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Power struggle in the Iranian oil and gas resources too important to be ignored

Even though it is the foremost traded commodity in the world, oil is not like any other commodity. It is also a geo-strategic and political commodity.

Astonishing economic growth, especially in developing countries over the past few years, has fueled big increases in oil demand. Today the world consumes 85 million barrels of oil per day. This is equivalent to about 156,000 liters per second. By 2030, global oil demand is expected to increase to 220,000 liters per second. Since oil is unlikely to be abundant in the future and the era of easy and low-cost oil is coming to an end, to meet that demand countries and companies have started to look around the world to find new hope. Hencean oil resource competition has started and security of supply became a major issue. As of January 2007, Iran had 136 billion barrels of oil, the second largest reserve in the world, waiting to be extracted.

On top of that Iran has a strategic location in the Middle East and is close to all the important oil fields there. It is possible that Iran might block the Strait of Hormuz (55 kilometers across at its narrowest point), though which one-third of world's oil exports pass every day, causing an oil crisis as never seen before. This is a big concern in the international community. Ahmadinejad will not make the first move, because he knows very well the US policy engraved in the Carter Doctrine of January 23, 1980, which implied the use of military force when necessary to continue the flow of oil from the Middle East. For whatever reason, if oil flow is disrupted through the straits, Russia will be the biggest beneficiary.


Iranian oil industry in poor health


Even though Iran has huge reserves, a multitude of factors (ranging from a lack of investment in the maintenance of fields and infrastructure, a lack of rebuilding of installations destroyed during the war with Iraq, difficulty in attracting foreign companies, US and European sanctions and bad management) prevented production from achieving desired levels. Today Iran produces over 4 million barrels per day (barrels per day). This might sound a lot, but there is also some bad news. First, Iranian oil field decline rates, according to an oil minister, are around 0.5 million barrels per day. Second, Iranian oil consumption has been soaring, causing a substantial drop in oil exports. According to official figures oil exports have declined to 2.3 million barrels per day in 2006. Third, Iran currently imports about 40% of its petroleum products. These have been interpreted by some people in such a way that they claim Iran will become a net oil importer in 10 to 15 years time.

For instance, in a much publicized December 2006 report by the US National Academy of Sciences it is argued that if the current increase in local Iranian oil consumption continues and the current decline in oil production is not stopped, then Iran's oil exports will decline to zero by 2015. Instead of being alarmist, one should look at the options. Iran has three options: a: increase production, b: put a brake on consumption, c: increase refinery capacities. As far as production is concerned, it is widely agreed that compensating for the decrease in the fields and adding new capacity would be impossible unless a radical shift in the legal and fiscal model, including buy-back agreements, takes place. Even though the government would like to maintain its capability of producing oil, gas re-injection into oil fields has become more and more pronounced.

It is true that souring relations with Western powers has severely hampered progress in the oil industry, but it is quite naïve to think Iranians watch their oil fields drying out and do nothing. On the contrary, Iran plans to increase oil production to 5 million barrels per day by 2009 and 7 million barrels per day by 2024 is expected. The giant Azadegan and Yadavaran fields, and a substantial increase in condensate production coming from gas fields, will surely help in achieving that target. As for domestic consumption, some radical move is necessary. The first thing the Iranian government will consider is to reduce domestic subsidies, which are said to be currently over $20 billion.

According to the Iranian News Agency, Iran's Parliament has already approved in March the rationing of subsidized oil. Starting from May 22 this year Iranians will pay 11 cents (1000 rials) instead of the current 9 cents (800 rials) per liter. This move may hurt the popularity of Ahmadinejad, who mobilized the poor voters with „I am one of you and I know you well.” But he doesn't have many options. On the refinery side, Iran has already begun upgrading the existing refineries and building new ones. Iran's current refining capacity remains 1.32 million barrels per day. The plan is to increase this to 2 million barrels per day by 2011 through completion of projects currently underway in existing refineries, and to 2.5 million barrels per day by 2016 by building new facilities.


Gas industry situation no better


What makes Iran important is not only its oil resources but also its abundant gas, the second largest gas reserves in the world. Natural gas accounts for almost half of the country's total energy demand. Today, in order to satisfy domestic gas demand, practically all the present production is sent to the domestic market and some extra gas is imported from Turkmenistan. However, the government intends to increase domestic use of gas to its highest possible levels to a: maintain the correct pressure in its ageing oil fields, which requires huge volumes of gas for re-injection; b: substitute gas for oil products on the domestic market especially for power generation; c: utilize it in Iran's mega-petrochemical industry; d: increase the use of compressed natural gas in transport. That is why Iran's policy has recently focused on exploration and development of gas projects and reducing gas flaring.

