March 17, 2015

By Richard Nephew


There has been considerable speculation over the past several months (but particularly in the past week) over when a deal presently under negotiation with Iran could result in new oil supply hitting the market. Much of the analysis that has gone into this guesswork is based on a single important factor, such as:

 - whether a deal will be reached soon;

 - what is the state of the Iranian oil fields and production capability; or

 - will oil prices be such that Iranian production remains static.

The reality is that all of these factors will play a part in Iran bringing on additional production and that Iran’s decision and ability to do so will be the result of a complex, multivariable set of circumstances that are impossible to predict with any fidelity now.  The bottomline is that even if a deal is struck by the end of June, it is unlikely that global oil markets would see new crude from Iran for at least six months as implementation begin, and potentially later than that.

Key issues

Key issues that will be involved in what happens include:

  1. Whether a deal will be reached at all (or kept alive if reached).

As a senior US Administration official said yesterday, “Iran still has to make some very tough and necessary choices to address the significant concerns that remain about its nuclear program”[1] and it is not inevitable that a deal will be reached between the P5+1 and Iran. There are fundamental decisions still to be made in each capital about the nature of the deal being sculpted and whether it is sufficient for each government’s needs. It would be folly to assume that these negotiations will automatically result in a deal or that, if a deal is reached, it will automatically be implemented. International diplomatic history is strewn with the wreckage of deals not reached or consummated because of one problem or another. In a negotiation as complex and difficult as this one, there is still probably a better than even chance that 2015 ends without a deal in place, as unfortunate as that would be for all parties.

  1. The nature of the nuclear deal between the P5+1 and Iran.

Most discussion to date has focused on the idea of reaching a comprehensive solution between the P5+1 and Iran. And, indeed, that is the stated objective of the participants in the talks. This is for good reason: coming up with a “second step” arrangement to bridge the gap between the Joint Plan of Action (JPOA) and a comprehensive agreement would be difficult in the extreme. Parties would have to be able to accept something less than comprehensive resolution of their concerns – the nuclear program for the P5+1 and sanctions relief for Iran – in order to keep the process going. However, negotiators could elect to conclude for a good “second step” arrangement if they find a comprehensive solution is still not achievable. A “second step” option would keep the process alive, build confidence among the parties that an agreement reached would be implemented, and generally help to address the decades’ worth of mistrust that has built up between the sides, much as the JPOA has itself done. In such an arrangement, it is possible that oil sales would not be included, as they are a key element of the sanctions regime. But, either way, if a “second step” were to be pursued, as some outside commentators have suggested, then it is very likely that Iran’s oil sales would be restricted or limited in some fashion.

And, of course, there is the issue of what types of oil-related sanctions are going to be part of the deal. If all various aspects of the secondary application of US oil sanctions (meaning those beyond the US national embargo) are to be relieved, then it is relatively easy to judge how sanctions relief can operate. The issue becomes one of sequencing (see below). If, on the other hand, some aspects of sanctions will be retained for the duration of a deal, then it is much more difficult to guess – at this juncture – as to how oil relief will be structured and what parts of it may come first (e.g., will oil export limits be eased before or after financial restraints; will export limits be relaxed or eliminated altogether; will purchasers be limited to the current six customers or will other purchasers be able to get into the mix).

  1. The specific sequencing steps agreed to between the P5+1 and Iran.

Let us assume for a moment that a comprehensive agreement is struck between the sides. In no scenario imaginable will that agreement include a provision for “immediate” lifting of sanctions or “immediate” undertaking of nuclear steps. This is because, first, both sides are going to want to continue to see progress being made on implementation before they jump into the deep end of the pool and, second, because the steps to be undertaken will themselves take time.

This latter point is more important on the nuclear side than the sanctions side, which mostly involves issuing waivers, exemptions and the like. On the nuclear side, in a comprehensive agreement, Iran will have to do things. The precise nature of the things to be done will be a decision of the negotiators, but let us assume again for a moment that what is involved is the dismantling of centrifuges. This will take time. People will have to disconnect pipes, decontaminate machines, physically haul them out of tight, confined spaces, and then submit them to verification so that there is some accountancy of the centrifuges once dismantled. Let’s assume that an individual centrifuge takes 3 hours to dismantle (and I must stress that I am making up this number to prove a point: it could be 1 hour, it could be 10, depending on what’s done and how). Even a single cascade of 164 centrifuges would therefore take almost 500 hours to dismantle or 20 man-days of effort with 3 hours as the default assumption.

The point is that some things take time and the United States will be unwilling to suspend critical sanctions on the basis of a promise to act, if for no other reason than this would subject the agreement to even more scorn than is probably the default nowadays. And, if the United States does so peg implementation of its side of the bargain to specific nuclear steps being taken, then how long it takes and what is involved will be a critical aspect for when sanctions relief manifests, especially oil.

