Health of Iran's oil industry in question

As the United States wages a very public battle against Iran's quest for nuclear power, Washington, DC, quietly is gaining ground on another energy front: the oilfields that are the Islamic Republic's lifeblood.

Iran's oil industry has raked in record amounts of cash during three years of high oil prices. But a new US campaign to dry up financing for oil and natural gas development poses a threat to the republic's ability to continue exporting oil over the next two decades, many analysts say.

The campaign comes at a moment of unique vulnerability for Iran's oil industry, which also faces challenges from rising domestic energy consumption, international isolation, a populist spending spree by President Mahmoud Ahmadinejad and trouble closing contracts with foreign oil companies - a recipe for potential disaster in a nation with one of the world's largest reservoirs of oil.

"If the government does not control the consumption of oil products in Iran ... and at the same time, if the projects for increasing the capacity of the oil and protection of the oil wells will not happen, within 10 years, there will not be any oil for export,'' Mohammad Hadi Nejad-Hoseinian, Iran's deputy oil minister for international affairs, said in a telephone interview.

If Iran were suddenly to stop exporting its 2.4 million barrels of oil a day, such as in the event of a military strike, world oil prices probably would skyrocket. But a gradual decline probably could be offset by other Organisation of Petroleum Exporting Countries (OPEC) members, analysts say, particularly as Iraq increases its oil production and Saudi Arabia carries out plans for significant increases in its production capacity.

The efforts by the US and its allies over the past few months to persuade international banks and oil companies to pull out of Iran threaten dozens of oil and gas projects, including plans for development of Iran's two massive new oil fields that stand to expand oil output by 800,000 barrels a day over the next four years.

In addition, banks are no longer granting letters of credit for delivery of some supplies, ministry officials say. And as nations such as Japan begin to back out of Iran oil development under US pressure, the government in Tehran is being forced to dig deeply into its own reserve funds to get crucial new projects off the ground.

But Nejad-Hoseinian said Iran has recognised the gravity of the threat and has launched steps to head it off, including new "smart'' rationing cards scheduled for distribution in March to check skyrocketing sales of cheap gasoline and an overhaul of Iran's historically stingy contract terms in an attempt to lure big oil companies into skirting the US roadblocks.

Iran also is hoping to turn to China and Russia for help. But US officials have warned they will seek to hold China accountable under Washington's unilateral sanctions laws if it proceeds with a $16-billion project to develop Iran's North Pars gas field.

Iran's oil and natural-gas dilemma has no direct connection to the sanctions adopted by the UN Security Council last month, which are tightly targeted at assistance to Iran's nuclear programme. Rather, the looming crisis stems from a series of domestic problems that have converged at a time when Iran is susceptible to US attempts to capitalise on them to coerce Iran's compliance on the nuclear issue.

Sanctions

More than two decades of previous US sanctions have had little effect on Iran's oil industry - US-based companies have been replaced, largely by Europeans. But this new attack on financing has started to dry up potential loans on dozens of projects, according to oil industry insiders in Tehran and the West.

In a report published this month by the National Academy of Sciences, Johns Hopkins University geography professor Roger Stern argued that the confluence of high domestic demand, delay in adding new production capacity, diversion of natural gas to keep wells pumping and other factors could lead to a decline of 33 per cent to 46 per cent in exports by 2011 and a halt to exports by 2015 or so. Other analysts have said output is more likely to remain flat at about 4 million barrels a day.

Iranian officials say they have signed $28.4 billion worth of new oil and gas development contracts over the past 15 months and hope to increase production to 7 million barrels a day by 2014 - a goal that the International Energy Agency says will require $80 billion in investments. Whether that will be realised or not could depends, in large part, on what happens on the nuclear issue.