The 27th USAEE/IAEE North American Conference
“Developing & Delivering Affordable Energy
in the 21st Century”
September 16-19, 2007
Houston, Texas – USA
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Iran May Need Nuclear Power to Improve
its Oil Outlook
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By
Dr Mamdouh G. Salameh
Director
Oil Economist
World Bank Consultant
UNIDO Technical Expert
Oil Market Consultancy Service
Spring Croft
Sturt Avenue
Haslemere
Surrey GU27 3SJ
United Kingdom
Tel: (01428) – 644137
Fax: (01428) – 656262
e-mail:
Iran May Need Nuclear Power to Improve
its Oil Outlook
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By
Dr Mamdouh G. Salameh*
Introduction
For a country with supposedly the third largest proven crude oil reserves in the world and the fifth largest oil exporter, the prospect of ceasing to be a major oil exporter by 2010 might seem like a nightmare scenario. Yet, already Iran is looking at the future of its oil industry with mounting trepidation. In the face of steadily declining production capabilities of its major onshore oilfields, deteriorating well reservoirs from past over-production, fast-rising domestic consumption and shortage of reserves and investment funds, Iran is under mounting pressure to remedy the situation if it is to avoid being relegated to the ranks of small oil exporters by 2010.
In the furore about Iran’s nuclear programme, one important fact is being overlooked – Iran’s oil resources may not be sufficient to supply its rapidly growing population without major cuts in oil exports. Iran’s proven oil reserves have been greatly overstated to the extent that it may actually need nuclear power to fuel its economy and also to remain an oil exporter in coming years.
Iran’s oil industry – hampered by years of mismanagement and US sanctions – is a mess; the country hasn’t been able to make its OPEC quota since 2005, and its refineries are so inadequate that it has to import almost half the gasoline it uses. Plans to raise output are well behind schedule; and long-term plans for expanding production capacity may have to be scaled back as well because of insufficient reserves. Against this background, it is perhaps not so surprising that one of OPEC’s leading members should want to develop nuclear energy.
The Iranian nuclear programme is under attack from the US and the European Union (EU), with Tehran being accused of using its nuclear programme as a smokescreen to conceal the development of nuclear weapons. The US government has argued strongly that a country so apparently well-endowed with oil and natural gas as Iran cannot have any legitimate need to develop nuclear energy.
Iran would doubtless not be averse to possessing nuclear weapons, but the United States is wrong to suggest that Irandoes not need an alternative source of energy to oil. Iran’s population is growing rapidly as are its energy needs. Oil consumption is now rising faster than 5% per annum and Iran needs to import more than 200,000 barrels a day (b/d) of gasoline to satisfy domestic demand. Oil production, on the other hand, has only risen by about 100,000b/dsince 2000.
Struggling to Raise Production Capacity
From a peak production of 6 million barrels a day (mbd) and crude oil exports of 5.7 mbd in 1974, Iran in 2007 is struggling even to meet its current OPEC production quota of 3.95 mbd with net exports in 2006 down to 1.95 mbd; Iran exported 2.10 mbd of crude in 2006 but imported 150,000 b/d of gasoline to meet rising demand. And if the current trend continues, Iran’s projected consumption of 2.15 mbd by 2010 would leave it with just 1.37 mbd for export (see Table 1).
Political and economic pressure from the United States and other Western governments has frozen foreign investment in Iran and is squeezing the fragile Iranian energy industry, a problem that is in many ways at the heart of the nuclear controversy involving Iran. The squeeze comes at a time when consumption is booming, adding strains to a government burdened by sanctions and wary of prompting discontent.
Table 1
Iran’s Current & Projected Crude Oil Production,
Consumption, Exports & Sustainable Capacity, (2004-2030)
(mbd)
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2004200520062007200820102015 2020 2030
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Production capacity 3.95 3.95 3.90 3.90 3.85 3.75 3.60 3.50 3.50
Production 3.95 3.90 3.85 3.85 3.80 3.90 3.90 3.40 3.35
Consumption 1.58 1.66 1.75 1.84 1.94 2.15 2.79 3.56 5.34
Imports of gasoline 0.10 0.12 0.15 0.17 0.19 0.23 0.39 0.55 1.08
Net exports/Imports 2.27 2.12 1.95 1.84 1.67 1.37 0.42 - 0.71 - 3.07
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Sources: IEA’s World Energy Outlook 2006 / BP Statistical Review of WorldEnergy, June 2007/
Petroleum Review, April 2006 / Oil & GasJournal.
