Iran

This article is part of the series: Politics and government of Iran

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The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and "local and foreign national persons and legal entities." Buyback contracts, for instance, are arrangements in which the contractor funds all investments, receives remuneration from the National Iranian Oil Company (NIOC) in the form of an allocated production share, then transfers operation of the field to NIOC after a set number of years, at which time the contract is completed.

NIOC controls huge deposits of crude oil from which over 130.798 billion barrels (2.07952×10¹⁰ m³) can be exploited in the form of primary and secondary recoveries. Iran is the fourth largest oil producer in the world after the United States and OPEC's second largest exporter. During 2005, Iran produced about 4.24 Mbbl/d (674,000 m³/d) of total liquids. Of this, 3.94 Mbbl/d (626,000 m³/d) is crude oil, roughly 5 percent of world crude production. Iran's current sustainable crude oil production capacity is estimated at 3.8 Mbbl/d (600,000 m³/d), which is around 310,000 bbl/d (49,000 m³/d) below Iran's latest (July 1, 2005) OPEC production quota of 4.110 Mbbl/d (653,400 m³/d).

The huge reserves of natural gas put Iran in the second place, in terms of the natural gas reserve quantity, among other countries, only next to the Russian Federation, with an estimate of proven reserve quantity close to 23 bcm. There are, at present, eight refineries —with a potential capacity of 950,000 barrels per day (151,000 m³/d) and one refinery complex in the country with a total refining capacity of over 1,5 mb/d (in Tehran, Tabriz, Isfahan, Abadan, Kermanshah, Shiraz, Bandar Abbas, Arak and Lavan Island) and a storage capacity of 8 milliard litre. Abundance of basic material, like natural gas, in the country provide favorable conditions for development and expansion of petrochemical plants.

Thus National Iranian Petrochemical Company (NIPC) has succeeded in the recent years in producing a wide range of petrochemicals and increasing its production, in terms of quantity, to a new level.

[edit] Major developments

Iran holds 10% of the world's proven oil reserves and 15% of its gas. It is OPEC's second largest exporter and the world's fourth oil producer.

In 2001 Iran’s already sizable oil reserves were bolstered by the discovery of a large new offshore field near Abadan at the head of the Persian Gulf. However, oil recovery percentages in existing fields lagged in the early 2000s. The largest natural gas field is South Pars, discovered in 1988 in southern Iran and under intensive development in the early 2000s.

According to the Oil and Gas Journal, as of January 1, 2006, Iran held 132.5 billion barrels (2.107×10¹⁰ m³) of proven oil reserves. This figure, which includes recent discoveries in the Kushk and Hosseineih fields of Khuzestan province, means Iran holds roughly 10 percent of the world's total proven reserves. The vast majority of Iran's crude oil reserves are located in giant onshore fields in the south-western Khuzestan region near the Iraqi border. Overall, Iran has 40 producing fields – 27 onshore and 13 offshore. Iran's crude oil is generally medium in sulfur and in the 28°-35 °API range.”

Iran currently produces about 4 million barrels (640,000 m³) of oil per day, of which only 2.5 million barrels (400,000 m³) are exported with the remaining 1.5-million-barrel (240,000 m³) being consumed internally. According to the latest report (26 Dec 2006) by the National Academy of Sciences of the United States (NAS), if the current increase in local Iranian oil consumption continues and the current decline in oil production is not stopped, then by 2015 Iran’s oil export will decline to zero. ^[1] According to this and other reports Iran needs to invest about $2.5 billion a year just to stand still. Iran is not running out of oil, but needs money to maintain old fields and bring in the new fields online. More recently, Oil Minister Gholam Hossein Nozari said Iran plans to invest $500 billion in the oil sector until 2024.^[2] In 2009, Iran was one of the largest gasoline consumers in the world ranking second behind United States in consumption per car.^[3] Iran has the third largest consumption of natural gas in the world after United States and Russia.^[4]

[edit] Foreign Direct Investment in Iran

Since the 1979 revolution in Iran, the country has been under constant US unilateral sanctions. “The first U.S. sanctions against Iran were formalized in November 1979, and during the hostage crisis, many sanctions were leveled against the Iranian government. By 1987 the import of Iranian goods into the United States had been banned. In 1995, President of the United States Bill Clinton issued Executive Order 12957 ^[5], banning U.S. investment in Iran's energy sector, followed a few weeks later by Executive Order 12959 ^[5] of May 9, 1995, eliminating all trade and investment and virtually all interaction between the United States and Iran.”

