Iran faces energy crisis through sanctions

12 October 2010

As Iran gets ready to assume Opec presidency, the country is facing an energy crisis at home as economic sanctions stem the flow of much-needed foreign investment and skills

Key Iran oil fact

Iran’s reserves currently stand at 150.3 billion barrels, up from 137.6 billion barrels in 2009

Source: MEED

From next year, Iran will assume Opec presidency. It has been more than 10 years since Tehran held the post.

Iran is the second largest oil producer in the group, and was one of the first countries to push for the establishment of the cartel, along with Venezuela in 1949.

Barely a week after Iraq’s reserve increase, Iran raised its own estimated crude reserves figure to 150.3 billion barrels from 137.6 billion barrels in 2009. It is surpassed only by Saudi Arabia and Venezuela. As it takes on a leadership role within Opec, Iran risks being distracted by a series of problems facing its hydrocarbons sector, made worse by tougher international sanctions since June.

Falling oil production

Tehran is currently relying on an oil price of $69 a barrel to balance its budget, making it one of the members of Opec most vulnerable to a sudden drop in demand and prices.

Several projects in its upstream sector are experiencing significant delays, which could make it difficult for Iran to maintain its current production levels.

Oil Minister Masoud Mirkazemi denies that Iran’s increasing isolation and sanctions are affecting the country’s oil business. But he has warned the hydrocarbons sector requires investment worth $150-200bn over the next five to six years to arrest declining production rates. Iran risks becoming a net oil importer if output rates continue to fall.

Iran average daily crude oil production
YearThousand barrels a day
Source: Opec

Much of Iran’s production comes from mature fields, some of which have been producing since the 1950s or longer. The country is forced to use enhanced oil recovery (EOR) techniques to arrest decline, as well as to develop new discoveries.

Samuel Cizsuk, Middle East analyst at US-based IHS Global Insight, says conservative estimates suggest Iran needs to replace at least 300,000 barrels a day (b/d) of oil production capacity a year as its fields mature.

So far, Tehran has managed to do this, maintaining average production capacity above 3.5 million b/d for much of the past decade and more than 4 million b/d since 2003. Opec quotas currently limit production to 3.6 million b/d.

Nonetheless, output is far lower than it was 30 years ago. The country produced more than 5 million b/d on the eve of the Islamic Revolution in 1979. Since then production has declined through a combination of war and sanctions.

Against the backdrop of rising domestic demand and lack of foreign investors due to increasing international isolation, reviving production to 5 million b/d again will be difficult to achieve in the medium term. 

Iran is struggling with a shortage of project finance, technology and skilled personnel. It is focusing on fewer projects and prioritising exploiting oil and gas fields owned jointly with its neighbours Iraq, Kuwait and Oman.

According to the Iranian parliament’s energy committee chairman, Hamid-Reza Katouzian, inadequate investment and poor decisions are hampering the development of Iran’s joint oil fields. Katouzian warned in May the lack of progress will cause the country serious problems in future.

Foreign support for Iran oil projects

Sinopec is partnering with National Iranian Oil Company to develop the Yadavaran oil field in the Khouzestan province, close to the Iraqi border. The Chinese state-run oil and gas firm, agreed in 2004 to take the lead in developing the field with a 51 per cent stake. Phase one is expected to produce around 85,000 b/d and phase two 185,000 b/d.

Progress has been slow. A number of sources in Iran are now concerned Sinopec is looking to exit the project.

Project management consultancy and engineering, procurement and construction contracts for the early production facilities were due to be awarded in June.

Bidders are still waiting for news from Sinopec, which has yet to drill its first well at the field. If Sinopec leaves the project, it will be a crushing blow for Iran. As Western oil majors turn their back on the Islamic republic, Tehran has staked its hopes on China taking on an increasing share of its oil and gas development.

Without the support of the West and China, Iran position as an influential player in the world’s oil markets would be under threat. Such concerns will on Mirkazemi’s mind as he takes up Opec presidency in January.

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