"Energy expert Dr Mamdouh G Salameh says that, with the exception of Qatar and possibly Kuwait, most OPEC countries need oil prices above $100 a barrel to break even in their budgets. Here he puts the focus on Iran's inflated oil reserves, saying that Iran may actually need nuclear power to fuel its economy and also to remain an oil exporter in the coming years.

At a recent discourse organised by the Arab Center for Research and Policy Studies on the proposed Iranian nuclear agreement and its repercussions, one statement by Dr Mamdouh G Salameh, an international oil economist and consultant for the World Bank in Washington DC on oil and energy, drew everyone's attention.

He says that the lifting of sanctions on Iran as a consequence of the nuclear agreement will hardly affect the global oil prices or the oil market, particularly against a projected growth in global demand. Dr Salameh answers some of the most pertinent questions that the global energy industry is examining and he also predicts the oil price range.

He says, "A range of $100-$110/barrel is a suitable price for producers as it provides them with acceptable revenues enabling them to continue to invest in oil exploration and production and this is also good for the global economy, the oil industry and global investments."

He projects that the current low oil prices will start to rebound soon, reaching $65-$70/barrel by the second half of 2015 and "possibly recouping all their loses by 2016/2017."

Is it really true that Iran's oil status has been overstated? What would be the reason for this?

Iran claims to have proven reserves of 157 billion barrels (bb). While the Oil & Gas Journal (O&GJ) and the BP Statistical Review of World Energy seem to concur with Iran's declared reserve figure, a number of international experts have disputed it.

Whereas O&G and BP mainly rely on published "official" figures (which are usually bloated and highly political), two former National Iranian Oil Company (NIOC) experts, the late Dr Ali Samsa Bakhtiari and Dr Ali Muhammed Saidi, had estimated Iran's proven reserves between 36 bb and 37 bb, respectively. Dr Bakhtiari once went on record that Iran was running out of oil and its proven oil reserves were closer to 36 bb.

However, starting with a reserve base of 59 bb in 1985 (as reported by OPEC's Annual Statistical Bulletin 1989) and taking into account Iran's production of 36 bb during the period 1985-2014, and also allowing for the addition of 7 bb of recoverable reserves from the Azadegan oilfield, I have calculated Iran's actual proven reserves at no more than 30 bb.

Moreover, Iran is one of the top nine oil producers in the world whose oil production peaked. USA peaked in 1971, Canada in 1973, Iran in 1974, Indonesia in 1977, Russia in 1987, UK in 1999, Norway in 2001, Mexico in 2002 and Saudi Arabia in 2005.

If Iran's oil production would really cease by 2030 the need for the generation of nuclear energy is almost too vital for the country. How will it impact the Iranian energy scenario?

Oil is at the heart of Iran's nuclear programme. Iran needs nuclear energy to replace the crude oil and natural gas currently being used to generate electricity, thus allowing more oil and gas to be exported. Without nuclear power, Iran could be relegated to the ranks of small exporters by 2020 with catastrophic implications for its economy and also the price of oil.

In the furore about Iran's nuclear programme, one important fact is being overlooked. Iran's proven oil reserves have been greatly overstated to the extent that it may actually need nuclear power to fuel its economy and also to remain an oil exporter in the coming years.

From a peak production of 6 million barrels a day (mbd) and crude oil exports of 5.7 mbd in 1974, Iran in 2014 was struggling even to produce 3.15 mbd with net exports down to 1.00 mbd. And if the current trend continues, Iran could cease to remain an oil exporter by 2030.

The decline in Iran's oil exports over the last few years was not solely due to tighter sanctions but mainly due to fast-depleting old oilfields whose reservoirs were damaged in the 1970s when Iran was producing 6 mbd under the Shah. Since then Iran has never had the chance to repair its damaged oil industry, because of the war with Iraq from 1980 to 1988 followed by stringent sanctions because of its nuclear programme.

