Potentials and Challenges in the Iranian Oil and Gas Industry

Thirty years after the revolution, Iran’s hydrocarbon industry is facing new opportunities and challenges. This essay attempts to evaluate the future of Iran’s oil and gas sector in view of changing circumstances in the oil and gas industry and the barriers to Iran taking full advantage of its potentials.

Iran’s combined oil and gas reserves are probably the highest in the world and are matched only by Russia and Saudi Arabia. Based on official statistics, Iran’s oil reserves are over 130 billion barrels, which allows the country to produce more than 5 million barrels of oil per day for over 50 years. Even if half of the declared estimated reserves are considered, Iran could still produce oil at current levels for over 40 years. The gas reserves (around 30 trillion cubic meters) make Iran’s gas potential second only to that of Russia. If gas production is increased by four times the current level to over 550 billion cubic meters per year by 2020, Iran can still produce gas beyond 2055. The country is also rich in mineral resources, and the mining industry could be profitably exploited in view of the availability of energy in the long term.

Iran’s other major potential is its educated youth. More than 70% of the Iranian population is below 32 years; there are currently 20 million people at schools and 2 million in universities. The combination of human skills and mineral resources near the natural gas fields of the Persian Gulf makes an ideal investment opportunity in energy-based industries. For example, the cost of production of clinker and cement in Iran would be one of the lowest in the world, given the vast lime stone availability, low priced gas, local technical and operational expertise, and immediate access to Persian Gulf ports. Other energy-based industries such as iron, aluminium, and glass industries as well as Gas to Liquids and Liquified Natural Gas (LNG) also have good potential. Iran’s petrochemical industry is already the second largest in the Middle East, but has much room to grow.

Another potential asset that Iran can utilize is its geographical position connecting the resources of the Persian Gulf countries with those of the Caspian Sea region and Russia in West Asia as well as being within a reasonable distance on land from major energy consuming regions (i.e., the Indian subcontinent and Turkey). Easy access to markets in the Far East and Europe from the Persian Gulf is an additional advantage. Iran could be a major producer and consumer (given population growth projections) of a variety of goods and services, importing and exporting oil products, natural gas, and electricity.

Against all these enviable potentials, which could easily make Iran a regional superpower in a relatively short time, there exist a number of major challenges that have to be addressed if Iran would like to benefit from these advantages. First and foremost, Iran needs to redefine its outlook on the world in line with the regional and international realities. The governments that have come to power through revolution usually call for a revolutionary sprit and zeal to continue, and Iran is not an exception. However, after 30 years of revolutionary behavior, it is time to give priority to the future of its young population, who seek jobs and a better standard of living. The biggest challenge is to set these priorities based on the country’s real strengths and regional realities, rather than delusions. Iran must sort out its differences with the United States and Europe in order to open the door to a constructive competition from all countries for inward investment, particularly in the oil and gas industries, which is the country’s engine of growth.

Iran has to address the rapid decline in oil production from the old fields, which is currently estimated to be over half a million barrels per day each year. This is a major challenge, which requires a transfer of up to date technology in enhanced oil recovery techniques, development of gas resources to be injected into old oil fields, and huge capital investment in developing new oil fields. If the political circumstances improve and the right economic incentives are offered, the transfer of technology and the much needed investment would be forthcoming. The present legal framework — “buy back” service contracts — is neither attractive to international oil and gas companies nor popular among many experts within Iran. In addition, these types of contracts have failed to bring Iran up to date with recent technological advancements. In general, the interaction between Iranian scientists in various fields with their counterparts around the world has been limited. Unless serious changes in policies are made, the technology gap will widen, with serious consequences for the industry in general and the oil and gas sector in particular.

Another major challenge that Iran must address is the rising domestic demand for petroleum products and natural gas, which has been over 10% annually during the past decade. Energy subsidies and the lack of comprehensive energy policies are generally blamed for this. The idea of raising energy prices to the price level of other countries is a folly that could reduce the consumption of energy at the expense of the total collapse of the country’s industry, resulting in more wide-ranging severe economic consequences. It is prudent that in the initial stage the energy prices are raised to the level where it covers the cost of energy production, refining, and transportation with a reasonable rate of return in each sector. The government could then gradually levy taxes similar to those in many energy producing countries of the world. Although energy subsidies should be directed to the lower income group, it would be unwise to think of this as a solution to the problem or use it as a political objective.

The current structure of the oil and gas industry in Iran is not suited to deal with developments in the world oil and gas sector that have taken place in the past 30 years. Major changes are needed in order to enable the present Iranian oil and gas industry to cope with the realities of the domestic and world markets. Privatization has not moved according to plan, and Iranian’s participation in the oil and gas industry has been minimal so far. After 100 years of oil and gas production, refining, and transportation, private and even state Iranian companies are not fully capable of undertaking major upstream or downstream projects without relying on foreign help. Similarly, the structure of the industry has prevented the Iranian banking system and private capital from engaging in the oil and gas business. Consequently, for every major project, the government seeks international finance and participation from foreign energy companies.

Another important issue is the lack of adequate research and development facilities and proper institutions for Iranian students to learn about different aspects of the oil and gas industry. Although the National Iranian Oil Company has had its own research center for some time and a few universities recently have opened petroleum study courses, there is no serious link or cooperation between the oil and gas industry and higher education institutions.

If the above-mentioned challenges are swiftly resolved, there will be a huge investment in the Iranian oil and gas industry, which would lead to a major positive impact on the Iranian economy and the standard of living in Iran.