Iran's Hydrocarbon Profile: Production, Trade and Trend

Shah Alam, Researcher


Iran has vast oil and gas reserves. With 5 per cent of the world's oil and 14 per cent gas it is placed as an important country on the world energy map. Iran is the second largest oil and gas producer among the Gulf states after Saudi Arabia. It is the second largest owner of gas reserves after Russia. Despite having huge amounts of oil and gas, it has been unable to translate these into production and exports due to many reasons.

There is a difference between the pre-and post-Revolution petroleum industry because of changes in the physical aspects of the industry, domestic demand, and the world market.

Oil production had fluctuated in the 1980s as a result of the Revolution and the Iran-Iraq War. The war with Iraq and political instability were major factors for disruption of oil production and exports. But in the 1990s, oil production returned to normal with the end of the war with Iraq, and political stability. Despite resumption of normal oil production, it could not reach the mid-1970s' oil production levels. So, oil exports passed through ups and downs.

In order to increase its oil and gas production, the Government of Iran has adopted many measures. It has invited many foreign companies to invest in its oil and gas industry. Some foreign companies have been investing in its oil and gas industry under "buy-back" arrangements despite the US sanctions. However, the US sanctions have adversely affected Iran's oil and gas industry.

Iran has 5 per cent of the world's oil and 14 per cent natural gas reserves. Its combined oil and gas will last nearly 80 to 90 years even if it is extracted at the rate of 5 million barrels per day (mbd). In 1998-99, Iran extracted 3,500 barrels per day (bpd). Iran is the hub of oil and gas, but it has been unable to translate these into production and exports due to a variety of reasons. This article discusses the physical aspects of Iran's hydrocarbon profile (reserves and production of oil and gas industry) and its institutional set up. It will focus on the way the government has operated this state-owned industry, from discovery and extraction to refining and marketing and what has been the government's internal and external oil policy in the post-Revolution period. Broadly, the subject primarily encompasses two areas: how much oil can be extracted and sold every year and the value of the oil sold.

It is necessary to understand the differences between the post- and pre-Revolution petroleum industry and examine the changes in the physical aspects of the industry, domestic demand, and the world market. On the physical side, production capacity cannot be set at will to suit the required revenues of a given period because oil fields are getting older and require more investment to rejuvenate them to yield the same production as before. The Revolution and the eight-year Iran-Iraq War severely affected oil production. The war destroyed many of Iran's plants and much of its oil infrastructure. They had to be repaired to raise production capacity. Due to the war, its production capacity was affected, subsequently its exports suffered too. But with the end of the war with Iraq and the gradual return of political stability, oil production and exports have both stabilised. So, while in the 1980s, oil production and exports greatly fluctuated, the 1990s witnessed stability in oil production and exports.

In order to enhance oil and gas production capacity, Iran needs to develop new wells and fields. Iran needs foreign capital and technology to explore and develop wells and fields of oil and gas. Despite the US sanctions on Iran's oil and gas industry, many European and Asian countries have been investing to develop and explore oil and gas fields on "buy-back" arrangements that will guarantee foreign companies recovery of their investment and a suitable rate of return.

Oil Reserves and Production

The Gulf region has the largest oil reserves in the world. In the Gulf region, Iran, Iraq, Kuwait, and the United Arab Emirates (UAE) have more or less equal amounts of oil reserves, whereas Saudi Arabia has much larger oil reserves. So, the Gulf, economically and strategically, has been an important region in the world. Table 1 shows the oil reserves in the various countries of West Asia. Oil reserves in Iran are estimated at 88,200 million barrels. Most of Iran's oil reserves are located onshore. Offshore oil reserves are less in quantity. Iran's oil reserves have made it a vital country in the region.