Despite the sanctions, Iran continued to attract foreign investment and technical cooperation for its energy sector. Countries such as France, Japan, Italy, Norway, UK, Brazil, Malaysia, Spain, Holland, China, Russia, and others took advantage of absence of the American competition and tried to fill the gap. However, the threat of American retaliation kept the investment way below the desired levels. It only allowed Iran to continue to keep its oil export at its OPEC determined quota level.

In 2006, China signed oil and gas contracts worth over $100 billion with Iran. China is heavily involved in developing the huge Yadavaran oil field. If completed, the deal will allow China to buy 150,000 barrels (24,000 m³) of Iranian crude a day at market rates for 25 years as well as 250 million tons of liquefied natural gas (LNG). Under an initial agreement signed by the Sinopec Group in October 2004, China could pay Iran as much as $100 billion for the stake and the purchases of oil and gas over 25 years.” ^[6]

The amount of foreign investments made in Iran's oil industry showed a 9.1 percent growth in the last Iranian calendar year (ended March 19, 2007). Over$14.2 billion worth of foreign investments was made in the oil industry in the period 2006-2007 with the National Iranian Oil Refining and Distribution Company (NIORDC) attracting most of the amount.^[7]

[edit] Gas Cartel

In October 2008, in Tehran, the Gas Exporting Countries’ Forum (GECF) agreed to form a cartel. Russia, Iran, and Qatar announced that they intend to form a yet-unnamed group to "coordinate gas policy." The Group of Three (the "troika") will meet quarterly to coordinate and exercise control over close to two-thirds of the world’s gas reserves and a quarter of all gas production. To compare, the Organization of Petroleum Exporting Countries (OPEC) controls more than three-quarters of the world’s oil reserves but only 40% of global production.^[8] According to Valery Yazev, the head of the Russian parliament's energy committee and the Russian Gas Union industry group, the cartel could be joined by Turkmenistan, Kazakhstan, Uzbekistan, Ukraine and Belarus.^[9][10] The founding fathers of the "gas OPEC" as it sometimes referred to, are Iran, Russia, Qatar, Venezuela and Algeria. Members of the Gas Exporting Countries Forum include Algeria, Bolivia, Brunei, Egypt, Indonesia, Iran, Libya, Malaysia, Oman, Qatar, Russia, Trinidad and Tobago, the United Arab Emirates and Venezuela. Norway is an observer.^[11]

[edit] Gasoline subsidies

Iran has one of the cheapest gas prices in the world: 8 cents per liter (33 cents per gallon) while mineral water sells for 13 cents a liter, because the government subsidies many basic commodities, including gasoline, totalling more than $100 billion per year (2007/2008) - $7 billion worth of gasoline imports as of 2006 alone, because of lack of domestic refining capacity.^[12] Iran has also one of the highest gas consumption per capita in the world because of contraband with neighboring countries and public waste (domestic consumption increasing 10% per year). This problem of dependency on imports has also national security ramifications because of possible sanctions on gasoline imports.

[edit] Waste and pollution

Experts agree that oil is a pollutant and that its usage should be made as efficient as possible and not wasted because encouraged/incentived through subsidies.^[13] The same holds true for electricity (power wastage hit $1.1 billion in 2006), water^[14], wheat^[15], pharmaceuticals and other commodities like cement and steel and for the same set of reasons. Consequently, Iran has become a net importer of gasoline (in 2006, 40% of Iran's daily 70 million liters of gasoline consumption was imported)^[16].

