Iran is sapping its own potential

Like a wounded tiger, Iran's government has been growling its discontent and lashing out at its antagonists.

A fuel rationing programme sparked riots last year.
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Like a wounded tiger, Iran's government has been growling its discontent and lashing out unpredictably at its antagonists. Its latest swipes: threats to lob missiles at Israel and seize shipping through the Strait of Hormuz, if attacked. With the world's second-largest reserves of both conventional oil and gas - 138 billion barrels and 982 trillion cubic feet respectively - the muscular Gulf state should by all rights be an energy powerhouse, self-sufficient in fuel with plenty left over for export. But it is far from realising its vast economic potential, and hence its political ambitions of wielding significant regional and world power.

This has not gone unnoticed among the country's political elite, some of whom are increasingly at loggerheads with the Iranian president, Mahmoud Ahmadinejad, over his rhetoric-charged style of populist government. "If we want to become a regional power, we cannot use slogans in an imprudent way and employ sentimentalism," said Iran's prosecutor general, Ghorban Ali Dori Najafabadi, recently, according to the country's Etemad newspaper. "You cannot rule the country with slogans."

Mr Najafabadi said that Iran, which increased its gross domestic product (GDP) by 4.6 per cent last year, was in 15th place economically among countries in its region - a dismal showing compared with its central Asian neighbours, such as Azerbaijan and Turkmenistan, each of which achieved a stunning 17.4 per cent jump in GDP last year. Inflation topped 26 per cent last month, according to Iran's central bank.

Mr Najafabadi's remarks came after Ali Akbar Velayati, a top adviser to Iran's supreme leader, Ayatollah Ali Khamenei, told Iran's hardline Jomhouri Eslami newspaper that the country's "officials and political experts need to avoid provocative and illogical declarations". Iran may now be pumping crude at a rate of 4.1 million barrels per day (bpd), as recently reported by its oil ministry - the highest since the 1979 revolution that founded the Islamic Republic by toppling Iran's former monarch, and the highest output of any Opec producer except Saudi Arabia. Still, this is a far cry from the peak of more than six million bpd reached in 1974, before its oil industry was nationalised.

As for self-sufficiency in petroleum products, the recent government rationing of petrol shows this has been an elusive goal for Tehran. It may be one that the government is belatedly tackling, following last summer's riots over petrol rationing. "There is a crash programme going on right now," said Mehdi Varzi, the president of the London-based consulting firm, Varzi Energy, who from time to time advises Iran's government. "Roughly 1.5 million barrels per day of refining capacity could easily hit two million barrels per day over the next five years," he added.

According to Bloomberg, Iran's deputy oil minister, Mohammed Nematzadeh, said this month that the country planned to spend up to ?20 billion (Dh117bn) in the next seven years to revamp its refineries to meet European standards. He said Iran also planned to more than double its oil processing capacity to 3.3 million bpd, enabling it to end petrol rationing. The country's insufficient refining capacity has also hurt its oil exports, at least temporarily. This spring, Iran had as much as 30 million barrels of unsold heavy crude stored in tankers floating in the Gulf near its main export terminal, as maintenance work at East Asian refineries capable of processing the sulphur-laden crude slowed its oil sales to about 2.2 million bpd in April and May. Iran's oil minister, Gholamhossein Nozari, recently told the Reuters news agency that much of the stored crude had been sold.

At the World Petroleum Congress in Madrid this month, Mr Nozari said that Iran planned to raise its oil output to 5.3 million bpd and triple its gas production by 2014, adding that Tehran was seeking international help to do this. But Mr Varzi is among a number of international experts who are intensely sceptical of the country's ability to achieve either goal. "The problem is the extraordinarily inefficient bureaucracy: no innovation, no incentive," he said. "Discussions of key projects are conducted by very few individuals, which reduces the [country's] capacity to negotiate."

He added that, among the shortcomings of its energy sector, Iran had no experience in state of the art techniques for improving recovery from ageing fields, and no experience in deep water oil and gas exploration, which had hampered its efforts to find offshore resources in the Indian Ocean and Caspian Sea. "It has fallen way behind other states. There are whole areas where Iran needs the latest expertise, and the government does not allow it," he said.

