Iran's Oil Sector: Persistent Presence, Waning Influence
In early 2021, President Trump reinstated the "maximum pressure" campaign on Iran, aiming to coerce Tehran back to the negotiating table. This move, coupled with ongoing tensions, has cast a shadow over the future of Iran's oil sector.
Iran, with a population of around 86 million, holds about 19% of the Middle East's proven oil reserves. However, its oil production remains below its peak levels of the 1970s, despite large reserves and advancements in drilling and extraction technologies. This underperformance can be attributed to years of underinvestment, limited foreign involvement, and domestic firms that often lack the necessary capital, technology, and expertise.
Oil accounts for nearly 9% of Iran's GDP, and the government has adopted a more flexible stance toward foreign investment, introducing the buyback contract. Yet, international investors have historically found the terms of the buyback contract unattractive, making it challenging to attract significant foreign investment.
Tehran spends the most on energy subsidies worldwide, further straining its economy. Approximately 10 key trade partners contribute to roughly 85% of its non-oil exports, with the majority of Iranian oil exports being sold to China, India, South Korea, and Turkey.
If sanctions are eased or lifted, Iran could increase its oil production and exports. However, any meaningful expansion would require investment in infrastructure, technology, and field rehabilitation, which cannot be achieved quickly. The Iran-Iraq War further devastated the oil sector, necessitating rebuilding.
Two broad scenarios for the future of Iran's oil sector have emerged. The first suggests that cuts to Iranian oil exports will be compensated by other producers, while the second proposes major post-sanction production increases. The critical variable is how OPEC would respond, with Gulf producers such as Saudi Arabia and the UAE having substantial spare capacity to compensate for losses.
The share of oil revenues in Iran's public budget has remained higher than 25% in most years, indicating the sector's significant role in the country's economy. However, sanctions have exacerbated challenges by limiting access to financing, curtailing technology transfers, raising trade costs, and reducing overall competitiveness.
If stronger penalties are introduced and enforced aggressively, Iran's oil exports could fall, creating upward pressure on global oil prices. Conversely, if Iran manages to overcome its challenges and attract substantial foreign investment, it could boost its production and exports, potentially leading to a surplus in the global oil market and downward pressure on prices.
In the past, Iran has failed to capitalize on international interest, deterred by legal and regulatory hurdles that remain largely unchanged. The future of Iran's oil sector hinges on its ability to navigate these challenges and seize opportunities for growth.
