Editor’s Note: Mohammad Salami, a young Pakistani academic, is a frequent contributor to Stimson on Iran’s economic problems and has a particular focus on the energy sector.
By Barbara Slavin, Distinguished Fellow, Middle East Perspectives
An announcement in July that Iran would import 300 million cubic meters of gas annually from Russia was not unadulterated good news for Iranians who, despite ample reserves, often face shortages.
Iran’s then-oil minister Javad Owji called the contract a “masterpiece of energy diplomacy.” But Iranians wondered why a country with the world’s second-largest gas reserves – 17 percent – and 9.54 percent of global oil reserves should have to import energy from a country ostracized by much of the planet after its 2022 invasion of Ukraine.
Sanctions, a lack of investment, and mismanagement have plagued the Iranian energy industry for years. Iran has long imported gas from neighboring Turkmenistan, which has occasionally cut off supplies because of a lack of repayment. In December 2022, Owji warned that Iran would become a net energy importer if it failed to attract $240 billion in investment in its oil and gas sector.
Iran’s neighbors, which do not suffer from the burden of sanctions, have been able to increase their energy production capacity over the last two decades with the help of foreign investment and technology. That is especially bad news for Iran because it shares many oil and gas fields with adjacent countries and rising production there means reducing Iran’s potential earnings.
Iran shares 28 fields with neighbors, of which 15 are located under the waters of the Persian Gulf. Iran shares 12 fields with Iraq, five with the United Arab Emirates, four with Saudi Arabia, four with Qatar, and one field each with Oman, Kuwait, and Turkmenistan.
Joint fields constitute 20 percent of extractable oil and 30 percent of Iran’s gas reserves. However, according to the Ministry of Oil, only 15 of the 28 joint fields are active, and the other 13 fields have not completed development and reached the production stage.
Iran’s slow progress is the result of its reliance on domestic investment.
On average, in the last 2.5 years, $6.5 billion have been invested annually in the oil industry. According to the Iranian parliament’s research center, annual investment in Iran’s upstream oil and gas projects dropped from around $18 billion in the 1990s to $7 billion in the early 2010s, and to $3 billion since 2017.
Not only is Iran losing out on new production, but it is also seeing existing energy infrastructure deteriorate. The oil ministry and the U.S. Energy Information Administration report that 80 percent of Iran’s oil production comes from old fields that are experiencing a decrease in pressure, which causes a yearly decline in production of between 8 and 10 percent.
To stem a rapid decline in oil production, Iran needs to re-inject nearly 300 million cubic meters of gas per day (MCM/d) into its old oil deposits. However, the latest available official datashows that in 2017, gas re-injection was at best 80-90 MCM/d. According to the parliament research center in 2017, if the gas required for injection is not supplied, 2.3 to 2.7 billion barrels of crude oil will be trapped in the reservoir and will never be extracted. Considering that each barrel is worth $50, $115 to $135 billion in wealth is likely out of reach.
Iran’s neighbors do not face the same constraints.
Iraq, for example, has been able to double its oil production since the U.S. toppled Saddam Hussein two decades ago, from about 2 million barrels per day to 4.5 million barrels. Benefiting from Chinese, Russian, and Western investment, Iraq seeks to increase its oil production to 6 million barrels per day within five years by accelerating hydrocarbon projects and ending the import of refined products from countries such as Iran. To achieve this, Iraq aims to increase production from a field it shares with Iran.
Since 2013, Iran has also prioritized the development of joint oil fields bordering Iraq. Iran has harvested 90,000 barrels a day from these fields, and by 2021, with the help of Chinese companies, it was supposed to increase production from the Yadavaran, Azadegan North and South, and Yaran North and South to 1.2 million barrels per day. Due to the lack of commitment by Chinese companies, however, Iran could only achieve 350,000 barrels per day, while Iraq’s oil production has been increasing. Development of these five joint fields requires an investment of $11 billion and advanced Western technology. With current Iranian technology, only 5 to 10 percent of the 64 billion barrels of reserves in these fields can be extracted.