Mr Varzi's forecast for Iran's energy output: "I think they will be able to hold [oil] production at four million bpd and maybe raise it a bit; I think we will see more gas production, but maybe not going up as fast as the market would like." Iran's biggest missed opportunity may have been its failure to develop its gas industry. "They had the opportunity to build the biggest gas hub in the Middle East, but they have just stopped," Mr Varzi said.

Instead, Qatar has become the world's leading exporter of liquefied natural gas (LNG), sourcing it, ironically, from a vast offshore gas field that it shares with the Islamic Republic. Qatar has been tapping its side of the gas deposit, known as the North Dome, much faster than Iran has been withdrawing gas from its side, called South Pars. As a result, gas from Iran's biggest deposit has been migrating into Qatari territory.

"Iran is being negligent about South Pars. I think there will be a major problem with Qatar," Mr Varzi said. According to the BP Statistical Review of World Energy, Iran last year exported just 596 million cubic feet per day (cfd), or 5.5 per cent of its 10.8 billion cfd of gas production - all of it by pipeline to Turkey. It imported almost as much gas from Turkmenistan into its gas-poor northern region, leaving the country with the world's second-biggest gas reserves with negligible net gas exports.

As well as failing to develop LNG exports, Tehran has stalled on an agreement to export 600 million cfd of gas to the UAE via an undersea pipeline that the Sharjah company, Crescent Petroleum, finished building in 2006. At its annual meeting in April, Dana Gas, the Crescent affiliate that would distribute the imported gas, said it expected the long-awaited Iranian supplies to flow "within two to three months". Nothing has happened yet.

Tehran is at least trying to develop gas exports in two directions: it wants to boost exports to Turkey and possibly start providing gas to Europe by participating in the proposed Nabucco pipeline project that would link Central Asia's Caspian region to Europe; Iran might also be close to signing a gas pipeline deal with India, officials of both countries said this month. As for filling those pipelines, Tehran recently said it would invite an Indian oil company to develop a new gas field it had discovered in Iranian waters in the Gulf. Iran is also negotiating a deal with Turkey for the production of more than 700 billion cubic feet of gas from South Pars over the field's commercial life. Last week, however, Total, the French energy company, balked at committing to a new South Pars development phase, saying it was too politically risky to invest in Iran at the moment.

In May, Royal Dutch Shell, the Anglo-Dutch energy group, and Repsol, the Spanish oil and gas producer, also dropped out of South Pars, in part bowing to US pressure to isolate Iran over concerns about its controversial nuclear programme. OMV, the Austrian oil and gas company, had backed away from the field earlier this year. It is, above all, national hubris in opposition to the US-led sanctions that Mr Ahmedinejad has used as an excuse for turning his back on UN-mediated offers of access to the Western technology that Mr Varzi says Iran's energy industry desperately needs.

The US, Israel and some European governments have voiced concerns that Iran's uranium enrichment programme embodies Tehran's alleged ambition to develop nuclear weapons, a charge that Iranian officials have consistently denied, claiming that the country wants only to build nuclear power stations. But that is not the whole problem. Shell and Repsol also complained that Tehran's contractual terms for South Pars development were rigid and offered few commercial incentives.

"Problems will continue as long as Iran wants to go it alone. I don't blame it all on sanctions. Many companies and advisory firms would be willing to go in there if the incentives were there," Mr Varzi said. The head of the state-owned National Iranian Gas Company (NIAC), Kassaei Zadeh, told the recent Madrid congress that Iran had $28bn of LNG projects lined up. He forecast that annual gas production would more than double by 2012, to 274 billion cubic metres from 123 billion cubic metres last year.

Mr Varzi remains sceptical, saying that Iran does not have the access it needs to the proprietary gas liquefaction technology developed by Western oil companies. "I'd be amazed if anything is commissioned before 2015," he said. Tigers have not fared well in Iran. The last one known in the country was shot in 1959.