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©Blackwell Publishing Ltd, 2010
GLOBAL ENERGY REVIEW
Iran: Coping with Sanctions
A Report by Dr Paul McDonald Consulting Editor, Oil and Energy Trends
A survey of Iran’s energy industries,
Describing the impact of sanctions imposed by the UN, US, EU and others,
With detailed coverage of the oil and gas industries
And forecasts for production up to 2015
21 September, 2010
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Contents
Introduction 4
The Oil Industries 5 Sanctions and their Impact 5 Oil Production 5 Reserves and Production 7 Outlook for Oil Production 8 Missing Targets 8 Outlook to 2015 9 Oil Exports 12 Outlook for Oil Exports 12 Trade in Products 13 Oil Smuggling 15
The Gas Industry 16 Sanctions and their Impact 16 Production Problems 16 South Pars Plans 17 Outlook for Gas Production 18
Sanctions: The Next Step? 20
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List of Tables
Table 1 Iran: Oil Reserves and Production, 2010 7
Table 2 Iran: Actual v Planned Production 9
Table 3 Iran: Oil Production 1978-2010 10
Table 4 Iran: Oil Balance, 2009 13
Table 5 Iran: Gasoline Imports, Second Quarter, 2010 15
Table 6 Iran: Gas Balance, 2009 17
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Introduction
Sanctions are increasingly affecting Iran’s energy sector, restricting Iran’s ability to carry out its
ambitious plans to raise the production of oil and gas and to begin the export of natural gas on a
large scale.
Iran is subject to a range of sanctions as a result of its nuclear programme, ranging from the
general sanctions imposed by the United Nations to those of the United States of America, which
not only apply sanctions to Iran but also on companies that do business with Iran in a number of
areas, such as supplying Iran with refined petroleum products.
The effect of all these sanctions is to make it increasingly difficult for Iran to obtain either the
technology or the finance it needs to develop its oil and gas industries. It seems inevitable that
these industries will not develop as rapidly and to the extent planned by Iran.
As well as affecting Iran’s energy industries and, through them, its economy, these sanctions
may also affect the internal policies of a country that is already in political turmoil. If the
political situation there deteriorates, there will almost certainly be repercussions beyond Iran’s
borders, with consequences not only for its Middle Eastern neighbours but for energy users
across the world.
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The Oil Industries
Faced with rising consumption of electricity and the prospect of falling oil production and delays
to its gas development programme, Iran has begun to develop nuclear energy with the fuelling of
its first nuclear power station at Bushehr. The US and many of its allies believe that the nuclear
power programme is part of a wider scheme to develop nuclear weapons. Attempts to resolve
the situation by negotiation have so far proved unsuccessful. Sanctions have been imposed by
the US, the UN, the EU and others in an attempt to force Iran back to the negotiating table.
Sanctions and their Impact
Iran is subject to four levels of sanctions at present (see box). The UN has imposed general
sanctions on Iran, but these do not specifically target the country’s oil and gas sectors. The US
has imposed additional sanctions of its own on these sectors and, more recently, the EU and
others have imposed trade and other restrictions of their own.
This is unlikely to be the end of the process. There is now talk of imposing restrictions on Iran
by other countries, including–most significantly–by some of Iran’s closest neighbours in the Gulf
Co-operation Council (GCC), which is made-up of Saudi Arabia, Kuwait, Qatar, Bahrain, UAE
and Oman.
Given the recent history of bad relations between Iran and its Arab neighbours, there is particular
concern there at the prospect of Iran’s developing nuclear weapons. From 1980 to 1988 Iran was
involved in a bloody and destructive war with Iraq, which also involved attacks on neutral
shipping operating out of ports in Arab countries bordering the Persian Gulf. There are also a
number of unresolved offshore boundary disputes between countries on the Arabian Peninsula
and Iran, several of which include disputed claims to oil- and gasfields.
Oil Production
Sanctions pose a major threat to Iran’s oil production and exports. This is the result in particular
of the US and EU bans on the supply of production technology and the restrictions on providing
credit and other financial services to Iran.
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SANCTIONS AGAINST IRAN
Sanctions have been imposed by the United Nations, the United States, the European Union, Canada, Japan and
South Korea. Others are under discussion elsewhere, including the Gulf Co-operation Council.
