Running Dry; To finance its nuclear threats, Iran banks on its oil. But can it get the stuff out of the ground?
Daniel Fisher 3 July 2006 Forbes Volume 178 Issue 1
To finance its nuclear threats, Iran banks on its vast oil resources. But it's rather inept at getting the stuff out of the ground.
Iran's pugnacious game of nuclear brinkmanship is fueled by oil. With 133 billion barrels of proven reserves, it is the world's second-largest petro nation, after Saudi Arabia. And its threats-- like the recent taunt by Ayatollah Ali Khamenei to cut off oil shipments to the West if the U.S. attacks Iran--have the power to rattle international markets.
How ironic, then, that Iran's ability to pump is dwindling by the day. Thanks to high prices, the National Iranian Oil Company will bring in $50 billion this year and account for 85% of the nation's exports. But those swelling coffers mask a lot of problems. NIOC is a battlefield for competing powers within Iran's theocratic regime, and as a result it hasn't been able to invest enough money to keep the crude flowing. From fields more than half a century old (some dating back to the first oil discoveries in the Middle East in 1908) comes 60% of Iran's oil. "All, without any exception, are in decline--some in terminal decline," says Mehdi Varzi, a prerevolutionary NIOC official who now runs the consulting firm Varzi Energy in London. "Iran has great difficulty maintaining production."
And in refining. Tehran spends an estimated $5 billion annually to import 180,000 barrels a day of gasoline from places like India and Singapore. It then sells it, at a heavily subsidized price, to consumers for less than 40 cents a gallon. But this summer Tehran is expected to start rationing those supplies, providing a jolt to an already restive and young population, says Fereidun Fesharaki, a former energy official (pre-1979) who now runs Facts, an energy consultancy, and is a senior fellow at the East-West Center in Honolulu. The Iranian government can scarcely afford the subsidy, but raising the price of gasoline would potentially wreck the economy. It also might threaten the grip of Iran's ruling mullahs.
There is a solution to Iran's looming energy crisis: Bring in foreign capital and technology to boost oil and gas production. But these days Iran is no more inclined to welcome outsiders than is Nigeria or Venezuela. Not too long ago it was hospitable to foreigners: As oil minister, Bijan Namdar Zanganeh, an ally of powerful former president Ali Akbar Hashemi Rafsanjani, in the late 1990s pushed through billions of dollars in agreements with Shell, France's Total, Italy's Eni, Schlumberger and Halliburton to develop large and technically challenging projects, such as Iran's huge South Pars field, which is believed to hold 7% of the world's natural gas supply. Conoco was the front-runner for the South Pars job until then President Bill Clinton signed an executive order in 1995 banning it from doing business in Iran. (Today, as sanctions against Tehran have tightened, trade with the U.S. is restricted basically to the export of rugs, pistachio nuts, movies and TV programs.) Even though U.S. firms can't buy petroleum directly from Iran, 2.5 million barrels a day of Iranian oil find their way into the world market.
NIOC once tried to put on more of a Western face. Zangeneh planned to streamline it along the lines of, say, Shell, and even hired Bain & Co. Italy to conduct a $2.3 million study on how to make the bureaucratic state company more efficient. Bain & Co., headquartered in Boston, says its independent Italian unit did the work and no U.S. sanctions were violated.
Everything changed last year with the surprise victory of President Mahmoud Ahmadinejad over a field that included two-time president Rafsanjani. A demagogue who plays to Iran's masses by denying the Holocaust and calling for the destruction of Israel, Ahmadinejad also vowed to root out corruption at the oil ministry, where Rafsanjani's gang of former revolutionaries and their relatives, as well as cronies within the religious hierarchy, have made fortunes ("Millionaire Mullahs,"FORBES, July 21, 2003). "People didn't resist giving up political power, or even the presidency," says Hooshang Amirahmadi, a professor at Rutgers University and head of the American Iranian Council, a group that tries to foster better relations with Iran. "But they resist giving up that rent base."
The children and grandchildren of these shadow leaders, say experts with contacts inside Iran, control large portions of the economy, including firms that rake off fees for importing goods into the country and lucrative divisions within NIOC. (Iranians refer to the younger players as "the ten princes" and follow their deals on Web sites and via satellite TV programs produced by exiles in Los Angeles.) Some sources say that even the Revolutionary Guards--Ahmadinejad is a veteran of these forces, which once formed the core of Ayatollah Ruhollah Khomeini loyalists, then fought in the 1980--88 war with Iraq--have unclean hands, siphoning off as much as 30% of total oil production, which they sell in competition with the state-owned company. (Fesharaki says these reports are nonsense.)
