As tensions between Iran and Israel near a tipping point, the potential consequences for global oil markets are profound.
An escalation could put nearly 1 million barrels per day (bpd) of Iranian oil production at risk.
In an escalation scenario, Iran could block the busy Strait of Hormuz trade route, disrupting up to 12 million barrels per day (bpd) of oil supply, amplifying the impact on crude markets worldwide.
Upstream activity in Iran and Israel has remained steadfast despite regional conflict following Hamas’ assault on Israel in October 2023.
Iran's production rose by 227,000 bpd to 3.27 million bpd in August year-on-year, while Israel’s gas output grew 15% in 2023 and is expected to rise by 5% this year, supported by the Karish field.
About $2 billion in greenfield investments is planned for various projects over the next two years.
However, the Karish and Katlan fields could be at risk if regional tensions escalate, potentially affecting future production and exports.
If the status quo is maintained, with no direct attacks between the two nations, we expect the conflict to remain largely a proxy war, with no major assaults on critical oil and gas infrastructure such as pipelines, storage facilities, or refineries.
However, the initial impact could be on the maritime border agreement between Israel and Lebanon, signed in October 2022.
This agreement defined each country's rights over the Karish and Qana fields, with Israel retaining full rights to Karish and Lebanon to Qana.
We anticipate that escalating tensions could lead to the nullification of this agreement, affecting Israel's production from the Karish field, which is currently used for domestic supply.
This disruption may also impact Israel's gas exports to Egypt and Jordan, which saw significant growth in 2023.
Any decline in production and exports from Karish could be offset by increased output from other major fields like Tamar and Leviathan.
Escalating tensions in the region could be troublesome for the operations in Israel of London-listed Energean, which operates the Karish and Karish North gas fields.
The fields hold about 88 billion cubic meters (Bcm) of cumulative proven and probable (2P) reserves and together form the independent’s core area of operation following the divestment of its Croatian, Italian, and Egyptian assets.
Furthermore, production from the Katlan fields (Athena and Zeus) is expected to start by 2027.
These fields are located near the Karish field near Lebanon’s maritime border, meaning any significant unrest could delay start-up.
Iran’s production has steadily risen over the past year, unaffected by the conflict.
Production at the end of last year jumped by about 122,000 bpd compared to mid-2023.
The uptick continued this year as production increased by about 227,000 bpd to 3.27 million bpd in August compared to same month last year.
Future production is expected to remain stable in the case of no direct attack.
To sustain this production in the longer run, significant investments will be required by National Iranian Oil Company (NIOC).
The company is already in a difficult position, carrying a debt of $85 billion with the Central Bank as of January this year.
Amid ongoing conflict, investments in the upstream sector remain uncertain, despite being critically important.
Should a war time scenario occur, we expect Iran and Israel to engage in an active war, with attacks on upstream facilities, pipelines, and storage units.
Following the 7 October 2023 Hamas attack on Israel and subsequent outbreak of conflict, there was a 7% decrease in Israel’s gas production for a short time as the Karish field was shut in, but no direct attacks were made.
Production from the Karish field is entirely supplied to Israel’s domestic markets, which paved the way for the Tamar and Leviathan fields to increase exports.
Any possible attacks on the Karish field could dampen exports from Tamar and Leviathan and leave the consortium partners short of their contractual obligations to supply gas to domestic and international customers.
Such attacks would also have far-reaching consequences for the wider Eastern Mediterranean region, with an impact on Jordan and Egypt (heavily dependent on Israel’s gas imports), both of which are already reeling under the effect of power blackouts.
Oil and gas players may postpone their development plans, leading to delays in the timeline of the upcoming fields, postponing expected investments of about $2 billion.
After the 7 October attack, UAE state giant ADNOC and UK major BP decided to suspend their offer to jointly buy a 50% stake in NewMed Energy.
We expect no further merger and acquisition announcements or investment activity in Israel in this scenario, until settlement of the conflict.
A full-blown conflict would be a big blow to the already beleaguered Iranian upstream sector.
Iran has been working hard to maintain pre-sanctions capacity levels.
With legacy oilfields declining at rates of 8% to 12%, Iran is heavily investing in brownfield projects to counteract these declines.
However, these investments alone are insufficient to restore pre-sanctions output levels, prompting the country to invest in new discoveries as well.
Ever since international oil companies left the country in 2018, Iran has been developing its oil and gas fields with the help of local contractors, which in many cases lack necessary funding and technology.
Iran began a contract awarding spree in 2019, followed by additional rounds in 2021, 2022, and 2024.
This year alone, over $13 billion in oilfield contracts has been awarded, excluding the $20 billion pressure enhancement project at South Pars.
Development work for the 2022 projects is either under way or has not commenced, while work for all the 2024 projects is yet to start.
Any attack on petroleum facilities would inevitably delay these projects, potentially putting nearly 400,000 bpd of future crude production at risk on top of the damage inflicted on existing facilities, which could wipe off an additional 1 million bpd of Iranian oil from the market.
This supply deficit could be comfortably met by the other Middle Eastern OPEC+ nations, as they currently hold surplus capacity of over 7 million bpd of crude oil.
Furthermore, should a full-frontal war take place, Iran could choke off the critical Strait of Hormuz, resulting in much greater damage to Middle Eastern nations’ export volumes, which is already lacking any alternative supply routes.
This would result in about 10 million to 12 million bpd of oil volumes being knocked off the market and could force Brent crude prices to shoot up drastically.
Oil-importing Asian nations such as China, India, Japan and South Korea would lose significant import volumes, as a major portion of exports from these Middle Eastern countries is directed to them.
These importing countries will be forced to seek alternative sources, potentially hampering supply chains, driving up costs and disrupting the energy supply chain.
Markets are increasingly concerned about such escalations, leading to a 10% surge in oil prices from the beginning of October to the $80-per-barrel mark this week, although prices have since fallen below $75 per barrel as concerns look to gradually ease and demand outlook weakens.
Brent crude prices may further be impacted amid recent reports of Saudi Arabia rolling back its voluntary OPEC cuts and a reduction in Libya’s oil production due to internal disturbances.
