After the 2018 withdrawal of the United States from the JCPOA nuclear deal, Iran’s energy industry has faced new challenges in attracting foreign capital and technology. Following the initial 2015 lifting of sanctions, Iran intended to create conditions for attracting foreign investors by drafting new oil contracts; Tehran has repeatedly stated that it needs at least $200 billion in foreign investment to fully revive its oil and gas production capacity. Over the past year, the imbalance between supply and demand in the global oil market, along with the COVID-19 pandemic, geopolitical events, and declining economic growth in major oil-consuming countries, has caused oil prices to fluctuate wildly, discouraging outside investment.
One of the effects of the sanctions on Iran’s oil and gas industry has been a reduction in its domestic oil and gas production capacity. This reduction, along with the gradual increase of domestic consumption in the natural gas sector, could threaten energy security in the energy supply sector if the sanctions continue in the coming years. Iran can address its energy crisis in two complementary ways: it can take steps to reform its energy policy, and it can address its disputes with the international community, in exchange for a lifting of sanctions. If neither of these approaches are adopted, Iran’s energy sector will continue to face escalating challenges.
At present, six rounds of talks have taken place between Iran and the United States, and so far the two parties have not reached an agreement. With the victory of Ebrahim Raisi in the June 18 elections, the current Iranian negotiating team has a clear incentive to resolve the nuclear issue before President Rouhani leaves office, but it is unlikely that the Raisi administration will make any broader concessions regarding Iran’s missile program and regional policy. Iran will wait for the new Iranian government’s energy policy to increase oil exports after the agreement is reached and sanctions are lifted.
Raisi’s Ambitious Energy Plan
With the victory of Seyyed Ebrahim Raisi in the presidential election held on Friday, June 18th, many questions about the oil strategy of the new Iranian government have occupied the minds of oil market experts. Whether or not there will be an agreement on the nuclear issue with the world powers before or under Raisi’s leadership, the decisions of the government on oil production capacity, exports, and development of downstream petrochemical sectors will affect both the Iranian domestic economy and the global oil market.
Two days before the election, Raisi published his main economic plan, in which special attention was paid to increasing Iran’s oil production and export capacity. As of 2022, the average rate of non-oil economic growth, with an emphasis on improving productivity, will optimally exceed 5 percent.
In 2023, according to Raisi’s plan, the country’s total foreign exchange needs will be met through non-oil exports. By 2025, non-oil exports will at least double (from roughly $35 billion to more than $70 billion). At the same time, the share of non-oil exports to neighboring countries will at least double (from about $20 billion to more than $40 billion). By 2025, the operating budget will run a surplus, and budget dependence on oil revenues will be cut.
It is uncertain whether these targets will be met. Regarding how successful the new president can be in achieving them, though, one of the energy experts in Iran believes that solutions to achieve these goals in the oil and gas sector require Iran’s regional interactions with its neighbors. Rouhani’s two terms were accompanied by a decline in the country’s production, a decline in Iran’s position in OPEC, and the transfer of Iran’s share of international markets to other countries, including Saudi Arabia. The record of Rouhani’s administration and his energy policy officials have not been good, not only in the international oil field but also in empowering the private sector. For example, the transfer of projects to state-owned companies and the privatization of the country’s refineries and petrochemicals has created many problems for the Ministry of Oil’s manpower sector. Therefore, doubling down on these goals immediately seems unlikely. Instead, “[Raisi] may focus on the downstream and petrochemical sectors and not pursue the ambitious plans of the Rouhani administration in the upstream sector, which have not been largely realized due to sanctions,” said Platts, quoting sources close to the new Iranian president.
In response to a question about the trend in oil production and exports, Alireza Zeyghami, the chief energy adviser to Raisi, said on Friday before the election results were announced, “If he wins the majority of votes, Iran should stop refining oil sales with more refinements.” Of course, this cannot be done all at once; it must be a gradual move. The Iranian parliament has approved plans to build refineries. Whatever Iran’s oil production capacity is, for example, 4 million barrels per day, Iran’s refining domestic consumption will be between 1.7 and 1.8 million barrels, in addition to the needs of the Persian Gulf Star refinery, which receives about 400,000 barrels per day of condensate. Per Zeyghami, “These [new] refinery projects will reduce the gap between domestic consumption and total production of 4 million barrels.”