Table 2 demonstrates that Iran's oil production peaked at 5.8 mbd in the mid- 1970s, but this oil production trend did not last long and came down sharply in 1980 and 1981. The declining trend of oil production had begun in 1978 and it reached its lowest level in 1981. The sharp drop in oil production was because of the Iranian Revolution, Iran-Iraq War, and changes in oil prices. Just after the Revolution, oil production fell, but production capacity remained high. Oil production in 1979 averaged 3.0 mbd due to slow recovery in the oil fields after a long four-months general strike by the oil workers in the fall of 1978. But Iran's war with Iraq in 1980 severely affected the oil production of both, with Iran's production sharply declining to 1.3 mbd in 1981. The Iran-Iraq War created impediments in oil production as well as risk for buyers. So, Iran began to give price discounts in the early 1980s in order to raise its oil sales. Therefore, oil production rose gradually despite the war with Iraq and severing of ties with foreign contractors and suppliers. Between 1983 and 1989, average oil output was 2.3 mbd. Iran incurred losses due to the war, political instability, and the severe swings in oil export revenues imposed by the swings in oil prices.

Table 1. Crude Oil Reserves

(Million Barrels)

Year Saudi Iran Kuwait Iraq UAE Oman Qatar Bahrain


1989 1,69,970 92,850 91,920 1,00,000 98,105 4,071 3,150 126

1990 2,54,959 92,860 94,525 1,00,000 98,105 4,250 4,500 111

1991 2,57,504 92,850 94,525 1,00,000 98,100 4,300 4,500 97

1992 2,57,842 92,860 94,000 1,00,000 98,100 4,250 3,729 83

1993 2,57,842 92,860 94,000 1,00,000 98,100 4,483 3,729 69

1994 2,58,703 92,860 94,000 1,00,000 98,100 4,700 3,729 69

1995 2,58,703 92,860 94,000 1,00,000 98,100 4,700 3,729 69

1996 2,58,703 88,200 94,000 1,00,000 98,100 5,138 3,700 210

Source: International Energy Statistics Sourcebook: Oil and Gas Journal.

Due to the end of the Iran-Iraq War in 1988 and increased access to foreign technology and capital, oil production has picked up since 1990. In the 1990s, oil production rose considerably. In 1993, it reached 3.671 mbd. Although, oil production increased in the 1990s, it still did not touch the quantum of oil production of the mid-1970s.

Table 2 illustrates that oil production in the decade of the 1990s shows an increasing trend. The rising trend of oil production was not only confined to the Gulf states but was seen the world over. Rising oil production affected oil prices, and they fell to $9 a barrel. In January 1999, oil prices fell to $9 and $10 a barrel that created major problems for oil producing countries and especially a country like Iran whose economy was dependent on oil revenues. The oil prices were so low that some countries could not even meet the production cost. On the other hand, oil consumption fell in 1999 all over the world except in a few countries like Iran, China, India, Ukraine, and Brazil. Global oil consumption in 1999 was 0.2 per cent lower than the year 1998.1

Table 2. Oil Production

(Thousand Barrels Per Day)

Year Saudi Iran Kuwait Iraq UAE Oman Qatar Bahrain


1975 7,055 5,355 2,071 2,246 1,691 342 441 61

1976 8,341 5,882 1,915 2,161 1,940 366 486 58

1977 9,025 5,666 1,722 2,233 2,012 341 439 56

1978 8,063 5,210 1,865 2,629 1,833 315 483 53

1979 9,250 3,008 2,200 3,433 1,831 295 506 50

1980 9,629 1,471 1,384 2,642 1,709 283 472 48

1981 9,642 1,333 940 916 1,513 319 406 45

1982 6,375 1,992 667 917 1,230 322 331 44

1983 4,850 2,467 888 892 1,118 375 294 41

1984 4,467 2,175 938 1,208 1,159 415 396 41

1985 3,283 2,258 855 1,434 1,142 486 299 42

1986 4,833 1,850 1,242 1,691 1,330 542 332 44

1987 4,025 2,303 1,121 2,168 1,420 556 280 42

1988 4,942 2,237 1,333 2,689 1,471 605 346 43

1989 4,992 2,948 1,592 2,896 1,864 613 388 43

1990 6,300 3,138 1,083 2,085 2,118 677 394 42

1991 8,158 3,358 136 281 2,418 716 385 38

1992 8,138 3,455 878 425 2,286 739 424 107

1993 7,907 3,671 1,694 448 2,195 782 429 106

1994 7,811 3,585 1,811 550 2,221 810 408 105

1995 7,859 3,614 1,793 600 2,204 849 442 105

1996 6,460 3,640 1,648 600 2,200 696 490 106

1997 8,345 3,630 2,105 1,150 2,250 910 620 -

1998 8,370 3,610 2,080 2,110 2,290 900 670 -

1999 7,790 3,500 1,830 2,530 2,060 890 630 -

Source: International Energy Statistics Sourcebooks, Oil and Gas Journal: Petroleum Economist, vol. 67, no. 7, July 2000.