Given the problems in its oilfields, nuclear power may have an important role in restricting the consumption of hydrocarbons in Iran and allowing more oil and gas to be exported. In 2012, Iran used the equivalent of 610,000 barrels a day (b/d) of oil and natural gas to generate electricity. By 2015, Iran will need to use some 770,000 b/d of oil and gas for electricity generation.

Generating nuclear electricity will enable Iran to replace at least 93% of the oil and gas used in electricity generation in 2020, thus adding some 1.00 mbd to its oil and gas exports and earning an extra $36 billion. Based on these figures, Iran's quest for nuclear energy seems justifiable.

The nuclear deal with the 5+1 powers will not affect Iran's legitimate right to use nuclear power for peaceful purposes such as electricity generation. Therefore, it will not affect Iran's nuclear energy scenario. It will only try to stop Iran's nuclear weapons programme.

Will the lifting of the sanctions have any effect on Qatar's gas market if Iranian gas will then be used to supply most of the gas-deficient countries?

If a nuclear deal with Iran is struck, then all or a major part of sanctions against Iran would be expected to be lifted. This means that Iran could be able to import advanced American oil and gas technology, such as enhanced oil recovery (EOR), and to attract foreign investment.

While lifting the sanctions will hardly affect the global oil prices or the global oil market, it could enhance Iran's natural gas production since Iran sits on the second biggest proven gas reserves in the world. With technology and investments Iran could substantially raise its natural gas production and export a sizeable amount of it to Europe in the form of natural gas and LNG, thus competing directly with Russian gas supplies to Europe and with Qatar's LNG exports.

Why do you think the oil price has to go higher than what it is now? Some experts have even mentioned that we are at a non-inflated price for oil, which will be good for the country. Are we not increasing the cost of living by increasing oil prices?

The global economy can't reconcile itself with low oil prices for a long while because the main ingredients that make up the global economy, such as global investments, the world oil industry and the economies of the oil-producing countries, would be undermined. That is why the oil price has to go up.

The challenges facing the global economy in 2015 are manifold. One important challenge is a curtailment of global investments in many sectors of the global economy, particularly the oil and energy sector. The oil industry has already slashed $35 billion from its 2015 investments.

Another is sustained damage to the global oil industry. The seven major oil companies in the world - Royal Dutch Shell, BP, ExxonMobil, Chevron, Total, ENI and Statoil - need a price of $125-$135/barrel to balance their books.

Spending by oil companies on oil exploration and production has already dropped by 25%-30% in North America compared with 10-15% in the rest of the world. Also the number of rigs employed in US shale oil production has dropped by 687 rigs, or 43%, since October 2014.

The faster downturn in the North American industry is in part explained by the higher costs of US and Canadian production compared with oil from the Middle East. A break-even price for US shale oil production was estimated at $70-$85 per barrel. While some efficient shale oil drillers could live with an oil price of $50-60 a barrel, many of them are fracking themselves to bankruptcy.

The Arab oil producers have already lost $122 billion in reduced oil export revenues in 2014 and they are projected to lose $234 billion in 2015 if the price does not rise above $60/barrel.

While it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is offset by a curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands if not millions of people redundant.

At what price do you think that the oil will balance the fiscal budget in the OPEC countries? Which are the countries that will be most affected by the decrease in prices?

Most OPEC countries, with the exception of Qatar and possibly Kuwait, need oil prices above $100 a barrel to break even in their budgets and pay for all the government spending they have racked up in recent years.
Iran, for instance, needs an oil price of $130 a barrel to balance its budget while Saudi Arabia needs an oil price of $106/barrel in 2015 to fiscally break even, up from $98/barrel in 2014, according to the International Monetary Fund (IMF). The countries most affected by low oil prices are Saudi Arabia, Iran, Venezuela and Algeria.

"While it is true that low oil prices could reduce the cost of manufacturing, thus helping the global economy to grow, it is a short-term benefit as this is offset by a curtailment of global investment which forces companies around the world to cut spending, sell assets and make thousands, if not millions, of people redundant."