The former director of Iran’s oil industry considered the higher value added as the main reason why the downstream sector prefers the development of upstream production. According to him, in this sector, domestic demand will be provided first, and the rest of the products will be sold to foreign buyers. Zeyghami described the value chain of petrochemicals, gas units and oil refineries as extremely high. “Yes, sanctions are a separate issue,” he said to Platts on how Iran’s oil production capacity could reach 4 million barrels per day and whether the 13th Iranian government would achieve this goal regardless of the outcome of the negotiations.
Zeyghami expressed frustration that, due to sanctions and declining oil sales, some oil wells in Iran have been closed. He argued that they needed to be overhauled, and their valves repaired, to produce 4 million barrels: “Some wells that are not active can easily be returned to orbit with low repairs and costs.”
Given the changing dynamics of the oil market and the failure of the Rouhani government to implement plans to increase oil production and export capacity, Zeyghami suggested that the Raisi government would focus on the petrochemical and downstream oil industries. Iran Petrochemical also faces many problems, preventing it from increasing its exports of petrochemical products. In the meantime, it should be emphasized that traditional customers have lost their value over time, and there is a need for continuous research and development in the petrochemical business sector to find new and attractive markets. Therefore, it seems that the observation of new markets in the world that are willing to pay better prices for petrochemical goods should not be overlooked by industry experts.
The price of petrochemical feedstocks has increased significantly in the past year, and thus the price of gas feed to petrochemical units in Iran has become more expensive than in all countries of the Persian Gulf region. The petrochemicals of this region are the main competitors of Iran’s petrochemical products. Iran’s petrochemical industry, due to its enormous energy resources and access to sufficient and cheap crude, has rapid access to global and regional markets and has the potential to be widely considered by foreign investors. After Iran-Iraq war, the petrochemical industry experienced a growth of above 50% in exports. In recent years, most petrochemicals have not been able to satisfy domestic customers, as well as downstream industries. These factors, along with the impact of sanctions, present considerable difficulties in the petrochemical sector. High consumption of natural gas in Iran, compounded by a lack of foreign investment in Iran’s oil and gas industry, will prevent Iran from achieving its goals to increase production of petrochemical products.
Can Raisi Succeed?
The plan announced by Ebrahim Raisi for Iran’s oil and gas industry during his presidency could be feasible if active energy diplomacy is used alongside a tension-reducing foreign policy. Providing the framework for attracting foreign technology and capital must be the first priority for the new administration. With the approval of the Financial Action Task Force (FATF), the presence of foreign companies can be ensured. There is a need for investment in the development and research sector in the oil industry and in university research centers to change the pattern of energy consumption. If Iran resumes its nuclear and missile programs after a possible agreement and continues to support proxy groups in the region, sanctions will inevitably be re-imposed on Iran’s oil industry – a distinctly negative outcome for Tehran’s plans of energy reform and modernization.
Consultants should note that energy market dynamics have changed since the outbreak of the COVID-19 pandemic. Iran will be able to immediately sell 69 million barrels of oil stored in tankers after a possible deal, but it will need advanced technology to increase production capacity and address pressure drop in its South Pars field, the main supplier of consumed gas in Iran. Raisi did not mention the energy transition during the presidential debate, while most countries in the world are seeking to reduce the share of fossil fuels in their energy portfolio. It remains to be seen whether the new government has a serious and codified plan to deal with climate change, the water crisis, and widespread power outages in the coming years.
Dr. Omid Shokri Kalehsar is a Washington-based Senior Energy Diplomacy, Energy Security Analyst, and also an analyst at Gulf State Analytics (GSA), currently serving as a Visiting Research Scholar in the Schar School of Policy and Government at George Mason University.
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.