UN Sanctions were imposed under Security Council resolution 1929, which was approved on 9th June 2010.
These sanctions target specifically those companies alleged to be involved in Iran’s nuclear programme. It is the
fourth resolution on sanctions to be passed since 2006.
The sanctions approved under Resolution 1929 include an expanded embargo on the supply of arms and some
financial restrictions. The resolution provides a list of companies and individuals inside Iran that UN members
should refrain from dealing with, including those connected with the Islamic Revolutionary Guard Corps.
The financial restrictions call upon members of the UN to take ‘appropriate measures’ to prevent their own financial
institutions from co-operating with Iranian banks in providing finance for activities that could contribute to ‘Iran’s
proliferation-sensitive nuclear activities or the development of nuclear weapon delivery systems’.
The US had wanted the resolution to go further by blacklisting the Central Bank of Iran and extending sanctions to
cover Iran’s oil and gas industries; but this was vetoed by China and Russia.
US Sanctions are covered under a bill that was signed into law on 1st July 2010 by President Obama. They
were brought in because the US believed the UN’s sanctions do not go far enough.
These ban companies that supply Iran with refined products from doing business with the US. The sanctions apply
both to suppliers of oil and firms that provide tankers to deliver the oil. The US will also blacklist a number of
companies the US says are connected with the Islamic Revolutionary Guard Corps, the Post Bank of Iran and Islamic
Republic of Iran Shipping Lines. These include engineering and procurement companies.
EU Sanctions were announced on 27th July 2010. As with the American sanctions, they are designed to
supplement the UN’s sanctions, which the EU regards as being insufficiently tough.
The EU measures target mainly the energy and banking sectors, with particular emphasis on the Islamic
Revolutionary Guard Corps and Islamic Republic of Iran Shipping Lines. They also prohibit the sale or transfer of
technology to key sectors of the oil and gas industries, including exploration and production, refining and liquefied
natural gas (LNG).
Canada has imposed sanctions that include restrictions on financial assistance to Iran.
Japan has imposed a moratorium on new export credits for projects in Iran that last longer than two years,
which covers most Japanese energy investments there, but has stopped short of banning the import of Iranian crude
oil. The government has also called on the Japanese company Inpex to ‘consult the government’ on how to proceed
with the development of Iran’s Azadegan field, in which Inpex has a 10% shareholding. It has not, however, ordered
Inpex to withdraw from the project.
South Korea will not ban the import of oil from Iran, but will ‘restrict’ investments in Iran’s energy sector and
put all financial transactions with Iran under ‘strict’ government supervision.
The Gulf Co-operation Council, which consists of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates, is discussing possible financial sanctions to be imposed on Iran. In the UAE, the Dubai
Financial Services Authority is to make it more difficult to obtain letters of credit for some trading transactions with
Iran.
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Iran is struggling to increase its oil production whilst its consumption continues to rise steadily.
Output of crude and natural gas liquids (NGLs) has fallen by about 3% since 2008 and is now
mired at around 4.2 mn bpd. Production of crude oil is falling at an even faster rate than that for
output as a whole, and the total output has only been kept close to 4.2 mn bpd by an increase in
the production of condensate from new gasfields.
Table 1
Iran: Oil Reserves and Production, 2010
Proven Reserves 1
Reserves 2 137.6 bn barrels
Reserves Remaining 3 90 years
Recovery Rate 25%
Production (mn bpd)
Crude Oil
Production 4 3.7
Production Capacity 5 4.0
OPEC Quota 5 3.3
NGL
Production 4 0.5
Production Capacity 5 0.5 1 As at 1.1.10 2 Including NGL 3 Based on 2009’s production 4 First half, 2010 5 As at 1.7.10
Source: (Reserves) Oil & Gas Journal
(Recovery Rate) NIOC
(Crude Production and Quota) OPEC
(Other) Pearl Oil estimate
Reserves and Production
Despite its apparently large reserves (see Table 1), Iran is witnessing a steady long-term decline
in the output from its principal oilfields. The natural decline is somewhere in the region of 10%
annually, which means that Iran must bring almost 400,000 bpd of new production on-stream
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each year just to keep the output of crude oil at its existing level. All this is now threatened by
US and EU restrictions on upstream financing and technology transfer.
