By David Wood and Michael J. Economides
Iran Stuck in Neutral: Energy Geopolitics Hinder Iran's Oil and Gas Industry's Development
Iran's Current Status in International Oil and Gas
Iran is stuck. That statement can be verified by noting one stunning fact: despite having the second-largest gas reserves on the planet – more than 900 trillion cubic feet – Iran is a net gas importer. Combine that situation with that of Iran's struggling oil industry (which now produces just two-thirds the oil that it did during the mid-1970s), along with a burgeoning population with a ravenous appetite for energy of every type, and it becomes clear that the Iranian government faces a myriad of challenges, all of which are made more difficult thanks to the ongoing economic sanctions imposed by a number of countries, headed by the United States.
Further, as this article will show, given Iran's ongoing energy struggles, it makes sense, both economically and from an energy point of view, for the country to be pursuing nuclear power. Why? Iran simply doesn't have enough gas production to increase its electricity production in the short term. It does, however, have a surfeit of uranium. In addition, even if it did have excess gas, it might still make sense for Iran to develop nuclear power since it might be able to generate electricity from nuclear more cheaply than from gas.
Given the political uproar over Iran's nuclear aspirations, ET decided to take a hard look at Iran's energy sector.
Aside from Iraq, with its decade of sanctions followed by an ongoing war, no other country in the world has faced more frustration in realizing its oil and gas potential than Iran. Iran enjoys a major share of the world's oil and gas resources in terms of proven reserves and potential resources. It is endowed with some 138 billion barrels of proven crude oil reserves (year-end 2005), equivalent to 11.5 percent of the world's total reserves, second only to Saudi Arabia (Figure 1). Iran's oil endowment has a reserves-to-production ratio (R/P) of 93 years. By comparison, much of the developed world holds R/P ratios on the order of 12 years.
Proved Oil Reserves <http://www.energytribune.com/live_images/cover_story_pie_1_dec.gif>
Iran also possesses 944 trillion cubic feet (tcf) of natural gas, which is second only to Russia in proven gas reserves (Figure 2). Iran's gas reserves have a R/P of more than 300 years.
Proved Gas Reserves <http://www.energytribune.com/live_images/cover_story_pie_2_dec.gif>
These impressive reserves figures underline Iran's enormous potential role in global oil and gas supply. Such figures should have put Iran at the forefront of global energy supply, and established it as a prosperous nation among the world's most dominant economies. However, the gloss on these reserves figures diminishes when current production, domestic consumption, and exports are considered. Instead, a picture of domestic inefficiency, unfulfilled export potential, and poor infrastructure emerges.
Iran's oil and gas production figures reflect years of under-investment in infrastructure and isolation from export markets, particularly for gas. This is the result of more than two and a half decades of confrontational politics with western powers (primarily the United States) and their adverse geopolitical consequences.
At first glance Iran's oil and gas production figures do not look so bad, ranking fourth in oil and sixth in gas. However, in the case of oil production, Iran produced just over 4 million barrels per day in 2005, a decline of 0.8 percent from 2004 figures and way below its peak of nearly 6 million barrels per day in the mid-1970s. Iran's failure to raise its oil production level to its OPEC quota for recent years (4.11 million barrels per day for most of 2005 and 2006), during times of high global oil prices and supply shortages, is interpreted by most international oil and gas analysts as a technical inability. Politically isolated, the country has not had ready access to modern technology, and its human potential – one of the country's premier assets thirty years ago, compared to its neighbors – has been stifled, deprived of modern training.
Since the 1979 Islamic Revolution, Iran's population has more than doubled, from 32 million to nearly 70 million people, while oil production is less than 70 percent of the pre-revolutionary level. Not surprisingly, domestic oil consumption in Iran has risen 75 percent since 1990 and reached 1.66 million barrels per day in 2005 – some 41 percent of total oil production, and up from 29 percent in 1990. Iran's industrial consumption of oil is very high by global standards, partly due to a high state subsidy, which costs it tens of billions of dollars a year in lost export revenues. Hence, Iran exported only 2.4 million barrels per day in 2005, worth $50 billion in revenue.
Iran's roughly 60 major oil-producing fields are mature, with some approaching complete depletion. From 1979 to 1997, almost no major investment was made in Iran's oil production infrastructure, though almost all the major producing fields need drastic technical overhauls, facility upgrades, and more extensive pressure maintenance to ensure optimum recovery of in-place reserves. This work requires billions of dollars of investment and is progressing slowly, due to difficulties in accessing modern oilfield equipment caused by the persisting U.S. embargoes. Since 1997, Iran has had considerable success in attracting foreign capital, mainly European and Asian, for offshore oil and gas infrastructure projects through its buy-back contractual arrangements. Nevertheless it is still far behind other oil exporting countries in terms of attracting new technology and foreign investment. The tough natures of the contracts on offer, and the lack of foreign investor confidence due to sustained high political risks, are undoubtedly to blame.