Iran shares its most important gas field with Qatar. The field is known as South Pars in Iran and as North Dome in Qatar. Qatar started producing gas from this field in 1991, 11 years before Iran, and by 2002, when Iran started producing, Qatar had already extracted 214 billion cubic meters of gas. In the years 2002 to 2014, Qatar extracted 70 percent more gas than Iran, and this figure has doubled since.
Qatar has signed contracts worth $29 billion with Western companies to increase production by 30 percent by 2026, and it is expected that Qatar’s total gas production from South Pars will reach 740 MCM/d by 2030 while Iran’s production from this field is forecast to decline by over 30 percent, dropping to approximately 350 MCM/d due to a fall in pressure on the Iranian side.
The increase in gas extraction by Qatar has caused the gas reserves on its side to rise. Iran cannot preserve the helium extracted from the joint gas field due to the lack of necessary technology. Qatar is equipped with this technology and that has enabled Doha to produce 35 percent of the world’s helium.
After recent presidential elections, a new oil minister, Mohsen Paknejad, has been appointed. A veteran of the ministry since 1996, Paknejad told parliament he considered the implementation of development plans as his most important duty. He said he would pay special attention to joint fields such as South Pars and announced quick action to increase gas pressure in South Pars gas fields. He said that if this issue is not dealt with quickly, the equivalent of one phase of South Pars, i.e., 28 million cubic meters of production, would be lost annually.
It remains to be seen if these plans can be realized.
Sanctions imposed over Iran’s nuclear program and support for militant Middle East groups have severely undermined Iran’s economic foundation and pushed many of its formerly middle-class residents into poverty. Given the importance of oil exports to Iran’s budget, flagging production has forced the country to try to diversify its economy and rely more on services, taxes and non-oil exports. Ultimately, however, Iran needs sanctions relief to achieve prosperity, which will require concessions in its foreign and defense strategies that the Islamic Republic has been loath to make.
Dr. Mohammad Salami is a research associate at International Institute for Global Strategic Analysis (IIGSA). His areas of expertise include politics and governance, security, and counterterrorism in the Middle East and especially the Persian Gulf region. @moh_salami
Why is Iran Importing Natural Gas from Russia?
By Mohammad Salami
Middle East & North Africa
Editor’s Note: Mohammad Salami, a young Pakistani academic, is a frequent contributor to Stimson on Iran’s economic problems and has a particular focus on the energy sector.
By Barbara Slavin, Distinguished Fellow, Middle East Perspectives
An announcement in July that Iran would import 300 million cubic meters of gas annually from Russia was not unadulterated good news for Iranians who, despite ample reserves, often face shortages.
Iran’s then-oil minister Javad Owji called the contract a “masterpiece of energy diplomacy.” But Iranians wondered why a country with the world’s second-largest gas reserves – 17 percent – and 9.54 percent of global oil reserves should have to import energy from a country ostracized by much of the planet after its 2022 invasion of Ukraine.
Sanctions, a lack of investment, and mismanagement have plagued the Iranian energy industry for years. Iran has long imported gas from neighboring Turkmenistan, which has occasionally cut off supplies because of a lack of repayment. In December 2022, Owji warned that Iran would become a net energy importer if it failed to attract $240 billion in investment in its oil and gas sector.
Iran’s neighbors, which do not suffer from the burden of sanctions, have been able to increase their energy production capacity over the last two decades with the help of foreign investment and technology. That is especially bad news for Iran because it shares many oil and gas fields with adjacent countries and rising production there means reducing Iran’s potential earnings.
Iran shares 28 fields with neighbors, of which 15 are located under the waters of the Persian Gulf. Iran shares 12 fields with Iraq, five with the United Arab Emirates, four with Saudi Arabia, four with Qatar, and one field each with Oman, Kuwait, and Turkmenistan.
Joint fields constitute 20 percent of extractable oil and 30 percent of Iran’s gas reserves. However, according to the Ministry of Oil, only 15 of the 28 joint fields are active, and the other 13 fields have not completed development and reached the production stage.
Iran’s slow progress is the result of its reliance on domestic investment.
On average, in the last 2.5 years, $6.5 billion have been invested annually in the oil industry. According to the Iranian parliament’s research center, annual investment in Iran’s upstream oil and gas projects dropped from around $18 billion in the 1990s to $7 billion in the early 2010s, and to $3 billion since 2017.