Outlook for Oil Production
The Oil Ministry has tried to counter the effect of sanctions in a number of ways: one of which is
to stress the large size of Iran’s reserves. Its proven reserves are given as 137.6 bn bbl: sufficient
for 90 years’ production at current rates (see Table 1); but the Ministry claims this figure is a
small fraction of the country’s actual reserves. In 2008, the Deputy oil Minister, Ghulam Husain
Nuzari, suggested that Iran had potential reserves as follows:
(bn bbl)
Crude 630
NGL 110
Total 740
The Ministry has given no indication of where the additional oil and NGL are to be found or
under what circumstances–economic and technical–the liquids might be extracted.
There are even grave doubts about the validity of the much lower figure of 137.6 bn bbl given in
Table 1, which appears to have been dreamt up by the Oil Ministry for political purposes as part
of an argument over the allocation of production quotas within OPEC during the 1980s. This
topic is addressed in more detail in the previous GER Survey in this series: ‘Iran: Trying to
prevent a Decline in Output’.
Missing Targets
The Oil Ministry has been equally overoptimistic in its assessment of Iran’s production potential.
Targets were set for a production level of 8.0 mn bpd by 2015, which would involve a near-
doubling in output over recent levels. The target for 2009 was 5.4 mn bpd, which was undershot
by 1.2 mn bpd, and production this year is similarly running well below even the revised lower
target of 5.2 mn bpd (see Table 2).
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Table 2
Iran: Actual v Planned Production
Planned Actual Shortfall
(mn bpd)
2009
Total 5.4 4.2 1.2
2010
Crude 4.5 3.7 * 0.8
NGL 0.7 0.5 * 0.2
Total 5.2 4.2 * 1.0
2015
Crude 4.3 — —
NGL 1.0 — —
Total 5.3 † — —
* Estimated production, Jan-Sep 2010 † Revised downwards from 8.0 mn bpd.
Source: Oil Ministry
Outlook to 2015
On present trends, Iran is nowhere near on track to produce the planned total of 5.3 mn bpd in
2015. Output has not been at that level since 1978, after which it fell sharply during its eight-
year-long war with Iraq. Despite a steady recovery since 1988, Iran has struggled to go much
above 4 mn bpd (see Table 3).
Crude oil production appears to be falling again as output from Iran’s larger and older fields
declines. Some are witnessing output falls of 11% a year, according to the National Iranian Oil
Company (NIOC). Recovery rates are also low: about 25%, which is two-thirds of the global
average. Under the Oil Ministry’s plans, the decline in the output of the older fields is to be
more than offset by production from new fields, and an increase in the production of condensate;
but the programmes to increase the output of crude and condensate are both running behind
schedule (see Table 2) and their timing may very well slip further as a result of sanctions that
target investment in Iran’s oil and gas industries (see box).
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Table 3
Iran: Oil Production 1978-2010
Year Production*
(mn bpd)
1978 5.3
1979 3.2
1980 1.5
1981 1.3
1982 2.4
1983 2.5
1984 2.2
1985 2.2
1986 1.9
1987 2.3
1988 2.3
1989 2.9
1990 3.3
1991 3.5
1992 3.6
1993 3.7
1994 3.7
1995 3.7
1996 3.8
1997 3.8
1998 3.9
1999 3.6
2000 3.9
2001 3.9
2002 3.7
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2003 4.2
2004 4.2
2005 4.2
2006 4.3
2007 4.3
2008 4.3
2009 4.2
2010 4.2
* Includes NGL
Totals rounded
Source: (1978-2009) BP Statistical Reviews of World Energy
(2010) GER forecast
Iran has the ability at present to produce some 4.0 mn bpd of crude oil. The most it can hope to
do realistically between now and 2015 is to maintain its production capacity at or near that level.
The effect of sanctions makes it more likely that capacity will fall.
Nor are condensate and other gas liquids likely to come to the rescue. Sanctions will similarly
affect plans to produce more natural gas (see below), making it unlikely that the total output of
gas liquids will reach planned levels of about 1 mn bpd in 2015.