  1. How quickly Iran can increase production due to physical factors.

Taking aside the details of a deal, there is still the question about how much Iran could increase oil production and by when. Iranian oil minister Zanganeh said today that it would take “a few months” to boost production by 1 million barrels per day.[2]  However, prior to the imposition of oil-related sanctions at the start of 2012, Iran’s production was dropping due to exhaustion in the fields and lack of investment. Precisely how much damage Iran was experiencing remains speculative, but according to the Energy Information Administration (EIA), a combination of factors (field exhaustion, low recovery rates, sanctions, lack of investment) is limiting Iran’s production.[3] Even with sanctions removed, Iranian production will still be hampered by 3 of 4 of these factors, at least initially. 

  1. How quickly companies sign new contracts for investment in Iran and under what terms.

Of course, over time, companies are going to sign contracts to help Iran improve its oil production. Iran has made clear its intent to court international oil companies, including by drafting a new model contract that it intends to use in the future. The details of this contract have yet to be publically announced by Iran, but it is reasonable to argue that the terms will address some of the concerns oil companies had with the prior “buyback” arrangement in the 1990s, which itself was intended to deal with lack of investment stemming from Iran’s constitutional prohibition on anyone other than the government owning Iran’s oil resources.

Any company that decides to go back into Iran will have to first see this new contract, then decide if it is worth the headaches associated with a poor business operating environment in Iran and the risk that sanctions – which are to be suspended at some point in a deal and not revoked until later on – could be reimposed. Some companies will doubtless take this risk, but they’ll have to decide how much to risk and for what activities, mindful that the process of extracting themselves in the past was complicated, expensive, and difficult.

  1. How much oil the market is prepared to accept and degree to which Iran cares.

Of course, after nuclear diplomacy and contract terms, there is always economics: if oil prices are sufficiently low enough, even Iran will find it hard to increase production. There is not much good information available publicly on how much it costs Iran to produce a barrel of oil, but Reuters indicated in 2009 that Iran’s production costs were $10-15 per barrel.[4] CNBC quoted the same statistic in December 2014.[5] Assuming these figures are accurate, then it would take a significant price slump for additional production to be rendered not profitable in Iran. But, it is also possible that the costs of restoring Iran’s fields to prime operational capacity could push this cost higher. In any event, the price of oil probably will not undermine Iran’s desire to push additional production but it could limit how much and how fast.

  1. How quickly companies sign new contracts with Iran for supply and under what terms.

And, of course, there is the issue of whether Iran can find buyers for its oil. In a world without oversupply, this was relatively easy to answer. Today, the answer itself has as much to do with the political climate and risk that countries perceive in signing new contracts for new purchases of Iranian oil. The U.S.-led campaign to reduce Iranian oil sales was a complicated endeavor, creating difficulties for relationships between partners for the two years prior to the JPOA. While oil purchasing companies may be eager to restart normal purchases from Iran, their governments may be more reserved, at least in the short run, in the event that a deal does not mature. Moreover, the political risk signaled by the letter sent by 47 Senators to Iran about the future after 2017 undermines international confidence that a deal will be respected by Washington over its entire lifespan. Some purchasers may be hesitate to expose themselves to additional pressure in two years’ time; others will want to increase their purchase baseline so that a future reductions-based effort would start with higher numbers.


There are an almost bewildering array of options available to negotiators for designing a deal with Iran and how sanctions relief will be orchestrated. But, this array is dwarfed by the number of other complicating factors in how oil-related relief could take place in practice and with what practical effects it will manifest. Though many will be asked to place a bet on one option or another, the safest bet is to assume that: sanctions relief will probably take longer to manifest than optimists predict; oil-related sanctions are important and therefore will only be dealt to Iran in exchange for something very serious on the nuclear program; and, as eager to take advantage of the relief as Iran (and some international oil companies) may be, it will probably be more difficult to do so than Iran may hope.  Given all of this, it is reasonable to expect that new Iranian crude oil exports would not begin until at least the beginning of 2016, assuming a deal is struck at the end of June, and probably later than that.    


This views on this post are solely those of the author. It does not necessarily represent the views of the Center on Global Energy Policy.

[1] Gordan, M.R., “Iranian officials ask Kerry about Republicans’ letter,” The New York Times, 16 March 2015,

[2] Torbati, Yegenah,  “Iran nuclear deal may open oil taps in months, not weeks,” Reuters, March 17, 2015,

[3] US Energy Information Administration, “Iran country analysis,” July 22, 2013,

[4] Fuchs, M. et al, “FACTBOX—Oil production cost estimates by country,” Reuters, 28 July 2009,

[5] Gewirtz, J., “Another reason Iran doesn’t need low oil prices,” CNBC, 2 December 2014