These subsidies also create an environment in which manufacturers become complacent and not only do not conserve energy in their production activities, but also do not try to build energy efficient appliances and machines; simply because their consumers do not pay attention to the product's energy consumption. Based on energy consumption, Iranian made cars, freezers, refrigerators, etc. will not be able to compete with the similar sized Japanese, American or European products.^[17]

[edit] Contraband and massive theft of public property

Also contributing to the problem greatly, arbitrage opportunities, resulting from the difference between Iran's subsidized price and the market price abroad, through smuggling with other countries, has considerably aggravated the shortage of gasoline in Iran, diminished its exports of crude oil, and illegally drained/stolen huge financial resources (counted in billions of dollars per year) from the government coffers (treasury - people's money that is) into private bank accounts abroad^[18]. No arrest has been made public to this day by the judiciary, and the identity of the peoples responsible for this massive theft of the public property have not been released.^[19] In that context, it is possible that part of the "imported" gasoline has never been delivered to the Iranians.^[20] Meaning that it is solely an accounting transaction through the use of falsified documents (i.e., no physical delivery of the commodity but transfer of the payment and subsidies to those people who handle these matters at the Ministry of Petroleum). Some 1.8 billion liters of oil products worth 10 trillion Iranian rials ($1 billion USD) are smuggled out of Iran per annum (2006).^[21] Iran says its naval security forces have confiscated ten oil tankers smuggling 4,600 tons of Iranian fuel out of the Persian Gulf in 2008. Fuel smuggling has increased by 232 percent compared to last year's figures.^[22] The statistical difference by the Central Bank of Iran and the Oil Ministry during the four-year (2005-2009) period of Iran's ninth government is over $27 billion.^[23]

According to statements of counter-smuggling authorities in 2009, despite rationing, 40 million liters of gasoline was smuggled abroad every day equivalent to 17 percent of the national daily output. This is while most of the smuggling concerns gasoline and diesel fuel, whereas we are importing both of these to the tune of 30 million liters (7.9 million US gallons) every day (2009).^[24]

Besides, studies have shown repeatedly that subsidies for gasoline mostly benefit the higher income strata of the population because they are the ones who can afford to drive cars or who can profit by using it as an input/feed to their (export) businesses (e.g. transportation or petrochemicals).^[25] Subsidies for bread and medicine, for example, are highly untargeted vis-à-vis the poor, and the richest decile of households benefits 12 times more from gasoline subsidies than the poorest decile.^[26]

Therefore, it is advisable to ban gasoline subsidies altogether and transfer the subsidy amounts directly to the population equally or to the population who needs it specifically. A census is currently under way but, strangely, statistics regarding income levels have been discarded in the questionnaire. This precious information regarding who needs help in Iran can still be collected while the government distributes "justice shares", which are shares of state-owned enterprises being privatized given to low income Iranians, because they will have to justify (prove) their low income levels to the authorities at that time. In 2007, Iran had 12 million people living below the poverty line. Six million of these people were not supported by any foundation or organization.^[27]

[edit] Proposed solution

On January 24, 2007, Iranian President Ahmadinejad called high petrol consumption as "the main problem facing national economy", but at the same time, told the press that after making necessary preparations such as a development of public transportation system the government will free up petrol prices after five years (only) in 2011.^[28] In response to this situation, the Government of Iran has envisaged to implement a two-tier payment system for the purchase of gasoline through the use of smart cards, whereby:

• Starting on June 27, 2007, each car privately owned is allotted 100 liters per month at the price of 1000 rials per liter (11 cents for normal petrol, 15 cents for super - new domestic rationed price), with consumption beyond that at 60-65 cents per liter (imported/open market price - yet to be confirmed), ^[29]
• Private cars using petrol and compressed natural gas (CNG) would only be allowed 30 liters,
• Government cars with monthly limit placed at 300 litres, starting one week earlier,
• 800 liters per month for yellow taxis and privately owned taxis.