Output of all liquids is forecast as follows:
Year Impact of Sanctions
Low High
(mn bpd) (mn bpd)
2010
Crude 3.7 3.7
NGL 0.5 0.5
Total 4.2 4.2
2015
Crude 4.0 3.5
NGL 0.9 0.6
Total 4.9 4.1
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Oil Exports
Without an increase in production, Iran faces a decline in its exports of crude oil as domestic
consumption rises. Indeed, the Iranians are already encountering difficulties in selling their oil
overseas. Some oil companies are cutting back the volumes of oil they buy from Iran and some
have recently decided against renewing term contracts to purchase crude oil from Iran. In some
cases this has been for normal commercial reasons, such as disagreements over pricing or falling
demand; but there is growing concern in some company circles about the complications that
sanctions impose on trading with Iran. There are even fears in some quarters of future US
sanctions targeted specifically at Iranian oil exports.
In recent months, Iran has been forced to charter tankers in order to store oil it has been unable to
sell in current market conditions. Iran is not the only oil exporter that has had to put oil into
floating storage, but it accounted for about three-quarters of the crude oil temporarily stored at
sea during the summer of 2010.
Iran hopes that Asia’s growing oil markets will absorb increasing quantities of their crude, but
recent import figures from China, Japan and India suggest that purchases of Iranian crude are
falling. Iran cannot realistically expect exports to rise while international sanctions make
obtaining the finance and technology needed for its upstream industry increasingly difficult.
Outlook for Oil Exports
Iran’s oil consumption is expected to continue rising for the next five years. Over the last ten
years consumption of oil has risen by 3.6% annually. If it continued at a similar rate,
consumption would reach 2.1 mn bpd by 2015. There appears to be little scope to reduce this
quite modest rate of demand growth for a Middle Eastern country with a large young population.
Under such circumstances, exports may be forecast as follows, using the production forecast
presented above:
Year Impact of Sanctions
Low High
(mn bpd) (mn bpd)
2010
Net Exports 2.4 2.4
2015
Net Exports 2.8 2.0
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Trade in Products
The most immediate effect of sanctions has been on Iran’s trade in refined products. Iran’s
inefficient refinery sector is unable to produce all the white products required for the country’s
rapidly increasing population: and nowhere is this more evident than in the supply of gasoline.
Table 4
Iran: Oil Balance, 2009
(mn bpd)
Production
Crude Oil 3.8
NGL 0.4
Total 4.2
Consumption
Total 1.8
Trade
Exports 2.6
Imports 0.2
Net Trade 2.4
Totals rounded
Source: (Crude Oil) OPEC
(Other) Pearl Oil estimate
Of Iran’s approximately 200,000 bpd of imports during 2009 (see Table 4), about 130,000 bpd
were of gasoline–though the volume varied from season to season. Much of the remainder of the
import total was middle distillate: mostly diesel fuel.
There are signs that 2010’s total will be significantly lower than 2009’s, as a result of sanctions.
Some companies have formally announced that they will no longer supply Iran with refined
products. In June 2010, Total said it was ceasing to sell gasoline to Iran, and since then a
number of other companies are reported to have stopped supplying products. In the case of
companies that are still supplying Iran, there appear to have been problems in delivering the full
volumes as specified under the term contracts. In 2009, a number of other foreign companies
stopped supplying Iran, including Shell, Glencore, Trafigura and Vitol.
In early August 2010, Turkish refiner Tupras was reported to be having difficulty in fixing
vessels to deliver its gasoline to Iranian ports and may even have had to sell some of the cargoes
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intended for Iran to other buyers as a result. The US has threatened to impose sanctions on those
who provide ships or shipping services to deliver refined products to Iran. The Iranians had
asked Tupras to double their deliveries of gasoline between the second and third quarters of
2010, to 20,000 bpd. In late August, however, Tupras was reported to be selling no gasoline to
Iran. The fall in sales appears to be principally because of the reluctance of shipping companies
to handle oil bound for Iran. The Turkish government says that the sale of gasoline to Iran is not
illegal since it is not covered by the sanctions imposed by the UN. Ankara is not implementing
the tougher sanctions imposed by the US and the EU.
China–which opposes energy sanctions–continues to supply refined products to Iran. Russia also
appears to be supplying gasoline, though Russian oil trader Litasco, which is part of Lukoil, says
it has ceased to supply oil products to Iran. It has been suggested, however, that cargoes sold to
third parties by Litasco have been sold on to Iran despite destination clauses in the company’s
sales agreements that say that Litasco’s cargoes should not be sold to Iran.
