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Iran Tempers Expectations on Oil’s Return to Global Markets

First oil-export deal could be nine months away, Iranian official says

Iran sanctions
Iranian workers walk at a unit of South Pars Gas field in Asalouyeh Seaport, north of the Persian Gulf, on Nov. 19, 2015. PHOTO: REUTERS

Iran’s full re-entry into the global oil market could take months following the lifting of Western sanctions this weekend, one of the country’s top oil officials said Sunday, signaling that ongoing limitations on banking could spell delays.

Iranian officials said Sunday the country was preparing to increase production by 500,000 barrels a day. Some of that extra output could be sold immediately through existing contracts with China and other Asian countries. The volume of oil Iran could sell to its former buyers in Europe—where it was off limits for three years following the imposition of international sanctions—was unclear.

Rokneddin Javadi, chief of the state-owned National Iranian Oil Co., said it may take nine months before Iran signs its first new oil-export deal following the implementation of an agreement on its nuclear program.

Mr. Javadi said Iran still plans to boost its output by 1 million barrels a day but cautioned this could take time because of continued restrictions on its banks.

“Currently, we are studying problems faced by domestic banks to this end. Once they are resolved, production and overseas sales of crude will increase,” Mr. Javadi was quoted as saying by the oil ministry’s Shana news agency.

The global oil market has lost more than a fifth of its value since the beginning of the year, falling to lower than $29 a barrel for the first time in more than a decade, weighed down in part by the prospect of Iran’s returning oil exports. Oil traders have said market sentiment would rise and fall based on how quickly Iran could raise its oil production and move it to market.

Iran still faces a host of U.S. sanctions even after the lifting of those related to its nuclear program.

U.S. sanctions will continue to ban purchases of Iranian oil, prohibit weapons sales there, and bar any dealings with firms linked to the paramilitary group, the Iranian Revolutionary Guard Corps. Sanctions also stop the clearing of U.S.-dollar transactions, hampering Western investment in the Islamic Republic, as many European banks do significant business with the U.S. financial system.

Iran’s oil production fell by more than 1 million barrels a day after international sanctions were tightened in 2012. The country has the fourth-largest oil reserves in the world, but its oil sector has fallen behind rivals, like the U.S., where technology has unlocked oil once thought to be unreachable.

Amir Hossein Zamaninia, an Iranian deputy oil minister in charge of commerce and international affairs, said the production increase will be “managed…to minimize the negative impact” on oil prices. Iran is also considering bartering its oil for European goods and investing in refineries to lock in buyers.

Iran’s oil exports face a stiff challenge from other members of the Organization of the Petroleum Exporting Countries, especially Saudi Arabia. The Saudis abandoned their role of propping up prices with production cuts in favor of pumping as much as possible and making strategic price cuts in a fight for buyers across the world. Iran also faces new oil exports from the U.S. and a record level of output in Russia.

Over the longer term, Iran is trying to lure back Western oil companies such as Royal Dutch Shell PLC, Total SA and Eni SpA. Iran’s greater ambitions are to build its production capacity to 6 million barrels a day.

Oil company executives have said their appetite for returning to Iran will depend on the details of new contracts Tehran has produced for foreign energy firms to work there.

Before the imposition of sanctions, oil companies had problems with working conditions in Iran, which doesn’t allow firms to own the oil they pump, and had contracts with inflexible terms that some executives said led to steep losses.

The new contracts will be announced at a conference in London in February. Iranian officials have said the new arrangements will be more flexible about cost overruns—a key point for oil companies—and will give firms longer-lasting access to fields. But Western businesses remain circumspect, considering the formidable banking challenges, say executives and current and former American and European officials. Banks, such as BNP Paribas , have been hit with multi-billion-dollar fines for running afoul of U.S. sanctions. And these will continue to ban dealings with the Iranian Revolutionary Guard Corps that maintains wide connections to much of the country’s economy.

This will complicate the process of taking equipment to Iran, as many Iranian companies are controlled by the paramilitary force, said Nigel Kushner, chief executive of W Legal Ltd., a U.K. based law firm specializing in sanctions.

A U.S. prohibition on conducting dollar-based transactions is proving to be a hurdle, say officials at European major oil companies, who say they instead will have to do rely on Chinese banks or German financial institutions that don’t do much American business.

“I think the Iranians are going to find it a lot more difficult to re-create the financial links” with Western firms than they think, said Richard Nephew, a former top U.S. State Department negotiator with Iran, now at the Brookings Institution, a think tank.

The low oil price is another problem for Western businesses there, said Peter Harrell, a former U.S. State Department official who oversaw sanctions.

“Most major oil companies are looking to cut capital spending for the near term, not to increase capital spending over the next year or two,” Mr. Harrell said.

U.S. oil companies face hurdles when working in Iran. American citizens likely won’t be allowed to have business dealings with Iran and the use of U.S.-origin technology will be prohibited. Firms are studying how to set up foreign subsidiaries that comply with sanctions.

Ultimately, U.S. companies may sit out opportunities in Iran until the outcome of the U.S. presidential election is known, business officials said.

“The psychological impact of sanctions relief is the most important point of Implementation Day,” said Ali Vaez, senior Iran analyst at International Crisis Group. “The tangible impact will come with a lag.”

The EU’s climate and energy commissioner, Miguel Arias Cañete, said Sunday that European officials would travel to Iran in February for an assessment of the country’s energy capabilities, ahead of a “high-level political energy dialogue” about Iranian energy.

The European Commission says it believes that the 28-nation bloc could import between 25 billion and 35 billion cubic meters of gas a year from Iran by 2030, The Wall Street Journal reported in September.

“The Iran deal opens the door to a closer EU-Iran energy cooperation,” Mr. Cañete said.

The Original Write to Benoit Faucon at benoit.faucon@wsj.com and Laurence Norman atlaurence.norman@wsj.com