Oil Production Problems Are Brewing in Iran

Thu, Jun 9, 2011 - 9:56am

Iran - the second largest OPEC producer after Saudi Arabia - produces 3.7 million barrels of oil a day. After years of insufficient investment in infrastructure, however, that output is threatened. Iran's deputy oil minister, Mohsen Khojasteh-Mehr, says the country has to invest at least $32 billion to maintain its production capacity. If it does not do so, output will fall to 2.7 million barrels per day by 2015.

The Iranian national oil company in fact plans to invest much more - its fifth development plan, which stretches until 2015, envisions investing $150 billion to increase oil production to 4.7 million barrels per day, while also increasing gas production from 600 million to 1,470 million cubic meters. Some $75 million would go towards developing new gas fields, while $34 billion would support development of new oil fields, and $32 billion would be spent to maintain production capacity.

The question is, where is Iran going to get all of this money? The official stance is that the national oil ministry will provide $50 billion and Iranian banks will invest $40 billion. The government expects to raise the other $60 billion through foreign investors. The problem there is that global powers have imposed tight economic and financial sanctions on Iran for its disputed nuclear program. Those sanctions have prompted most major Western companies to leave the country and made it difficult, if not impossible, for Western investors to participate in Iran.

Iran had 138 billion barrels in reserves at the end of 2009. The country also boasts the second largest natural gas reserves in the world, after Russia. But its oil capacity is withering, and not just because of crumbling infrastructure - it also regularly puts itself at odds with its OPEC partners. The country's Islamic hard-liner President Ahmadinejad sacked his oil minister in a cabinet re-shuffle on May 14 and temporarily took over the position himself. The move came shortly before a June 8 OPEC meeting, and Iran currently holds the rotating position of OPEC president. As other analysts immediately inferred, the move was simply intended to give the Iranian president an opportunity to project himself onto the world stage in open confrontation. Thankfully, these concerns eased a few days later when Ahmadinejad relented and said he would send a member of his cabinet to the meeting.

The OPEC partners are also at odds over current oil prices. Crude prices have increased almost 20% to roughly $100 per barrel since mid-February. The increase suits Iran's strategy better than Saudi Arabia's, as the latter has a long history of fostering stability in the oil markets while Iran simply wants the cash.

The revelation from Iran that its infrastructure needs investment is hardly surprising - oil industry watchers are well aware that several key oil producers have been operating under overly draconian fiscal regimes for years. It goes without saying that, without investment, oil infrastructure starts to crumble and, soon after, oil production starts to decline. Venezuela is another country where this situation comes to mind.

The Casey energy team just completed a major investigation into global oil supplies. Specifically, we investigated where exactly the world's major oil importers - the United States, China, and Japan - get their oil. The results were stark. A full 44% of America's oil comes from sources that we classify as At Risk (either because the relationship is rocky or because the supplier nation is inherently unstable) or sources where production is declining in a serious way. And the situations for China and Japan are even worse. (If this is the kind of thing you would like to hear more about, consider subscribing to the Casey Energy Report.)

These are all very bullish signals for oil. The world's major oil importers need to support exploration in new, more stable, and friendlier areas, because it is becoming more and more clear that supplies from the old sources are risky at best. Remember, risk can take the shape of political uprisings, insufficient investments in infrastructure, greedy production taxes, poor international relations, or any number of other challenges. And many of our oil suppliers - a list that includes Iran and Venezuela - boast that entire list of qualities.

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