By Neil Misra
The purpose of this memorandum shall be to examine Iran’s energy assets (placing particular emphasis on natural gas, oil, and nuclear resources) and to analyze Iran’s energy prospects and potential foreign partners if the current nuclear issues were to be resolved. The conclusions reached are that (1) Iran’s massive natural gas reserves and tremendous oil resources make it a top energy player and (2) the lifting of sanctions would catalyze a dramatic increase in Iran’s energy output, thus bolstering Iran’s future energy prospects. Iran was chosen because international sanctions have devastated Iran’s energy sector, and repealing sanctions will considerably improve the Iranian economy and energy production.
Iran possesses tremendous energy assets. Its oil and natural gas reserves (proven) rank fourth and second in the world, respectively. Furthermore, Iran is a top ten oil producer and top five natural gas producer according to the EIA. However, in order to maximize its energy production potential, international sanctions must be lifted.
Iran possesses massive natural gas reserves, but many reserves remain unexploited because of international sanctions. Iran has the second-largest endowment of proved natural gas reserves in the world (17% of the world total), second only to Russia. With total natural gas resources standing at 1,187 trillion cubic feet, Iran accounts for one-third of OPEC’s natural gas reserves. 40% of Iran’s natural gas resources are situated in one immense field in the Persian Gulf, the South Pars, part of a larger field Iran splits with Qatar. Other notable gas fields include Kish, Tabnak, Forouz, Kangan, Khayyam, Madar, and Sardare Jangal. Despite these sizeable natural gas holdings, Iran is a relatively small exporter of gas. Iran could potentially annually produce $130 billion in natural gas revenues (which would surpass oil revenues), but its gas resources remain under-exploited largely due to sanctions and the withdrawal of major Western energy companies (e.g. Shell and Total).
In addition to the underdevelopment of its natural gas fields, there are three main reasons why Iran has been unable to fully profit from its copious natural gas holdings. Firstly, Iran suffers from significant geographic constraints. Given the country’s location, it is unable to conveniently export to the sizeable East and South Asian markets (as well as other distant markets). This is because it is largely unfeasible to build pipelines to these regions. A pipeline to Pakistan is possible, but vulnerable to attack by Baluchi rebels. Currently, Iran can only export its gas through pipelines. Only Azerbaijan, Armenia, and Turkey are accessible by pipeline and Iran is, therefore, losing out on huge potential natural gas markets. Secondly, Iran lacks the technology to produce liquefied natural gas (LNG). Countries outside of Iran’s immediate vicinity that would be willing to purchase Iranian natural gas (e.g. Japan, China, India, South Korea, etc.) could only feasibly import it as LNG. However, 2010 EU sanctions have “blocked Iran from receiving all technology used in exporting LNG, including tankers for transport.” Thus, if Iran cannot liquefy and transport its natural gas (and because it cannot easily build pipelines to further natural gas markets), it cannot export its natural gas to its biggest potential clients. According to the EIA, Iran “lacks the infrastructure to capture and transport” associated gas. Iran has subsequently become the second-largest “flarer” of gas in the world, which is a waste of its gas resources. If the sanctions were to be lifted, Iran could more fully extract value from its gas holdings and energy assets.
Iran possesses the fourth-largest proved crude oil reserves in the world and accounts for 10% of the world’s total reserves. Most of Iran’s oil reserves are located underground, and 85% of its onshore holdings are in the Luristan-Khuzestan basin. Major Iranian oilfields include Marun, Ahwaz, and Karanj. Additionally, Iran has oil reserves in the Caspian Sea, but has been unable to take full advantage of its Caspian holdings due to territorial disputes with Turkmenistan and Azerbaijan. Nonetheless, Iranian oil output has recently “decreased to its lowest level since 1986.” If sanctions were removed, Iran could potentially export 3.5 million barrels per day within one year and 4.2 million barrels per day within two years.
