A Colossal Energy Producer
As one of the founding members of the Organization of Petroleum Exporting Countries (OPEC), Iran has been a key player in the international energy market for the past 70 years. As shown in Figure 9.1, the country sits on some of the largest proven oil and gas reserves in the world and ranks among the world’s top five oil and natural gas producers. Furthermore, Iran controls the Strait of Hormuz on its southeastern coast that is seen as an important route for the world energy market. An estimated 17 million barrels per day of crude oil and oil products, almost 20 percent of the global output, is transported via the Strait of Hormuz.1 In addition to oil and gas, Iran enjoys a well-developed electricity industry by a power generation capacity of 67 gigawatts, ranked 14th in the world and 1st in the Middle East. Half of the electricity is generated by gas and combustion-based power plants while the rest is produced by hydroelectric power plants. The country enjoys a substantial aptitude in dam construction and has numerous hydroelectric projects under construction. Iran has acquired technical expertise in constructing hydraulic and gas turbines, hydroelectric, gas, and combined cycle power plants.2 In the recent years, the nation has signed multiple contracts on building power plants in neighboring states.3 Iran annually exports 5.5 terawatt-hours of electricity to neighboring countries including Afghanistan, Pakistan, Iraq, Turkey, Armenia, Azerbaijan, and Turkmenistan.4 At the same time, the country is investing in alternative energy producing projects such as solar, biomass, and wind power plants to boost its electricity generation capacity to 73 gigawatts per year. In 2004, Iran opened its first wind-powered and geothermal plants. The country is able to generate 6,500 megawatts of power from wind. Solar energy is particularly promising as the country enjoys about 300 clear sunny days a year and an average of 2,200 kilowatt-hour solar radiation per square meter.7 In 2012, Iran allocated $700 million to renewable energy projects.8 Electricity generation from other sources like tidal power, sewage, and organic waste of domestic and industrial origin has been under assessment.9 Iran has recoverable coal reserves of nearly 1.9 billion tons and produces about 1.3 million tons of coal annually.10 Currently, Iran is seeking to develop an advanced nuclear program that is allegedly for civilian and energy purposes. The nuclear program provides greater energy security and may allow the country to maximize its energy export earnings.11 For instance, the nation plans to generate 23,000 megawatt-hours of electricity through nuclear technology by 2025.12 A combination of oil, gas, solar, wind, hydroelectric, geothermal, and nuclear sources could turn Iran into a colossal energy exporter.
Figure 9.1 Largest proved reserve holders of crude oil, January 2014(billion barrels)
Energy Consumption
With a daily consumption of 1.75 million barrels, Iran is the second-largest oil-consuming country in the Middle East after Saudi Arabia.13 Indeed, Iran is recognized as one of the most energy intensive countries of the world with per capita energy consumption 15 times that of Japan and 10 times that of the European Union (EU). As a developing economy, Iran’s energy consumption has grown by more than 50 percent over the course of the past decade.14 The national average daily gasoline consumption hovers around 63.2 million liters. In 2010, Iran’s energy consumption was estimated at 212.5 million tons of oil equivalent.15 The consumption of electricity rose by 9.3 percent between 2010 and 2011 and it is expected to rise at about 6 percent per year for the next decade. The highest volumes of energy consumption are respectively related to residential, commercial, and industrial utilization. Oil and natural gas provide 98 percent of Iran’s total energy needs but other sources are consumed occasionally. It is estimated that 87 percent of urban population and more than 30 percent of rural population have access to natural gas.16 Energy prices are set well below the economic cost of supply and, for that reason, energy is inefficiently consumed across the country. Due to limited domestic oil refining capacity, Iran is dependent on imports of refined products, but the country’s dependence on imported gasoline has been diminishing in the past five years.17 According to estimates, the Iranian government paid $84 billion in subsidies for oil, gas, and electricity in 2008).18 The energy subsidies have led to an excessive consumption, increasing fuel imports, and severe air pollution in large cities.19 Thanks to government subsidies and relatively low energy prices, a lucrative cross-border industry of smuggling fuel has been developed. Fuel is being moved illegally out of the country through cities bordering Afghanistan, Pakistan, and Turkey.20 It is estimated that between 7 to 10 million liters of petrol and diesel are smuggled out every day.21 For the past 15 years, the Iranian government has been planning to manage the energy resources more efficiently and has made several attempts to reduce energy subsidies.22 More recently, international sanctions have particularly targeted fuel imports and have generated further momentum for the Iranian government to restrain energy consumption.