The Iranians meanwhile say that they are producing more gasoline at home: apparently as a
result of diverting naphtha and reformate from the production of aromatics in the petrochemical
industry and partly by refining more domestically-produced gas condensates. It is doubtful that
these measures have led to the production of large quantities of gasoline. There nevertheless
appears to have been a sharp reduction in the volume imported since mid-March.
Gasoline imports in the second quarter of 2010 were reported at 46,000 bpd by the Iranian
student news agency, ISNA (see Table 5). This is approximately half what they were during the
previous quarter.
Iran’s principal supplier during the second quarter was the UAE, and most of this trade appears
to have been handled by firms in Dubai, which has long-standing trade links with Iran.
Approximately 8,000 Iranian businesses have offices in Dubai, but Dubai may soon have to fall
in line with sanctions now being discussed by the GCC (see box). Already, the Dubai Financial
Services Authority is making it more difficult to secure letters of credit for some trading
transactions with Iran.
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Table 5
Iran: Gasoline Imports, Second Quarter, 2010
Supplier Volume
(kbd)
UAE 34
Netherlands 4
Oman 3
Singapore 3
Turkmenistan 2
Total 46
Supply period covers 20/3/10 to 21/6/10
Data in tonnes converted at 8.5 bbl/tonne
Source: ISNA news agency
Oil Smuggling
The issue of Iranian oil imports has become further complicated by accusations that illegal trade
is taking place between the autonomous Kurdish region of Iraq and Iran. Some 40,000 bpd of oil
is allegedly being smuggled across the border into Iran.
The situation appears to have arisen largely as the result of a dispute between government in
Baghdad and the Kurdish Regional Government (KRG) over the export of crude oil produced in
Kurdistan. After an argument over payment, the export of crude oil from Kurdish fields via the
pipeline from Kirkuk to Ceyhan was stopped. Iraqi Kurdistan produces some 90,000 bpd, of
which only about half can be absorbed locally. The result is that a surplus of 40,000 bpd of
crude oil and a small volume of products is being exported to Iran.
Whilst this trade does not fall under any UN sanctions, the central government in Baghdad
declares that all of Iraq’s exports must be handled by the State Oil Marketing Organization
(SOMO). The KRG is accused of turning a blind eye to the sale of oil to Iran and sharp words
have been exchanged on the matter.
The KRG appeared at first to deny the existence of such trade, but there were credible reports
that lines of road tankers were regularly crossing the border. The KRG has since claimed that
tankers have the necessary authorization from Baghdad to cross the border. It is further claimed
inside Kurdistan that Iraqi firms are also involved in supplying oil to Iran.
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The Gas Industry
Sanctions and their Impact
Sanctions are likely to have a similar effect on the gas industry as they do on oil. There are
already signs of reluctance on the part of foreign companies to become involved in future gas
projects in Iran. All this in fact merely adds to the problems of an industry which is well behind
schedule in its plans to develop Iran’s enormous reserves of gas.
These plans are based on the South Pars gasfield. The giant offshore field is designed to be
developed in 28 separate phases but only nine are in operation so far and many of the remaining
19 are a long way behind schedule. Tehran is now proposing a series of bond issues to raise
sufficient funds to allow the development to be completed.
The Iranians nevertheless face considerable obstacles to their plans to complete the development
of South Pars. US sanctions, imposed in response to Iran’s planned nuclear programme, make it
difficult for Tehran to raise money in the world’s main capital markets. The UK also bars the
sale of its oil and gas technology to Iran.
Production Problems
The South Pars field complex is estimated to contain 375 trillion cf of gas. It is part of a much
larger structure that contains Qatar’s North Field and a further part of the Pars field, which is
known as North Pars and which Iran also plans to develop. Together, these two Pars fields have
an estimated 1,225 trillion cf of gas. Qatar’s North Field has further reserves of about
890 trillion cf. North and South Pars provide Iran with the world’s second-largest reserves of
natural gas: only Russia’s are larger.
For all its large reserves, however, Iran has struggled to exploit the huge reserves of North and
South Pars. So far, it is only South Pars that has been developed: and the development is both
partial and behind schedule. The Iranians have wanted for some time to establish an export trade
based on South Pars but have been forced instead to develop the early phases for domestic use in
order to meet gas shortages at home.