Not only is Iran losing out on new production, but it is also seeing existing energy infrastructure deteriorate. The oil ministry and the U.S. Energy Information Administration report that 80 percent of Iran’s oil production comes from old fields that are experiencing a decrease in pressure, which causes a yearly decline in production of between 8 and 10 percent.
To stem a rapid decline in oil production, Iran needs to re-inject nearly 300 million cubic meters of gas per day (MCM/d) into its old oil deposits. However, the latest available official datashows that in 2017, gas re-injection was at best 80-90 MCM/d. According to the parliament research center in 2017, if the gas required for injection is not supplied, 2.3 to 2.7 billion barrels of crude oil will be trapped in the reservoir and will never be extracted. Considering that each barrel is worth $50, $115 to $135 billion in wealth is likely out of reach.
Iran’s neighbors do not face the same constraints.
Iraq, for example, has been able to double its oil production since the U.S. toppled Saddam Hussein two decades ago, from about 2 million barrels per day to 4.5 million barrels. Benefiting from Chinese, Russian, and Western investment, Iraq seeks to increase its oil production to 6 million barrels per day within five years by accelerating hydrocarbon projects and ending the import of refined products from countries such as Iran. To achieve this, Iraq aims to increase production from a field it shares with Iran.
Since 2013, Iran has also prioritized the development of joint oil fields bordering Iraq. Iran has harvested 90,000 barrels a day from these fields, and by 2021, with the help of Chinese companies, it was supposed to increase production from the Yadavaran, Azadegan North and South, and Yaran North and South to 1.2 million barrels per day. Due to the lack of commitment by Chinese companies, however, Iran could only achieve 350,000 barrels per day, while Iraq’s oil production has been increasing. Development of these five joint fields requires an investment of $11 billion and advanced Western technology. With current Iranian technology, only 5 to 10 percent of the 64 billion barrels of reserves in these fields can be extracted.
Iran shares its most important gas field with Qatar. The field is known as South Pars in Iran and as North Dome in Qatar. Qatar started producing gas from this field in 1991, 11 years before Iran, and by 2002, when Iran started producing, Qatar had already extracted 214 billion cubic meters of gas. In the years 2002 to 2014, Qatar extracted 70 percent more gas than Iran, and this figure has doubled since.
Qatar has signed contracts worth $29 billion with Western companies to increase production by 30 percent by 2026, and it is expected that Qatar’s total gas production from South Pars will reach 740 MCM/d by 2030 while Iran’s production from this field is forecast to decline by over 30 percent, dropping to approximately 350 MCM/d due to a fall in pressure on the Iranian side.
The increase in gas extraction by Qatar has caused the gas reserves on its side to rise. Iran cannot preserve the helium extracted from the joint gas field due to the lack of necessary technology. Qatar is equipped with this technology and that has enabled Doha to produce 35 percent of the world’s helium.
After recent presidential elections, a new oil minister, Mohsen Paknejad, has been appointed. A veteran of the ministry since 1996, Paknejad told parliament he considered the implementation of development plans as his most important duty. He said he would pay special attention to joint fields such as South Pars and announced quick action to increase gas pressure in South Pars gas fields. He said that if this issue is not dealt with quickly, the equivalent of one phase of South Pars, i.e., 28 million cubic meters of production, would be lost annually.
It remains to be seen if these plans can be realized.
Sanctions imposed over Iran’s nuclear program and support for militant Middle East groups have severely undermined Iran’s economic foundation and pushed many of its formerly middle-class residents into poverty. Given the importance of oil exports to Iran’s budget, flagging production has forced the country to try to diversify its economy and rely more on services, taxes and non-oil exports. Ultimately, however, Iran needs sanctions relief to achieve prosperity, which will require concessions in its foreign and defense strategies that the Islamic Republic has been loath to make.
Dr. Mohammad Salami is a research associate at International Institute for Global Strategic Analysis (IIGSA). His areas of expertise include politics and governance, security, and counterterrorism in the Middle East and especially the Persian Gulf region. @moh_salami
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