Oil Sector: Reserves and Production
As shown in Figure 9.1, Iran is estimated to possess 157 billion barrels of proved crude oil reserves, representing nearly 10 percent of the world’s crude oil reserves and 13 percent of reserves held by the OPEC.23 Iran was the second largest producer of OPEC in 2012 by an estimated production of four million barrels of crude oil per day. Most of Iran’s crude oil reserves (about 70 percent) are located onshore but some other reserves are located offshore in the Persian Gulf and the Caspian Sea. Iran shares many onshore and offshore oil fields with neighboring countries such as Azerbaijan, Turkmenistan, Iraq, Qatar, Kuwait, and Saudi Arabia.
Under the Pahlavi rule, oil production reached its highest level in the mid-1970s (6.0 million barrels per day), but it plummeted after the Islamic Revolution and the Iran–Iraq War (See Figure 9.2). In the post-war era, the oil output rose but never reached its peak of 1975. Despite the size of its oil reserves, Iran’s oil production has not increased due to multiple factors. The United States and the EU sanctions, geopolitical frictions, aging infrastructure, mismanagement, old technology, and lack of new investment are some major reasons explaining the low levels of Iranian oil production.24 In addition, the country output has been declining due to depletion of oil fields, which is estimated at 8 to 11 percent of annual production capacity.25 It is estimated that the oil sector share in GDP has decreased from 30 to 40 percent in the 1970s to 10 to 20 percent in the recent years.26 In 2012, a new round of sanctions imposed by the United States and the EU punitively targeted Iran’s oil exports and imports, banned investment in the country’s oil and gas sector and, more importantly, restricted Iran’s access to the European and American sources for financial transactions.27 Following the implementation of these harsh measures, Iran’s crude oil production fell significantly in 2013 and Iran dropped from being the second-largest crude producer in OPEC to the fourth after Saudi Arabia, Iraq, and the UAE.28 According to OPEC’s and other official sources, in 2013, Iran’s crude oil production was estimated between 2.7 to 3.7 million barrels per day that is 25 percent lower than the production level of 4.2 million barrels per day in 2011.29 It seems that the country’s production has increased again in 2014, changing Iran’s rank to the third-largest crude oil producer in OPEC.30 The Iranian government is optimistic about Iran’s potential to increase its oil output, predicting a production of 7.0 million barrels per day by 2024.31 Currently, the main export markets for Iranian oil include Japan, China, India, and South Korea.
Figure 9.2 Iran’s oil and natural gas production
Source : Energy Information Administration (EIA) (2007).
The oil industry is dominated by the State via the National Iranian Oil Company that suffers from grave technological and organizational inefficiencies. It is estimated that the cost of oil production in Iran is much higher than that of Saudi Arabia or other Persian Gulf states.32 Most of Iran’s oil reserves have been discovered before 1965 and the country has not had a new oil field enter into production since 2007.33 Some new developments have been reported during the past decade, but due to the economic sanctions, multinational companies have had very restricted activity in Iran’s energy sector. In the past 20 years, companies from China, Japan, France, Russia, Malaysia, and Norway have been present in the Iranian oil production.34 Iran has sought technical assistance and investment from many multinationals such as Switzerland’s energy company EGL (2006), Austria’s OMV (2007), Russia’s Gazprom (2008), and China National Offshore Oil Corporation (2008). Some of these deals have come under harsh criticism from the United States and have been considered as violations of the Iran Sanctions Act.35 China Petroleum & Chemical Corporation (Sinopec), Japan’s INPEX, Russia’s Gazprom, and Statoil are among some major players in developing Iran’s oil fields. The oil sector generally receives the bulk of domestic and foreign investment. The Iranian Constitution prohibits foreign firms from possessing equity in oil projects; therefore, the foreign companies’ involvement is through buy-back agreements under which the foreign companies become entitled to the oil or gas resulted from the development projects.
