15 per barrel. It also has the lowest break-even cost in OPEC and in the world. Iran’s strategic location allows it to transport vast amounts of crude oil.

Saudi Arabia is also among the countries with the lowest break-even and production costs. Record production from Saudi Arabia and Iran will be detrimental for US oil producers and global oil producers. The EIA (U.S. Energy Information Administration) estimates that when Iran scales up production, crude oil prices could fall by $5–$15 per barrel. ETFs like the Vanguard Energy ETF (VDE) and the iShares US Oil Equipment & Services ETF (IEZ) are affected by uncertainty in crude oil prices.

The crude oil rig count is an indicator of crude oil production. We’ll explore the rig count in the next part of this series.

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