Iran produces 12.7 bn cfd of gas and consumes a roughly similar amount (see Table 6). It
exports about 800 mn cfd to Turkey but has to import a similar volume from Turkmenistan to
balance supply and demand. In recent years it has been forced to make temporary cuts in its
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exports to Turkey in order to meet seasonal increase in gas demand at home. Iran is, if anything,
a small net importer, taking each year as a whole.
Table 6
Iran: Gas Balance, 2009
Proven Reserves 991.6 trillion cf
Share of World Total 15.9%
World Ranking 2
Years Remaining 214
Estimated Total Reserves
Gas-in-place 2,700 trillion cf
Amount ultimately recoverable 1,600 trillion cf
(bn cfd)
Production 12.7
Consumption 12.8
Exports 0.8
Imports 0.9
Net Trade (0.1)
Totals rounded
Source: (Proven Reserves) Oil & Gas Journal
(Total Reserves) GER
(Other) OET estimate
South Pars Plans
Apart from the problems involved in raising the finance to develop South Pars, Iran is struggling
to attract international oil and gas companies to undertake the work. US firms are banned by
Washington from participating and some European firms are wary of involvement in case the EU
should join the US in imposing sanctions in protest against Iran’s nuclear programme. There
have also been a number of arguments over contract terms for developing certain phases. Iran’s
rapidly rising consumption of gas has prompted Tehran to restrict the amount of gas available for
export in future, thereby obliging potential foreign investors to sell to the much less attractive
Iranian domestic market.
The result of all this is that some potential foreign investors have either delayed making any final
investment decision or backed out altogether. Iran has tried to pressurize some of its potential
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investors by hinting that the phases they are interested in developing may be awarded to other
companies. There have been discussions with some Chinese firms, and one–China National
Petroleum Corporation–has been invited to join the consortium that wants to develop Phase 11 of
South Pars, which is a scheme to export 2 bn cfd of gas as LNG. The scheme’s other two
partners–Total and Petronas–have been in discussions on the project for several years without
making a final decision.
There are signs that Iran wants a much greater involvement by Chinese firms in future. The
government has begun to draw up proposals for the development of the North Pars field and has
already signed up one foreign investor: the state-owned China National Offshore Oil
Corporation.
Outlook for Gas Production
North Pars must be seen as a long-term option. Between now and 2015, Iran’s additional
production depends on South Pars. There are plans for an increase of 550% in production by
2024. The near-term plan is to double output to just over 23 bn cfd but this target looks doubtful
without an easing of sanctions.
Iranian plans are for a series of gas developments, most of which are intended to produce gas for
export. Three of these are designed to produce LNG for export, with an original combined
production target of 10 bn cfd by 2014. Sanctions, and in particular those by the EU, have made
this target all but impossible, since two of the schemes originally involved EU companies Shell,
Repsol and Total.
Shell and Repsol had been considering participation in Phases 13 and 14 of South Pars, which
were to have produced 2.1 bn cfd of gas for a project known as Persian LNG. A second scheme,
known as Pars LNG, involved Total and had an intended LNG production of 1.3 bn cfd. Neither
looks like going ahead as planned, leaving only Iran LNG, which has a targeted output of
1.4 bn cfd. Iran LNG is being developed by Iranian companies without any foreign participation.
Whilst some of the work has been completed, there is no indication so far of when–or if–the
LNG export terminal is going to be built.
A number of preliminary agreements have been signed with companies in Asia covering other
prospective LNG developments. Last year, for example, NIOC and China National Offshore Oil
Corporation agreed to work on a project designed to export 2.6 bn cfd of LNG from the North
Pars gasfield. Asian countries have in general exhibited less enthusiasm for sanctions than their
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European and US counterparts. Nevertheless, it is far from clear which–if any–of these projects
will go ahead.
The Iranians have also been pursuing plans to export gas by pipeline: to India and Pakistan, as
well as to Europe. The Nabucco Pipeline, which is backed by the EU Commission, has ruled out
Iranian participation in the proposed trunk line from Turkey to Central Europe. The Iranian Oil
Ministry, however, says that it is examining another six routes to export its gas to Europe.
At present it is difficult to see how any of the LNG or pipeline export schemes might proceed.
Where they do not prohibit participation by companies from various countries in Iranian gas
developments, they create sufficient uncertainty to prevent–or at least delay–most other large
developments projects.