NIOC must contend with more than mere corruption. Trapped between warring factions inside Iran's government, the technocrats in charge of producing oil and gas find it hard to get much done. Nationalist politicians resist any deals with foreign oil companies as giveaways or threats to Iran's sovereignty. Petropars, an entity set up to negotiate development projects with foreign companies in the South Pars field, lost much of its autonomy in 2002 after members of the Iranian parliament accused it of corruption. (Olav Fjell, chief executive of Norway's Statoil, and two other higher-ups were forced to resign a year later over allegations the firm made improper payments to Mehdi Hashemi Rafsanjani, son of the former president, to secure contracts in Iran. Statoil paid a fine, though no criminal charges have been filed.) Former revolutionaries and others with ties to the ruling mullahs, meanwhile, guard fiefdoms within the Ministry of Petroleum where they can control the budget and operations of NIOC.
The fight over Iran's oil wealth has paralyzed negotiations with foreign oil companies. Statoil recently wrote down the value of an investment in the South Pars gas field of $237 million after taxes, citing "considerable cost increases and delays in the development." Joint ventures were already difficult because of Iranian laws prohibiting most direct investments in oil. Companies were offered "buybacks" instead, under which they drilled for oil, built pipelines and handed over the assets to the government in exchange for a fixed return, paid in oil. Total's return on its 1997 South Pars project was 18% to 19% a year, says London consultant Varzi, because authorities were desperate to sign a deal after Conoco pulled out. Subsequent returns dropped as low as 11%, thanks to political pressure inside Iran, discouraging all but the most desperate players from participating. Iran hasn't negotiated a buyback since 1999. "No foreign company in its right mind would hand over the most advanced technologies to Iran and then get kicked out after a few years," says Varzi.
Iran has $97 billion in oil, gas and petrochemical projects on the drawing board, according to the Middle East Economic Digest. But few of them seem to be moving forward. In March 2004 NIOC boasted about huge contracts it was signing with foreign companies to help meet its goal of increasing oil production by 25% by 2010. Among them: an initial $2 billion pact with Inpex of Japan to develop the estimated 26-billion-barrel Azadegan field near the border with Iraq. But since then Inpex hasn't drilled a single well. Inpex, which is closely linked to the Japanese government, says it's waiting for Iran to clear away mines left over from the Iran Iraq War. The Islamic Republic News Agency says Iran has dug up most of the mines, and Tehran has threatened to cancel Inpex's contract and give it to another oil company.
Iran's natural gas reserves come to 940 trillion cubic feet--15% of the world's known supply. NIOC plans three ambitious projects to expand South Pars, including multibillion-dollar liquefiers to chill the fuel into a form that can be carried by refrigerated tankers to Europe and the rest of the world. Two years ago Total announced an LNG project (reportedly $2 billion) but hasn't moved beyond the planning stage. ("Discussions have been ongoing for quite some time," says spokesman Paul Floren, without elaboration.) NIOC also recently announced plans for a $7 billion gas pipeline to Pakistan and India.
Gas exports would increase the foreign currency flowing into Iran. But Iran needs the gas for domestic consumption and to pump into existing oilfields to keep the crude flowing. Iran shut down its electricity grid several times last winter to conserve gas, says former energy official Fesharaki, and it plans to build at least 600 compressed natural gas stations this year to reduce demand for gasoline. "Iran has sold gas to India, but it has nothing to deliver," he says.
More menacing to Iran's future is the accelerating decline of its oilfields. As they age, it becomes more difficult to force the crude from them. Fesharaki cites a 1974 study that determined Iran needed to reinject 9 billion cubic feet of gas a day to maintain oil production above 4 million barrels a day. That figure has risen to 20 billion cubic feet or so a day now--roughly double the current production and equivalent to planned LNG exports from Qatar, a leading supplier.
Output at the Ahwaz Bangestan oilfield has declined to 150,000 barrels a day from 250,000, Fesharaki says, and is on its way to 60,000 barrels a day if nothing is done. Production could be stabilized at 200,000 barrels a day if Iran invested in gas reinjection--assuming it could get its hands on both the gas and the technology to use it. Fesharaki is more optimistic than most experts about whether Iran can maintain current production of around 3.9 million barrels a day. But its target of 5.3 million barrels a day by 2010? "Impossible," he says. Even if the U.S. lifts sanctions prohibiting giants like ExxonMobil and ConocoPhillips from returning to Iran, "no one will invest," Fesharaki says.
He may be wrong there. Just as they lined up like anxious Sooners, anticipating a lifting of sanctions on Libya, U.S. oil titans are eager to reenter Iran after a 27-year lockout, even if they aren't admitting it publicly. Greed may eventually trump politics in Tehran, too. The economy is a shambles. Public debt, thanks to a bloated bureaucracy and subsidized social programs, is 28% of GDP. With unemployment at 11%, and half its 68 million people under the age of 25, Iran will have a tough time keeping the populace happy with just anti American slogans and nuclear- tipped ballistic missiles. |