Natural Gas Sector: Reserves,
Development, and Production
With an estimated 17 percent of the world’s proven natural gas reserves and more than one-third of OPEC’s reserves, Iran has the second-largest proved natural gas resources in the world after Russia (See Figure 9.3).36 Most of Iranian gas fields such as South Pars, Kish, North Pars, Tabnak, Forouz, and Kangan are located offshore in the Persian Gulf. South Pars is the country’s largest gas field and accounts for almost 40 percent of the nation’s gas reserves. Part of the South Pars basin stretches to the water borders of Iran and Qatar. This immense field has a 24-phase development plan with an estimated cost of more than $100 billion.37 In addition to the gas fields in the Persian Gulf, Iran has significant natural gas reserves in the Caspian Sea. More recently, some new onshore and offshore reserves have been discovered; among them Khayyam, Forouz, Madar, and Sardar Jangal fields are of significant importance. Due to lack of territorial demarcation agreement among the Caspian Sea countries, exploration and production of northern fields could be very complex and litigious.
Figure 9.3 Largest proved reserve holders of natural gas, January 2014 (trillion cubic feet)
Source : Oil & Gas Journal.
Natural Gas Production
The history of gas production is much more recent in Iran and goes back to the 1980s. The natural gas is viewed as a viable substitute to oil that can diversify Iranian economy and generate substantial revenues. In line with this view, the government has been involved in developing new gas fields, building pipelines, and negotiating international agreements. For instance, Iranian government inaugurated a pipeline to Turkey in 2002 and has been negotiating similar projects with Pakistan, India, China, and Turkmenistan to export gas across Europe and Asia. In 2012, the country produced an estimated 8.2 trillion cubic feet of natural gas. According to these numbers, Iran was the third-largest gas producer after Russia and the United States, but it accounted for only 5 percent of the world gas output.38 Currently, most of Iran’s gas production is used for domestic consumption. The domestic consumption has increased to 5.5 trillion cubic feet in 2012. Furthermore, a large portion of the produced gas is injected into oil wells to boost oil recovery. Considering the high rate of oil reserves depletion, natural gas use for injection is expected to increase in the near future.39 Considering its abundant reserves, the country could become one of world’s leading natural gas exporters. Obviously, Iran’s gas sector has been held back by a combination of factors including three decades of turmoil after the Islamic Revolution, geopolitical tensions, international sanctions, war in the 1980s, political instability, lack of investment, and outdated technology. Iran’s natural gas production is expected to increase to 10.6 trillion cubic feet by 2020.
Natural Gas Imports and Exports
Despite its abundant gas reserves, Iran accounted for less than 1 percent of global natural gas trade in 2012.40 Since Iran does not have the necessary infrastructure, exported and imported gas go through pipelines. The country trades only insignificant amounts of natural gas via pipelines with neighboring Turkmenistan, Armenia, Azerbaijan, and Turkey. In 2012, Iran exported 326 billion cubic feet of natural gas to Turkey and imported 188 billion cubic feet from Turkmenistan and Azerbaijan. In return, Armenia exports electricity to Iran for the natural gas it receives. The imported gas from Turkmenistan helps Iran meet the domestic consumption especially during the winter. Armenia and Azerbaijan swap gas with Iran that account for 6 percent and 3 percent of Iran’s natural gas exports respectively.41 More than 90 percent of Iran’s exports go to Turkey. It is estimated that Turkey receives approximately 20 percent of its natural gas imports from Iran.42 As such, Iran is recognized as Turkey’s second largest source of natural gas imports after Russia. While Iran and Turkey enjoy the mutual benefits of gas trade, their business relations have not been always smooth and steady. At times, the flow of gas to Turkey has been disrupted by seasonal shortages during cold weather or technical and security-related problems. Similarly, Turkey has disputed the price and the quantity of imports.43 Furthermore, the gas pipelines have been subject to terrorist attacks and sabotage from the Kurdish rebels inside Turkey. According to the EIA, the average revenues from Iran’s natural gas exports between July 2011 and June 2012 were estimated at $10.5 million per day, which is about 5 percent of the country’s revenues from crude oil and condensate exports. According to the same estimates, in 2010 natural gas and crude oil accounted for 4 percent and 78 percent of Iran’s total export earnings, respectively.44 While Iran boasts of being the second largest proven gas reserves in the world, it is a net importer of natural gas.45 The country has been pursuing the construction of a liquefaction facility to export liquefied natural gas, but the U.S. and the EU-led sanctions have hampered the financing and the acquisition of necessary