Foreign investors who have helped oil development in Iran have been scarce since the Islamic Revolution in 1979, and the oil industry in Iran has now suffered decades of economic, political and technical problems. Iran has signed no firm oil or natural gas contracts with foreign investors since June 2005 when Mahmoud Ahmadinejad was elected president and began flaunting Iranian nuclear ambitions and renewing tensions with the West.1
Iran’s crude oil production is currently close to 3.85 mbd. This is some 2.15 mbd below its highest level of 6 mbd recorded in 1974. Since then, despite ambitious plans to raise production to levels well in excess of the 1974 level, Iran has struggled to increase its output. It was supposed to have an output capacity of 5 mbd by 2005, but fell short of this target by1 mbd.It has now set itself a target of only 5 mbd for 2010. The Iranians, however, had once great ambitions of having a capacity as high as 8.4 mbd by this date. They have since proposed an 8 mbd target for 2015. 2However, far from achieving its ambitious long-term aims, Iran may well find that its crude oil production is unlikely to exceed 4 mbd by 2010.
Each yearIran has to find ways to make up for production declines that can range from 200,000 b/d to 500,000 b/d out of a total output of some 3.85 mbd. Moreover, its refining capacity lags behind its domestic needs, forcing the country to import 40% of its gasoline.
And to appease a population historically prone to unrest, it spends about $20 bn a year to keep consumer prices low for gasoline, natural gas, electricity and other energy products according to the International Monetary Fund (IMF). Those subsidies – the price at the pump is a mere 35 cents a gallon, or less that 10 cents a litre, one of the lowest in the world – have prompted double-digit growth in consumption in this country of 70 million people, encouraged waste and boosted smuggling to neighbouring countries in addition to having become a hefty drain on government coffers. To curb runaway demand, Iran’s parliament approved on the 7th of March 2007 rationing subsidized gasoline beginning the 22nd of May this year, a move which would help insulate the fuel-importing nation from any possible extension of international sanctions. 3The measures will see prices for rationed gasoline rise by 33% from 9cents/litre to 12 cents/litre. Private car owners will be allocated a ration of 90 litres per month at this price, with any additional gasoline requirement paid for at international prices plus the cost of distribution ($0.6/litre). 4
Domestic consumption of oil products is beginning to crowd out crude oil exports. Some economic analysts warn that if action is not taken to remove energy subsidies altogether, there could come a time in the not-too-distant future when the cost of the subsidy programme could exceed the country’s total oil export revenues. 5
Because of the growing domestic oil demand and Iran’s inability to expand its production capacity, net Iranian oil exports have been steadily declining. Some analysts say that if this acute imbalance between production and demand at home continues unchecked, Iran will have little oil left over to export by about 2015.
A major stumbling block in Iran’s attempts to raise capacity is the reservoir management practices that were used to achieve the record levels of the 1970s. During the 1970s, the re-injection of gas into oil reservoirs was greatly increased. In less than 10 years, crude oil production rose from under 2 mbd to 6 mbd. This proved too much for some large reservoirs and output began to fall sharply. By 1978, it was down to 5.2 mbd. The same year, a series of strikes by workers in the upstream sectorled to a period of turmoil during which reservoir management suffered considerably. In 1979, output was down to 3.2 mbd. The following year, the war with Iraq helped push production below 1.5 mbd and it did not rise above 3 mbd until 1990, since when Iranhas only been able to add about 1 mbd to its production capacity.6
Problems compound one another; Iran has barely maintained its oilfields well enough to sustain a high level of production. To maximize its production capacity – or even to maintain it – Iran needs huge amounts of cash, yet the current situation does not allow for such vital investments. These either have to be postponed or paid for by committing Iran’s future oil production. Equally grave are the political constraints that prevent Iran from eliminating its profligate domestic oil subsidies that lead to waste, smuggling and substantial loss in income.
The excesses of the 1970s and the neglect of the 1980s have left Iran with pressure problems and water encroachment in several of its oilfields. Billions of barrels of reserves have probably been lost as a result despite attempts to step up rates of gas injection in recent years.
Iran’s Oil Reserves
Iran claims to have proven reserves of 137.5 billion barrels (bb) – sufficient to last for 87 years at present rates of production.7While the Oil & Gas Journal (O&GJ) and the BP Statistical Review of World Energy seem to concur with Iran’s declared reserve figure, a number of international experts have disputed this figure (see Table 2).
Table 2
Iran’s Remaining Proven Oil Reserves, 2006
(bb)
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Oil & Gas BP Statistical Colin Samsan Mamdouh Ali
Journal Review 2006 Campbell Bakhtiari Salameh Saidi
137.5 137.5 68.0 35-45 34.8 37
Sources: Oil & Gas Journal / BP Statistical Review of World Energy, June 2007/ ASPO’s Newsletter #
62, February 2006.
