Iran General NewsHow Iran is vulnerable to a decline in oil...

How Iran is vulnerable to a decline in oil exports

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Wall Street Journal: Tehran’s chest-beating over its nuclear-development program has masked a longstanding but growing Iranian vulnerability: its oil exports. The Wall Street Journal

By BHUSHAN BAHREE
February 20, 2007; Page A14

Tehran’s chest-beating over its nuclear-development program has masked a longstanding but growing Iranian vulnerability: its oil exports.

The energy industry accounts for some 85% of Iran’s export income, but oil shipments may be poised to go into a steep decline. Some industry researchers say they can see the day — perhaps 10 years off — when Iran may have no oil to export unless it dramatically changes the policies affecting its oil industry. Such an outcome would rob world markets of a major source of supply and leave the Iranian government with no oil revenue to placate its fast-growing population.

The potential crunch stems in part from rapidly rising domestic consumption in Iran. Also at work are Iranian government policies that have so weakened the oil industry that petroleum production may start declining unless Iran moves swiftly to inject foreign capital, technology and know-how to reverse the downtrend.

A big investment boom in the industry would be difficult. The U.S., which has long used sanctions to prevent investment of more than $20 million in Iran’s energy sector, is making it progressively harder for Iran to get foreign money and technology as it attempts to contain the Islamic Republic. And Iran’s populist president is on a spending spree that is whittling down Iran’s rainy-day currency reserves and leaving less for petroleum investment. Venezuela and Mexico have the same malady — declining oil production because of mismanagement and a lack of foreign investment.

The four-year boom in oil prices has provided Iran with sharply rising revenue. But the boom is camouflaging flat or falling export volume. The value of Iran’s oil exports rose to $51 billion in 2006 from $19 billion in 2002, according to the Centre for Global Energy Studies, a London petroleum consultancy. But the volume of exports fell in the same span, to an average of 2.29 million barrels a day in 2006, from 2.43 million in 2002.

By some accounts, the seeds for the coming crunch were sown in 2000, when President Mohammad Khatami, widely seen as a reformist, was Iran’s president. That’s when Iran’s door to foreign oil companies, even though it was never opened much in the 1990s, began closing. Iranian technocrats and parliamentarians threw up obstacles to production-sharing deals with foreign majors, which had already been balking at the terms on offer.

Because oil projects can often take five years or more to come to fruition, the impact of that slowdown in investment and technology flows is about to start being felt.

“Oil is as important as the nuclear issue; it will affect the very survival of the regime,” says Mehdi Varzi, a former Iranian diplomat and National Iranian Oil Co. official, who now heads consulting company Varzi Energy in London. Like some others, Mr. Varzi expects Iran’s oil output to stagnate at best for the next five years or so, a prelude to an outright decline — if the government doesn’t swiftly encourage large injections of capital and technology.

Meanwhile, domestic gasoline use is rising so fast, at about 11% annually, that Iran must import more processed fuel because its refineries long have been unable to meet demand. Already, Iran is using some 1.5 million barrels a day of its own crude production of close to four million barrels a day.

“Gasoline is just nine cents a liter in Iran,” says Vera de Ladoucette, petroleum analyst at Cambridge Energy Research Associates in Paris. “On balance, they are going to use more and more of their own oil.”

After peaking at some six million barrels a day in the 1970s, Iran’s output of petroleum plunged in the aftermath of the 1979 Islamic Revolution. The industry suffered further from widespread damage inflicted on oil facilities at the outset of the eight-year war with Iraq that followed. By 1981, Iran’s oil production had slumped to 1.3 million barrels a day, according to the Organization of Petroleum Exporting Countries.

Many of Iran’s biggest fields have been producing for decades and are now in strong natural decline.

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