The rationing system is scheduled to last 4-6 months during its first phase.^[30]

A new plan is under discussion (December 2008). According to those who are preparing the plan, energy subsidies would be deposited in the account of the beneficiary in cash in the first phase of the project. And gradually, the rich will be left out of the energy subsidy plan. In subsequent phases, the plan will include the subsidies for staple goods such as wheat and bread.^[31]

[edit] Criticism

It must be noted that even if the government does not plan to target low-income Iranians for the subsidies, experts agree that in the worst case scenario (the present situation that is), it would make more sense to distribute the same amount of subsidies in the Government's budget (if not more) to the entire population equally and directly through cash payments.^[32] That would be $400 US per adult per year in 2006 for gasoline alone when the average annual salary in Iran is $2,700 US ($1,400 per person, including children, per year when including other subsidies/commodities for 2008. That means $5,600 for a family of four in 2008!); instead of implementing a two-tier payment system that can be technically defrauded, in order to avoid the real cost incured by the underprivileged, general population and the government because of contraband, waste and over-consumption among other reasons cited above ^[33]. This is the easiest and most efficient solution because inflation would increase by the same amount or much less than the purchasing power of the Iranian consumers, because of the cash transfer from the government to the Iranian people (as described above from previously budgeted subsidies).^[34] This, above the transfer from the thieves to the Iranian people (from the proceeds of the smuggling activity) and through productive Capital investment. However subsidies must be suppressed simultaneously for all 3 sources of energy (gasoline, gas and electricity), otherwise there will be a new arbitrage opportunity created for speculators and businessmen between these 3 sources of energy. Therefore it is not even a problem that the measure would be unpopular for the rulers, if things are explained properly to the population and implemented (quite the opposite!). These subsidies are, de-facto, a massive and illegal transfer of wealth - counted in billions of dollars per year - from the people of Iran to the pockets of the ruling class/mafia,^[35][36] but falsely disguised as "economic help/assistance" to the Iranian people and this is the only real reason why they are kept in place.^[37]

[edit] Organization

The Ministry of Petroleum (MoP) manages:

• National Iranian Oil Company (NIOC) - oil and gas exploration and production, refining and oil transportation;
• National Iranian Gas Company (NIGC) - manages gathering, treatment, processing, transmission, distribution, and exports of gas and gas liquids;
• National Iranian Petrochemical Company (NPC) - handles petrochemical production, distribution, and exports; and
• National Iranian Oil Refining and Distribution Company (NIORDC) handles oil refining and transportation, with some overlap to NIOC.

The National Iranian Offshore Oil Co. (IOOC) is in charge of offshore oil fields in the Persian Gulf. The National Iranian South Oil Fields Co. (NIOC South) is in charge of onshore oilfields in southern Iran. Pars Oil & Gas Co. (POGC) is in charge of the offshore North and South Pars gas fields. Khazar Exploration & Production Co. is in charge of Iran's Caspian Sea sector. Also, the National Iranian Tanker Company (NITC) controls the second largest fleet of tankers in OPEC.^[38]

[edit] See also

• Energy of Iran
  • Iran-Turkey pipeline
  • Korpezhe-Kurt Kui Pipeline
  • Iran-Armenia Natural Gas Pipeline
  • Iran-Pakistan-India gas pipeline
  • Neka-Jask pipeline
  • Nabucco pipeline
  • Iran Shipping Lines
    • National Iranian Tanker Company (Oil tankers)
• Economy of Iran
  • Privatization in Iran
  • Foreign Direct Investment in Iran
    • The Industrial Corridor of Asalouyeh
  • Sanctions against Iran
  • Iranian oil bourse
• Environmental issues in Iran
  • Strait of Hormuz
  • Kharg Island
  • Caspian Sea