More than 60 percent of Iran's gas reserves are located in non-associated undeveloped or partially developed fields. The major non-associated gas fields include:
- South Pars (280-500 tcf of gas reserves – an extension of Qatar's North field) - North Pars (50 tcf) - Kangan (29 tcf) - Nar (13 tcf) - Khangiran (11 tcf)
There are also several other large gas fields with multi-tcf reserves.
Oil & Gas Production in 2005 Top 6 Countries for Each Fuel <http://www.energytribune.com/live_images/cover_story_table_dec.gif> Iran is among the top six producing countries worldwide for both oil and gas, but is struggling to maintain current production levels.
Iran's Under-Developed Natural Gas and Power Generation Industries
Iran's global position in terms of international gas supply is even starker. Iran has achieved nearly a four-fold increase in gas production since 1990, rising from 2.2 billion cubic feet per day (bcfd) to 8.4 bcfd in 2005. This is impressive except for the fact that almost all of this gas has been consumed domestically, much for re-injection for pressure maintenance in depleting oil reservoirs, but also for large-scale power generation projects. As much as 10 percent of gas produced is flared, and some 30 percent is re-injected for enhanced oil recovery purposes.
Despite its increased production, Iran was a net gas importer in 2005, with consumption recorded at 8.6 bcfd. Thus, Iran is now a net importer of approximately 200 million cubic feet of gas per day – a ridiculous position for a country with the second largest gas reserves in the world (after Russia). The bulk of the imports are flowing into northeast Iran from Turkmenistan. "The current gas import to Iran [from Turkmenistan] stands at six billion cubic meters per annum," said Seyyed Reza Kasaiizadeh, the managing director of the National Iranian Gas Company (NIGC), in early November. He continued, saying that NIGC expects more gas to come from Turkmenistan and that "price and volume increases are expected to come by the end of 2007." By 2008, annual gas imports from Turkmenistan will likely reach 14 billion cubic meters (1.35 Bcf per day).
Iranian gas exports began in the 1970s to the former Soviet Union at a peak rate of about 350 bcf per year, but only lasted about 10 years. Gas was transported through Baku from Iran's southern fields via a major trunk line to Astara in northern Iran. The Astara to Baku pipeline was linked to the Caucasus gas network in the 1970s.
Iran recommenced gas exports to Turkey in 2001, but these have yet to reach substantial volumes. The appearance of the Blue Stream gas pipeline from Russia (completed by Gazprom and ENI a few years ago), and the South Caucasus gas pipeline from Azerbaijan (approaching completion by western international oil companies), pushes Iran further back in the queue to export gas westward by pipeline. Iran's gas export potential remains huge. It has only to look across the Persian Gulf to Qatar to see what can be achieved in that regard, albeit from a less energy-hungry country of fewer than 1 million. By contrast, Iran's energy-hungry population of some 70 million people in 2005 is rapidly expanding, and likely to approach 75 million by 2010.
Iran has become increasingly reliant on electric power, much of which is oil-fired. Its electricity consumption has almost tripled from 58 terawatt-hours in 1990 to 169 terawatt-hours in 2005, and demand is growing at more than 8 percent per year. Figure 3 shows Iran's primary energy fuel mix dominated by oil and gas, understandable given its reserves of these resources, but still questionable in terms of sustainability and environmental impact.
Iran's 2005 Primary Energy Consumption, by Fuel in 2005 <http://www.energytribune.com/live_images/cover_story_pie__2_dec.gif> Iran's consumption of primary energy in 2005, not surprisingly, was dominated by oil and gas.
Iran's total primary energy consumption increased from 70 million tons of oil equivalent in 1990 to 162 million tons in 2005. This equates to an almost doubling of per capita energy consumption, from about 1.2 tons of oil equivalent in 1990 to 2.3 tons in 2005. This, of course, must be seen in context of per capita energy consumption for North America (8.1 tons of oil equivalent in 2005), United Kingdom (3.8), and Japan (4.1). This rapid increase in per capita energy is undoubtedly a concern for Iran, challenging it to develop an energy policy that balances future domestic energy requirements with the expansion of revenue-generating gas export projects.
Iran's Nuclear Power Ambitions Bolstered by Petroleum Geopolitics
Iran's nuclear enrichment project may not be as illogical for the country as some of its adversaries suggest. Nuclear electric power generation is likely to free up large volumes of its natural gas for export.