Whereas O&GJ and BP mainly rely on published ‘official’ figures (which are usually bloated and highly political), the internationally-renown geologist Dr Colin Campbell has based his estimates upon geological evidence. Thus, he roughly cuts by half the ‘official’ figures. 8On the other hand, two retired National Iranian Oil Company (NIOC) experts: Dr Samsan Bakhtiari and Dr Ali Muhammed Saidi, estimated Iran’s proven reserves at 35-45 bb and 37 bb respectively. 9
However, starting with a reserve base of 59 bb in 1985 (as reported by OPEC’s Annual Statistical Bulletin 1998) and taking into account Iran’s production of 27.27 bb during the period 1985-2006, and a production depletion of 250,000 b/d per year amounting to 1.92 bb during the same period and also allowing for the addition of 5 bb of recoverable reserves from the Azadegan oilfield, I calculated Iran’s actual proven reserves at no more than 34.8 bb. 10
During the 1980s, Iran reported a steady decline in its reserves to 48 bb in 1986. This is consistent with the results of an extensive survey by the National Iranian Oil Company carried out in the mid-1970s, which identified proven reserves of 62 bb. In 1988, however, Iran raised its reserve estimates to 93 bb despite all that happened in the upstream sector following the Iranian Revolution and the subsequent eight-year war with Iraq. The massive increase in reported reserves appears to have been prompted mainly by a similar move by Kuwait in 1985, which spawned a series of large increases across OPEC. 11
Between 2003 and 2006 alone, the figures have risen againto 137.5 bb. When the volume of oil produced between those dates is added, the net increase works out at nearly 44.5 bb, which is virtually equivalent to Iran’s entire proven reserves as reported in 1986. Based on the above considerations, however, it does appear that the figure of 137.5 bb is a great overstatement. Moreover, Iran’s four largest onshore oilfields (Gachsaran, Marun, Ahwaz and Agha Jari) are well past their peak and that oil finds in recent years have been of a much more modest size. They were probably producing around 3.93 mbd in 1974, since when their collective output has sunk to about 1.75 in 2006 (see Table 3).
Table 3
Comparative Oil Production by Iran’s Largest Onshore Fields
1974 vs. 2006(‘000 b/d)
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%
Oilfield 19742006Rate of Decline
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Ahwaz-A 872,900 725,000 - 17
Ahwaz-B 83,000 125,000 + 51
Agha Jari 1,009,643 180,000 - 82
Gachsaran 911,526 220,000 - 76
Marun 1,053,503 500,000 - 53
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Total 3,930,572 1,750,000 - 55
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Sources: Official report by the Oil Service Company of Iran (OSCO), 1974 / PetroleumReview, June
2006.
Iran is one of eight top oil producers in the world whose oil production peaked. USA peaked in 1971, Canada in 1973, Iran in 1974, Indonesia 1977, Russia in 1987, UK in 1999, Norway in 2001 and Mexico in 2002 while China and even Saudi Arabia are about to peak (see Table 4).
Future Plans for Capacity Expansion
Iran’s will find it hard to increase its oil production capacity over the next decade or so whatever the size of its reserves. It has not always managed to attract the foreign investment it needs to raise its capacity substantially, and where foreign companies have been tempted in, there have sometimes been delays in bringing important projects into production.
Table 4
The Peak & Depletion of Conventional Crude Oil
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Country Date of Peak Date of Peak % % Ultimate
Discovery Production Discovered Depleted Production
(bb
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China 1960s 2006 93 47 57
Canada 1950s 1973 95 76 25
Iran 1960s 1974 94 76 130
Iraq 1970s 2019 87 20 135
Indonesia 1950s 1977 93 65 31
Kuwait 1950s 1971 93 34 90
Libya 1960s 1970 94 42 55
Mexico 1950s 2002 94 55 55
Norway 1970s 2001 93 48 33
Russia 1940s 1987 94 61 200
Saudi Arabia1940s 2013 96 31 300
UAE 1960s 2014 94 23 78
UK 1970s 1999 94 63 32
USA 1930s 1971 98 88 195
Venezuela 1950s 1970 96 48 95
The World 1962 2005-2010 94 49 2100
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Sources: Association for the Study of Peak Oil’s (ASPO) websit /TheEnergyfiles Ltd /
Chevron / Petroleum Review.