technology.46 Iran and Iraq have signed an agreement in 2013 to build regional gas pipelines transferring Iran’s gas to Western Iraq. The pipeline is under construction, but the progress has been stopped by security concerns and political turmoil in Iraq and Syria. Furthermore, Iran has signed similar agreements with Oman, Pakistan, and UAE to provide them natural gas. Among them the Iran–Pakistan pipeline cost is estimated at $1.5 billion and would allow Iran to export 21.5 million cubic meters of natural gas per day to Pakistan.47 Iran has built more than 900 kilometers of the pipeline on its soil and the next piece of the pipeline on the Pakistani side is expected to be completed by 2015.48 The Iran–Pakistan pipeline is of tremendous importance because through this pipeline Iran can access the Indian market. Iran aims at increasing its share of global gas exports to 16 percent by exporting around 230 million cubic meters per day by 2025.49 Different countries such as India, Bangladesh, and China, have all been invited to participate in the pipeline project, but the United States has warned Pakistan and India against cooperation with Iran. Moreover, Saudi Arabia has also offered an alternative package in which it would supply Pakistan with attractive loans and cheaper oil.50 As a result of the pressures from the United States, India withdrew from the project in 2009,51 but so far Pakistan has decided to resist the international pressure. According to the Turkish daily newspaper, Today’s Zaman, following the relative détente between Iran and the world powers, the Turkish government is gradually moving to reach an agreement with Iran to build the Iran–Turkey–Europe Natural Gas Pipeline Project to transfer natural gas sourced in Iran via Turkey to Europe.52
Potential for the Energy Sector
With an estimated 17 percent of the world’s proven natural gas reserves and approximately 10 percent of the world’s crude oil reserves, Iran is an energy-rich country. Nevertheless, the political stalemate with the United States and the West has hampered Iran to capitalize on its opportunities in the energy markets.53 Over 85 percent of Iranian natural gas reserves have not been developed yet, and despite its immense potential, Iran’s exports represent only 1 percent of the global gas trade. In addition to the political standoff with the West, the resolution of disputes with the Caspian Sea countries especially with Azerbaijan and Turkmenistan over maritime borders will have significant implications for the sector and may boost Iran’s oil and gas production levels. There is no commercial oil production in the Iranian part of the Caspian Sea yet and Iranian oil exploration in this area has started very recently. Due to territorial disputes, multinationals have stayed away from oil and gas exploration in the Caspian Sea. For instance, in 2001 the Iranian military forces blocked the exploration of the Alborz field in the Caspian Sea by a BP-led consortium.54 Iran’s gas production is supposed to grow substantially over the course of the next decade. There are signs that Iran is focusing on increasing the level of gas production for export purposes. More recently, after rising tensions between the EU and Russia over Ukraine, Iran has shown interest in supplying natural gas to Europe, which is very dependent on the Russian gas.55 Likewise, Iran’s oil fields have a natural decline rate estimated at 8 to 13 percent per year and constantly necessitate renovation to enhance oil recovery. According to the Iranian government’s evaluation, the country should invest about 300 billion dollars over eight years in the energy sector.56 To become a major energy exporter, Iran needs to resolve, or at least to reduce its current political tensions with the United States and EU and attract massive foreign investment in the energy sector. After three decades of political turmoil, international sanctions, and geopolitical isolation, Iran’s energy sector urgently needs development and modernization. If Iran can attract sufficient level of investment, it will become a major player in the energy markets by exporting natural gas to Asia and Europe. While any significant gas export to Europe could take up to 10 years, Iran may benefit from a mounting, and probably prolonged, geo-political frictions between Russia and the West. Further sanctions on Russia may lead Iran to improve its relations with the United States and Europe and thus become an alternative energy supplier. The EU has been seeking to diversify away from Russia and has often seen Iran’s natural resources as a possible alternative. At the time of this writing, Iran is negotiating its nuclear program and its relations with the West. In 2013, for the first time after the Islamic Revolution, the Iranian president had a direct phone conversation with his American counterpart. More recently, Iran and the United States along with other Western powers have been conducting intensive talks over a wide range of geopolitical matters and bilateral concerns. One may speculate that an agreement between Iran and the global powers over the controversial nuclear program will lead to opening doors to investment in the nation’s energy sector.