[edit] References

1. ^ The Iranian petroleum crisis and United States national security - Stern 104 (1): 377 - Proceedings of the National Academy of Sciences
2. ^ Iran Daily - Domestic Economy - 04/24/08
3. ^ http://www.iran-e-sabz.org/news/iranenv.html
4. ^ https://www.cia.gov/library/publications/the-world-factbook/rankorder/2181rank.html?countryName=Iran&countryCode=ir&regionCode=me&rank=4#ir
5. ^ ^{a b} U.S. Treasury - Sanctions Program Summaries - Iran
6. ^ Bloomberg.com: Asia
7. ^ Foreign investment in Iran's oil industry up by 9.1 percent last year
8. ^ http://www.ensec.org/index.php?option=com_content&view=article&id=171:gas-exporting-countries-forum-the-russian-iranian-gas-cartel&catid=90:energysecuritydecember08&Itemid=334
9. ^ http://www.news.com.au/dailytelegraph/story/0,22049,20676058-31037,00.html
10. ^ http://online.wsj.com/article_email/SB117571518133560013-lMyQjAxMDE3NzA1NDcwMTQ1Wj.html
11. ^ http://www.iran-daily.com/1387/3324/html/economy.htm
12. ^ "Energy subsidies reach $84b". Iran-Daily. 2007-01-08. http://www.iran-daily.com/1387/3111/html/economy.htm. Retrieved 2008-04-27. 
13. ^ http://www.iran-daily.com/1387/3313/html/economy.htm
14. ^ Iran Daily - Domestic Economy - 06/06/07
15. ^ Iran-Daily: "Power Wastage Hits $1.1b"
16. ^ US Department of Energy - Oil Sector in Iran
17. ^ "Ahmadinejad's Achilles Heel: The Iranian Economy"
18. ^ Iran-daily: $1b Returned to Treasury
19. ^ Iran Daily - Front Page - 06/17/07
20. ^ http://www.payvand.com/news/09/oct/1266.html
21. ^ http://www.iran-daily.com/1385/2597/pdf/i3.pdf
22. ^ http://www.payvand.com/news/08/dec/1171.html
23. ^ http://www.upi.com/Energy_Resources/2009/09/23/Irans-massive-oil-revenue-discrepancies/UPI-38201253740655/
24. ^ http://www.presstv.com/detail.aspx?id=107132&sectionid=351020103
25. ^ Iran Daily - Domestic Economy - 04/07/07
26. ^ http://go.worldbank.org/KQD2RP3RX0
27. ^ Tehran Times - Poverty in Iran
28. ^ Times, Tehran (January 25, 2007). "Iran trying to prevent another UN resolution: president". Tehran Times. http://tehrantimes.com/Description.asp?Da=1/25/2007&Cat=2&Num=023. Retrieved 2007-01-25. 
29. ^ Iran Daily - Front Page - 03/08/07
30. ^ Protests flare in Iran over petrol rationing - Forbes.com
31. ^ http://www.iran-daily.com/1387/3103/html/economy.htm#s295833
32. ^ http://iran-daily.com/1387/3257/html/economy.htm
33. ^ http://tehrantimes.com/Description.asp?Da=2/22/2007&Cat=14&Num=001
34. ^ Iran Daily - Front Page - 05/20/07
35. ^ Iran Daily: Cash Subsidy Plan
36. ^ News Analysis: Firing Tightens Iranian President's Economic Circle
37. ^ Iran Daily - Domestic Economy - 05/17/07
38. ^ http://www.eia.doe.gov/emeu/cabs/Iran/Profile.html

[edit] External links

• Official website
• NIOC
• Brief Study - Oil & Gas in Iran (2003)
• Australian Government - Oil & Gas Industry Profile for Iran
• US Department of Energy - Iran
• SHANA - Official News Service for Oil and Gas in Iran
• BBC - Iran in Maps
• Ministry of Petroleum Overview - Iran Daily, April 2007

v • d • e Energy in Iran Oil Ministry of Petroleum  · National Iranian Oil Company  · Tanker Co.  · Iranian Offshore Engineering and Construction Company  · Oil Bourse  · Oil reserves Gas National Iranian Gas Company  · Persian LNG  · Gas reserves Gasoline National Iranian Oil Refining and Distribution Company  · Gas rationing Petrochemicals National Iranian Petrochemical Company  · Asalouyeh industrial corridor  · Marun  · Free Trade Zones Pipelines Iran–Turkey  • Korpezhe–Kurt Kui  · Iran–Pakistan–India  · Neka–Jask  · Nabucco  · Iran-Armenia  · Gas Trunkline Nuclear Atomic Energy Organization  · Nuclear program  · Facilities (Bushehr)  · Timeline Wind Wind power See also Environment  · Caspian Sea  · Strait of Hormuz  · Kharg Island  · Reservoirs and dams  · Transport  · Privatization (MAPNA  · AZAR AB  · IDRO)  · Foreign direct investment  · Sanctions