Through these efforts domestic demand is expected to be fed sufficiently and excess production is planned to be exported by pipelines and as liquefied natural gas (LNG) in order to generate income. These can be achieved if development of South Pars gas projects and related infrastructure (such as four LNG plants currently tabled) are speeded up. Unless financing and investment problems are solved, Iran will stay far behind Qatar. Any further delays mean a loss of gas and income. Since the 1979 revolution Iran has been under constant US unilateral sanctions. The first US sanctions against Iran came in November 1979, after the hostage crisis. The import of Iranian goods into the US had been banned by 1987. In 1995, President Clinton issued an Executive Order banning US investment in Iran's energy sector.

Under the US Iran-Libya Sanctions Act of 1996, which imposed mandatory and discretionary sanctions on companies investing more than $20 million annually in the Iranian energy sector, both US and non-US companies were discouraged doing business in Iran. When Muammer Gaddafi opened up upstream oil and gas industry (and gave up weapons programs) Libya was dropped and the act was called the Iran Sanctions Act (ISA). With the help of the „Iran Freedom Support Act,” the ISA now extends until the end of December 2011. Subsidiaries of US firms are not barred, but some US companies have come under scrutiny for dealings by their subsidiaries with Iran (read Halliburton's gas deal in South Pars Phases 9 and 10).

Even though no projects have actually yet been sanctioned under the act, they are used as a threatening tool to shy away from financing energy projects in Iran. Recently US pressures through sanctions have intensified under the guise of stopping Iran from its nuclear ambitions. The desired effect, however, could not be achieved due to high oil prices which helped Iran. The US then tried to reduce oil prices with the help of Saudi Arabia and (according to some) of funds, but with only very short-lived success. When that didn't work out, the US changed its strategy and has begun putting considerable pressure, not only on governments and energy companies, but also on international banks and financial institutions to cut their ties with Iran.

The aim is to let the Iranian energy industry starve. In his testimony before the US Senate Foreign Relations Committee in March 2007, Under Secretary of State for Political Affairs Nicholas Burns made it precise: „ISA has been extremely valuable in emphasizing to foreign governments and firms our concerns about Iran and highlighting the risks and potential consequences of investing there…we believe that ILSA/ISA has been a factor in Iran's lack of recent success in attracting the oil and gas investment it seeks.” It is true that foreign sources of finance are drying up, the country is facing problems in financing industrial projects and is unable to attract sufficient foreign investments. Western and Japanese banks recently cut their financing for Iran. Several arrangements for developing Iranian oil fields turned out to be a blow due to political pressures.

More recently Japan's Inpex has given up its leading role in the development of the giant Azadegan oil field. Total announced earlier this April that it may delay or possibly cancel its South Pars LNG project because of rampant cost inflation and „geopolitical concerns.” What might come in the very near future is an international ban promoted by the UN Security Council on purchases of Iranian goods and a ban on international investment in Iran's energy sector. More importantly a possible ban on refined oil products (such as gasoline and diesel) or other products export to Iran would hurt the Iranian economy immensely. If that takes place it will cut the hands of Iranian economy and will eventually hurt the poor, whose lives Ahmadinejad had promised to improve. Furthermore the US government may push Turkey not to get additional gas from Iran.

This might have significant implications for the Nabucco gas pipeline project (which was planned to carry Caspian gas from Turkey to Bulgaria, Romania, Hungary and Austria). In the meantime Iran hopes to finally conclude more than decade-long discussions on the proposed Iran-Pakistan-India gas pipeline. But as usual the US may jump in, providing carrots to India and/or Pakistan to give up the deal and instead look for supplies from Qatar. In a similar situation, for example, the US pressured Georgia not to get any long-term energy deals with Iran, but had to close its eyes to short-term gas deals in winter months in exchange for supplying electricity to Iran. Last but not least, as the Iranian Economy Minister, Davoud Danesh-Jafari said in January 2006, „sanctions against Iran would probably have the effect of driving up oil prices to beyond levels that Western countries can imagine.” Maybe this is what the US and its allies want too, I mean keep the oil prices high. (