While none of the shale gas exporting countries can continue if the oil prices are reducing as the cost of shale production is much higher, why do you still feel that OPEC should reduce its output?
OPEC's ability to push prices lower to disrupt US shale oil production is constrained by members' higher fiscal break-evens.

While OPEC members need oil prices higher than $100/barrel to balance their budgets, US shale producers need prices of $70-$85/barrel to break even.

OPEC accounts for 42% of global oil production. It is the biggest single producer of oil in the world. OPEC has a moral responsibility to stabilise the oil prices in the global oil market and to defend oil prices in order to protect the oil revenues of its members and enable them to invest in oil production and exploration.
What are the chances that Qatar has to take in the scenarios? Does the country have to worry about oil price supremacy? Will this affect its gas exports too?

Qatar can withstand low oil prices better than all other OPEC members. Thanks to its great reserves of natural gas, it can balance its budget at an oil price even less than $60/barrel. Moreover, Qatar is the largest exporter of LNG in the world.

However, Qatar, like other Arab Gulf producers, is dependent on oil and gas export revenues to the tune of 90%. And like other Arab Gulf producers, it has not diversified its economy since the discovery of oil and gas in its territory. That is why Qatar, like its fellow oil and gas producers, is vulnerable to a decline in oil and gas prices.

Moreover, Qatar could face stiff competition in the coming years to its LNG exports from Iran once the sanctions are lifted. Still, Qatar is in a far better position to withstand declines in the oil and gas prices than other Arab Gulf producers.

Angola, Saudi Arabia and Iraq are potentially a lot more vulnerable to protracted low oil prices than Ecuador, Russia and Kuwait. Will this be detrimental to Saudi Arabia?

While Saudi Arabia, Iraq, Russia and Kuwait are affected by low oil prices to varying degrees, Saudi Arabia and Iraq are more vulnerable than Kuwait and Russia, which need an oil price of $75/barrel and $85/barrel, respectively, to balance their budgets.

Weakened oil prices have resulted in the US rating agency Standard & Poor's (S&P) downgrading its outlook for Saudi Arabia. "We view Saudi Arabia's economy as undiversified and vulnerable to a sharp and sustained decline in oil price," the S&P report says. A recent report indicated that the Saudi budget deficit will be far bigger than the $38 billion or 6% of GDP projected earlier.

What lessons does the volatility in oil prices show the Middle East countries and what, according to you, should be the perfect way forward?

With proven oil reserves of 645 bb, or 39% of the world's proven reserves, and a combined GDP exceeding $1.9 trillion at current prices, the Arab Gulf countries could be a formidable economic bloc. However, their Achilles heel is their continued dependence on oil export revenues to the tune of 85%-90%. They will always be very vulnerable to the volatility of the oil prices because they have not diversified their economies since the discovery of oil in their territories at the start of the 20th century.

However, the greatest threat to their oil-dependent economies actually comes from the steeply rising domestic oil consumption for power generation and water desalination and a lack of diversification.

To forestall such an eventuality, the Gulf countries not only have to accelerate the diversification of their economies and the transition to renewable and nuclear energy but also become smarter in their investment.

The diversification I am talking about is not industrialisation because the Gulf countries could never be able to compete with the top industrial nations in the world. Nor does it mean investing in hotels, casinos and real estate. It means investing in food production projects in the Sudan, for instance, and also in thriving and futuristic industries around the world.

The world is already heading towards a future food shortage on a global scale. Food prices could in the future rival, if not, exceed the prices of crude oil. Why not then invest in Sudan which has the land and the water resources not only to become the food basket of the GCC countries but also a great source of food export revenues for them.

Another aspect of diversification is intensive investment in renewable energy, particularly solar power, nuclear energy and water desalination technology. Solar power, along with nuclear energy, could provide all the electricity needs of the Gulf countries. Solar energy could also power an extensive network of water desalination plants along the Arab Gulf countries' coasts extending from the Arabian Gulf to the Arabian Sea and the Red Sea, not only for drinking but also for irrigation. Moreover, solar electricity could in the future be exported to Europe, earning a very sizeable income for the Gulf countries.

© Qatar Today 2015