A common claim amongst OECD nations is that Iran does not need nuclear energy because of its vast resources of oil and gas and high R/P ratios. Though this is true, with long-term sustainability and stewardship of these finite resources, Iran's identified uranium ore reserves could produce as much electricity as that from some 45 billion barrels of oil – about one-third of Iran's proven oil reserves – with almost zero emissions and atmospheric pollution.
One of the main arguments against Iran's development of nuclear energy is that this is a less economical way for it to generate electricity, given its vast gas reserves, as yet untapped, which could be more cheaply exploited for power generation. Indeed, the proposed Bushehr nuclear reactors would cost $1,000 per installed kilowatt, while electricity from natural gas-fired power plants could be delivered for much less at $600 to $800 per kilowatt. However, such pure cost analysis overlooks some of the broader issues. If the gas reserves were used to produce petrochemical products and gas-to-liquids transportation fuels, then much value and export revenue potential could be generated from the gas. Some of Iran's leaders have argued the case for the preservation of much of Iran's gas reserves, an act which would position it in the mid-21st century as the world's major energy supplier. There is also a strong environmental argument to be made, both globally and locally, for Iran to avoid adverse emissions from burning gas until better technologies are available to reduce greenhouse gas emissions and global-warming consequences.
Such arguments suggest that Iran has a valid claim, on commercial, economic, social, and environmental grounds, to pursue alternative energy sources.
In the early 1990s, Iran first realized that it faced increased pressures to sustain industrial development accompanied by rapidly growing domestic energy consumption, leading to the conclusion that it should explore alternative energy sources and primary energy mixes, including nuclear power. The country acknowledged that it would take some 20 years to get 20 percent of its electricity from nuclear power plants, and Iran first attempted to conclude a nuclear reactor deal with Russia at that time. This led to the unsettling prospect for many nations of a nuclear-armed Iran, and potential environmental, ecological, and safety concerns for the region that were associated with Russian-managed nuclear reactors in the wake of the Chernobyl disaster.
The conflict over Iran's nuclear program has escalated towards potentially punitive U.N. sanctions in 2006. There is worldwide apprehension that Iran may respond to such sanctions by cutting off or drastically reducing its oil exports, and such fear is reflected in the global oil markets, exacerbating an already volatile oil-price environment. Certainly over the past year, when more conciliatory rhetoric emerged from the Iranian government, oil prices tended to go down. When Iranian leaders even hinted at cutting off supplies, oil prices have tended to go up. This provides Iran with considerable strategic leverage and a strong short-term negotiating position with the U.N., but does little to develop Iran's energy industry at home or on the export front. China, India, and Japan – current major customers for Iranian oil, and potential major customers for its gas exports once those materialize – could bear the brunt of an Iranian oil production cutback, and may look elsewhere for more reliable gas suppliers.
Since the oil crisis of the 1970s following the formation of OPEC, the oil-producing nations have frequently, and for the most part successfully, used their control over oil supply as a political weapon. There is no reason to expect Iran won't continue to do so, as it has few other bargaining chips with the U.N. There is undoubtedly political brinkmanship involved here; many believe that Iran would be less able to sustain a massive cut in its oil revenues, and to face further economic isolation, than the OECD countries would be able to cope with oil at $100 per barrel.
Nuclear Weapons Issues Cloud Long-term Energy Strategies
Oil and gas are finite resources that currently dominate Iran's GDP, both from export revenues and domestic consumption. Nuclear power technology has the potential to increase the availability of oil and gas for export. Operating a full-cycle nuclear fuel fabrication and reprocessing operation would enable Iran to ultimately trade internationally in nuclear power fuel products and services, increasing and diversifying its status as a global energy power. In theory, Iran should be able to achieve such nuclear ambitions within the framework of the existing international nuclear proliferation treaty, and such moves seem to be supported by the majority of the Iranian population, whether or not they are sympathizers of the current hard-line regime.
Among U.N. members, the real political concern over Iran and nuclear weapons is not what this might do to nuclear proliferation in the Middle East or potential state-on-state nuclear warfare in that region. The concern is the possibility that nuclear technology will be shared with other Moslem fundamentalist states, and ultimately filter down to terrorist groups (e.g., Chechen rebels and Al-Qaeda), leading to stateless attacks throughout the capitalist world with dirty bomb devices. In this context it is incorrect to portray the nuclear issue as merely a confrontation between Iran and the U.S.; it is much broader than that. However, the political fog surrounding this issue obscures the fact that Iran has justified commercial and sustainability reasons for pursuing nuclear power.