Iran has made efforts to expand its civilian nuclear apparatus. It currently has one Russian-built nuclear plant at Bushehr, and has recently signed a deal with Rosatom to construct two new nuclear reactors (and potentially six additional reactors in the future). Recent discoveries have roughly tripled Iranian uranium reserves from 1527 tons to 4400 tons. However, Russia has demanded that Iran purchase Russian enriched uranium to fuel the reactors. Moreover, Iran has agreed to return spent fuel from the reactors to Russia in order to alleviate concerns of using the spent fuel to construct a nuclear weapon. If both parties agree and Iran’s energy production rises, Iran could reallocate some oil and natural gas resources from domestic electricity production to export and yield greater export revenues. Iran’s energy prospects and potential foreign partners if sanctions are lifted will be analyzed in the next section.
If the sanctions were to be lifted, three crucial developments would dramatically bolster Iran’s prospects for increasing energy production and exports. Firstly, Iran’s LNG production apparatus will expand. As stated above, Iran cannot export its natural gas without converting it into LNG, as geographic constraints make constructing pipelines to markets infeasible. Without sanctions, Iran could obtain the technology needed to create and transport LNG. Currently, sanctions prevent major Western energy firms from aiding Iran in producing LNG. Secondly, Iran could use Western technology to apply enhanced recovery techniques to mature oilfields. Currently, the production capacity of Iran’s oilfields is declining after peaking in the 1970s. Enhanced recovery could substantially increase the extraction and recovery of oil from these fields. Thirdly, Iran could alter its “buyback” contract scheme to attract greater foreign investment once sanctions are repealed. The implementation of a new “Integrated Petroleum Contract” (IPC) model would facilitate the re-entry of Western energy companies to Iran. In sum, the return of foreign firms into the Iranian energy sphere would catalyze greater upstream investment and development, driving energy production.
Iran has numerous potential partners for the development of its energy resources. First, China’s SINOPEC, runs an oil project in the Yadavaran oilfield. Its progress in this field has been relatively slow, though production could accelerate if sanctions were lifted. Iran also granted China National Petroleum Corporation (CNPC) a deal to develop the South Pars gas field (after Total S.A. was forced to withdraw), but terminated its contract in April of 2014. Both CNPC and Total S.A. could return to the South Pars field if the sanctions were repealed. Second, the Japanese were given a concession to develop the Azadegan field, but were also compelled to withdraw because of sanctions. The Japanese would represent another potential partner for developing Iranian energy assets. Third, Rosatom’s aforementioned deal to construct nuclear reactors for Iran makes Russia a central partner in the nuclear energy sphere. Fourth, given their technological expertise in gas and oil production, it is highly probable that Shell, Chevron, and ConocoPhillips would represent strong potential partners for Iran. Bijan Zanganeh, the Iranian Minister of Oil, explicitly stated he would like these companies to develop Iran’s fields. Fifth, the Italian firm ENI has been permitted to continue producing oil in Iran through a sanctions waiver, but could increase production if sanctions are removed. Sixth, Turkey is currently a crucial partner for Iran, and could be a bigger partner in the future if sanctions are withdrawn. It imports 800 million cubic feet of gas and 100,000 barrels of oil from Iran daily. Moreover, Turkey has signaled a willingness to purchase even more oil from Iran in the future, should additional supplies become available. Seventh, Iraq is another significant partner, as it has recently agreed to a four year, $14.8 billion natural gas deal with Iran. This deal has the potential to singlehandedly double Iran’s gas exports (though this is only because Iran currently lacks proper LNG infrastructure). Lastly, given their high demand for energy imports, China, India, Japan, and South Korea are, in general, potential Iranian partners as purchasers of Iranian energy resources.
In sum, it is evident that Iran possesses plentiful energy resources, particularly in the natural gas and oil sectors. However, Iran has been prevented from fully exploiting its energy resources by Western imposed sanctions. Should these sanctions be lifted, the prospects for Iran to bolster its energy output and exports are tremendous.
Neil Misra is a student at George Washington University, majoring in International Relations and Affairs.