The Oil Ministry appears to have recognized the difficulties that Iran now faces. In the first
place, it has more or less halved its original target of exporting 10 bn cfd. The original timetable
has also quietly been shelved. Some of the LNG projects are now to be allocated to North Pars
which is to be developed later than many of the South Pars phases.
Iran will now almost certainly make the domestic market the priority over exports. If there are to
be any export schemes, they are likely to be for the delivery of pipeline gas to countries nearby,
but none of these looks likely to be in operation before 2015. Output to 2015 is forecast as
follows:
Year Impact of Sanctions
Low High
(bn cfd) (bn cfd)
2010
Production 13 13
2015
Production 17 15
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Sanctions: The Next Step?
Sanctions are already affecting the upstream sectors of the oil and gas industries by denying
them access to several sources of finance and technology. They are also making it difficult for
Iran to import gasoline and other fuels for its domestic consumption. In what appears to be a
related development, Iran Air reported in August 2010 that it was having difficulty in securing
aviation turbine kerosine for its aircraft in some European airports, as a result of sanctions by the
EU, though the airline’s chairman later said that the problem had been a temporary one and that
Iran Air was now able to obtain fuel both at European and other aerodromes.
There were also reports that the UN’s sanctions that were imposed in June 2010 were inhibiting
Iran’s ability to sell its crude oil internationally. Large volumes of Iranian crude were reported
unsold and being stored at sea in tankers.
Iran certainly did experience problems in selling its crude oil during the third quarter of 2010,
but this may have had more to do with the high prices being asked by NIOC for its crudes.
Whilst Iran was putting oil into floating storage, the volume stored in tankers in the Persian Gulf
actually fell between 1st June and 1st September 2010, from 50.0 mn bbl to 31.4 mn bbl. NIOC
said that the high stock levels were caused by the closure of some of its refineries for
maintenance in the summer and that its floating stockpile would be reduced as domestic refinery
runs rose following the end of the maintenance period–which is what appears to have happened.
Iran has nevertheless had to consider taking a number of steps in order to carry on exporting oil
at what it regards as acceptable levels. These measures include:
Switching oil sales away from Europe towards Asia and other non-European
destinations where the EU’s sanctions do not apply [NB: the US does not import Iranian
oil].
Amongst the markets that NIOC may target for increased sales are China, Pakistan, Latin
America and various parts of Africa. Sales to some Asian markets, however, notably Japan
and South Korea, are likely to become more difficult following the imposition of sanctions
on these countries (see box).
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Refining more crude at home, which would reduce, and could eventually eliminate, the
need to import refined products, such as gasoline. The Iranian President, Mahmoud
Ahmadinajad, has indicated that Iran would prefer to export high-value refined products
rather than crude oil.
Exporting products, however, would encounter just as many problems as the export of crude
does. Moreover, for Iran to reduce substantially or eliminate its imports of refined products
there would have to be a considerable expansion and upgrading of the country’s old and
inefficient refinery sector which would, in turn, encounter similar restrictions on the
provision of finance and technology that now affect the upstream energy sector.
Ending the pricing of Iranian crude in dollars and euros, in an attempt to circumvent the
present and future financial restrictions from the US and the EU. One option under
discussion is to use the UAE dirham. Such a move would not necessarily be welcomed by
NIOC’s customers.
These measures are designed to deal with the present and future commercial pressures on Iran.
The problem is that Iran’s dispute with the US and its allies may turn into something more
serious. There are some in Iran who see the sanctions of the UN, the US, EU and others as part
of a US campaign to destabilize Iran and overthrow its government. Such people point to the
US-led invasion of Iraq in 2003 and the subsequent overthrow of the government under President
Saddam Hussain, as well as to US support of Israel, where there have been calls for an air attack
on Iran’s nuclear facilities.
One Iranian army general warned in August 2010 for Iranian retaliation in the event of what he
called ‘US aggression’. This retaliation, he said, would include an Iranian attack on Israel and
the closure of the Strait of Hormuz, thus preventing any exports from the Persian Gulf.
The US and its allies appear to prefer to rely on sanctions to force Iran to resume negotiations
about its nuclear programme; but this is not a risk-free option either. Sanctions are already
inflicting considerable damage on Iran’s energy industries, especially in the upstream sector and
on the development of an export industry based on LNG. It may be at some stage that Iran
regards this as sufficiently serious to consider some form of action of its own.