Events over the past 70 years suggest that nuclear weapons technology is out of the bag, and no end of diplomacy or U.N. resolutions is going to stop any nation that seriously seeks to develop a nuclear weapon. North Korea has done so with great economic cost and suffering of its population, and in the face of stiff international opposition, with fewer bargaining chips than Iran. The U.S., U.K., Russia, and France are all historically to blame for this situation, and are on weak ground in their attempts to deny other nations nuclear power technologies for fear of nuclear proliferation. A more realistic and pragmatic strategy might be for the U.N. to clearly spell out what its response would be to nations that precipitate nuclear conflicts and allow their technologies, weapons-making equipment, and materials to pass into the hands of terrorist groups. This would then put the onus on individual nations to decide whether they continue beyond nuclear power aspirations and capabilities down a path towards political and economic isolation. This, however, does not appear to be the strategy that the U.N. and OECD diplomats wish to take.
In light of the above, Iranians must debate the following questions in more objective terms.
- How quickly does Iran need nuclear power? - Should developing diversified, long-term gas export markets be a higher priority than nuclear? - Which nation is getting more value from the strategic relationship between Iran and Russia? - Is it preferable for Iran to defer its nuclear aspirations until it is less politically isolated?
David Wood, of David Wood & Associates, Lincoln, U.K., is an international energy consultant specializing in the integration of technical, economic, risk, and strategic information to aid portfolio evaluation and management decisions. He holds a Ph.D. from Imperial College, London. Research and training concerning a wide range of energy related topics, including project contracts, economics, gas/LNG/GTL, and portfolio and risk analysis are key parts of his work. His Web site is www.dwasolutions.com, or contact him by e-mail at woodda at compuserve.com.
Michael J. Economides is a professor at the Cullen College of Engineering, University of Houston, Managing Partner of Economides Consulting, a petroleum engineering and petroleum strategy consulting firm, and Editor-in-Chief of Energy Tribune. He has written or co-written 11 professional textbooks and books, including The Color of Oil, and nearly 200 journal papers and articles. Economides does a wide range of industrial consulting, and has major retainers from national oil companies and Fortune 500 companies. He has had professional activities in over 70 countries, and has written extensively on a broad range of energy, energy economics, and geopolitical issues. </blockquote>
A more alarmist article from the center-right on the same topic:
<blockquote> <http://www.pnas.org/cgi/content/abstract/0603903104v1> Published online before print December 26, 2006 Proc. Natl. Acad. Sci. USA, 10.1073/pnas.0603903104 OPEN ACCESS ARTICLE
Economic Sciences The Iranian petroleum crisis and United States national security
( market power | Middle East | oil | sanctions )
Roger Stern *
Department of Geography and Environmental Engineering, The Johns Hopkins University, 3400 North Charles Street, Baltimore, MD 21218
Edited by Ronald W. Jones, University of Rochester, Rochester, NY, and approved October 31, 2006 (received for review May 16, 2006)
The U.S. case against Iran is based on Iran's deceptions regarding nuclear weapons development. This case is buttressed by assertions that a state so petroleum-rich cannot need nuclear power to preserve exports, as Iran claims. The U.S. infers, therefore, that Iran's entire nuclear technology program must pertain to weapons development. However, some industry analysts project an Irani oil export decline [e.g., Clark JR (2005) Oil Gas J 103(18):34-39]. If such a decline is occurring, Iran's claim to need nuclear power could be genuine. Because Iran's government relies on monopoly proceeds from oil exports for most revenue, it could become politically vulnerable if exports decline. Here, we survey the political economy of Irani petroleum for evidence of this decline. We define Iran's export decline rate (edr) as its summed rates of depletion and domestic demand growth, which we find equals 10-12%. We estimate marginal cost per barrel for additions to Irani production capacity, from which we derive the "standstill" investment required to offset edr. We then compare the standstill investment to actual investment, which has been inadequate to offset edr. Even if a relatively optimistic schedule of future capacity addition is met, the ratio of 2011 to 2006 exports will be only 0.40-0.52. A more probable scenario is that, absent some change in Irani policy, this ratio will be 0.33-0.46 with exports declining to zero by 2014-2015. Energy subsidies, hostility to foreign investment, and inefficiencies of its state-planned economy underlie Iran's problem, which has no relation to "peak oil."
Author contributions: R.S. designed research, performed research, and wrote the paper.
The author declares no conflict of interest.
Freely available online through the PNAS open access option.
* Roger Stern, E-mail: rstern at jhu.edu </blockquote>
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