US companies are excluded from Iran under the terms of the Iran Libya Sanctions Act of 1996 (ILSA). Many other companies have found Iran’s upstream terms unattractive or the levels of political risk too high. Whilst some important developments have undoubtedly gone ahead, others have been subject to delay, including the Nowruz and Soroosh fields, an offshore field complex developed under one of Iran’s buy-back contracts, under which companies operate as service contractors and are repaid in oil. The project was delayed by technical production problems and was reported to have cost 75% more than originally estimated as a result. 12
There have also been problems with buy-back contracts at other fields. The rising capital cost of developing Iran’s oilfields has cut the rate of return on projects and some companies are reported to be trying to renegotiate terms with the Iranians. In other cases, companies have asked for higher rates of return than those that are generally on offer. Among the projects said to be affected are the Azadegan and Yadavaran fields. Azadegan is supposed to be onstream by 2012. NIOC is reportedly looking for new partners on the $2 bn development of the southern sector of the Azadegan oilfield after Japan’s Inpex lost the contract awarded two and a half years ago. Azadegan holds some 26 bb of reserves, of which between 5 bb and 6 bb are thought recoverable. 13 The Yadavaran contract is still under negotiation. The two field complexes are slated to produce more than 550,000 b/d.
Moreover, the rate of depletion is such that Iran needs to replace at least 300,000 b/d of capacity each year simply in order to maintain output at existing levels. That is why crude oil output has generally remained below 4 mbd. The maximum that Iran can produce at present is only about 3.85 mbd. This could even fall slightly in the short term as output from the older fields continues to decline.
Nuclear Power to the Rescue?
Given the problems in its oilfields Iranmay struggle to go much above 4 mbd. The development of South Pars condensate could provide an extra 0.5 mbd or so over the next decade. Still, there appears to be little prospect of achieving a capacity level much in excess of 4.00 mbd and it is more likely that Iran’s production capability will be below that level.
In these circumstances, nuclear power may have an important role in restricting the consumption of hydrocarbons in Iran and allowing more oil and gas to be exported.
In 2006, Iran produced 200 billion kWh of electricity (17 million tonnes of oil equivalent), over 70% from oil, 25% from natural gas and 5% from hydro-power. Of recent years, Iran’s annual electricity consumption has been growing at an estimated 11% (see Table 5).
Table 5
Iran’s Current & Projected Electricity Generation, 1998-2010
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Volume 199820002002200320042005200620072010
Billion kWh 97112 133 146 162 180 200 222 304
Mtoe 8.27 9.55 11.34 12.45 13.82 15.35 17.05 18.93 25.93
mbd 0.17 0.19 0.23 0.25 0.28 0.31 0.34 0.39 0.52
of which oil 0.12 0.13 0.16 0.18 0.20 0.22 0.24 0.27 0.36
Natural gas 0.04 0.05 0.06 0.06 0.07 0.08 0.09 0.11 0.15
Hydro 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01
Sources: IEA, World Energy Outlook 1999-2006 / BP Statistical Review of WorldEnergy, June 2007.
Iran used the equivalent of 340,000 b/d of oil and natural gas to generate electricity in 2006. At current oil prices it amounted to $8.1 bn per year. By 2010, Iran will need to use some 520,000 b/d of oil and gas for electricity generation valued at an estimated $14.2 bn per year. Generating nuclear electricity will enable Iran to replace at least 98% of the oil and gas used in electricity generation in 2010, thus adding some 510,000 b/d to its oil and gas exports and earning an estimated $14bn. Based on these figures, Iran’s quest for nuclear energy seems justifiable.
On the other hand, if Iran extends its nuclear programme beyond electricity generation and into the full nuclear fuel cycle, many countries may draw the conclusion that Tehran wishes to develop nuclear weapons. In that case, there would be a risk of trade and investment sanctions which might, in turn, have the effect of retarding the expansion of the oil and gas industries.The nuclear issue thus has an important bearing on the future supply of oil from one of OPEC’s key exporters. Without a settlement of the issue, Iran may find itself with falling production levels, rising domestic consumption and much lower oil exports.
However, it is most unlikely that the threat of sanctions will prompt a determined Iranian regime to renounce what it describes as its ‘inalienable right’ to enrich uranium. Since 2003, however, the diplomatic scales have been tipped in Iran’s favour by a dramatic rise in the price of oil. This has had immense repercussions for Iran, the second largest producer of oil in OPEC, and its relations with the outside world. The world is simply too dependent on Iranian oil exports to enforce any meaningful sanctions on Tehran, which derives 80% of its foreign exchange earnings from oil sales. Any disruption of supply would immediately send the price spiralling.