Over-production of oil and lower demand, and lower oil prices till January 1999, directly affected oil producing and exporting countries. In 1999, the Oil Producing and Exporting Countries (OPEC) decided to lower oil production in order to raise prices. Almost all countries of the world cut down their oil production in 1999.2 As a result of lower oil production, a steep rise in oil prices has occurred, raising Iran's revenues.

Rehabilitation and Expansion of Oil Production

In order to increase its oil production, Iran needs to invest in rehabilitating and expanding its oil industry. The National Iranian Oil Company (NIOC) has concentrated on frontier exploration efforts. In 1993, Iran discovered a field with 1.4 billion barrels of reserves near Abadan on the Iraqi border. It also discovered other oil fields with potentially recoverable reserves of one billion barrels near the southern part of Ganaveh in March 1995.3 The NIOC has made great efforts to explore Iran's territorial waters in the Caspian Sea and claimed that it has identified over 40 reservoirs containing as much as 3 billion barrels of oil. For more exploration, it has allocated $17 million for joint drilling with Azerbaijan in the Caspian Sea. Iran continues to invest in exploration of new oil fields to enhance its oil reserves and production capacity.

Iran began a five-year oil development plan in 1995 that called for increased use of enhanced oil recovery (EOR) techniques as well as in-fill and development drilling. It started horizontal drilling in the larger field in southern Iran which accounts for three quarters of Iran's total oil production. In northern Iran there is a dearth of oil. So, southern Iran supplies oil to northern Iran to fulfil its requirements. In order to meet the north's oil requirements, Iran has sought a swap arrangement with its northern neighbours. Under the swap arrangements, Iran would take oil from Turkmenistan, Kazakhstan, Uzbekistan, and Azerbaijan for use in the Iranian market. It would import oil from these countries and use the Nehka pipeline to transport oil to its oil refineries at Tehran, Tabriz, Arak, Isfahan and various other locations in the north.4 In return, Iran would provide equivalent amounts of oil from its southern oil fields to these countries for shipping to markets in Europe and Asia. Iran's northern area requires large amounts of oil, and the swap arrangement with its northern neighbouring countries makes it possible to secure it.

Nearly 90 per cent of Iran's oil production is from onshore fields. But the major problem in raising Iran's oil production comes from low pressure in the onshore fields. If it seeks to increase onshore production capacity, it needs to drill new wells and inject gas into depleting reservoirs, especially at the Gachsaran, Karanj, Pars, Maran, and Ahwaz fields. Oil production is increasingly dependent on the reinjection of gas for maintenance of reservoir pressure.5 This is necessary because its main oil fields are 30 to 60 years old.

The massive drop in pressure had been noticed as early as in the 1960s when a Consortium was in charge of the oil fields. But the Consortium did not pay attention to this issue and did not undertake remedial measures.6 In the early 1970s, after the NIOC took over the management of the fields, it started a massive reinjection programme, but in the following years, little reinjection was actually done due to the Revolution and the war with Iraq. After the end of the war, reinjection became an important government policy. Twelve of Iran's onshore fields require reinjection on a continuous basis.

Iran needs large amounts of gas for the reinjection programme. It needs about 3,000 billion cubic metres (bcm) or about 15 per cent of the proven gas reserves. The Second Five-Year Plan put emphasis on raising reinjection from 19.7 bcm per year in 1994 to 40.4 bcm per year in 1998. This reinjection scheme will add 2.6 billion barrels to Iran's proven reserves and will raise about 1 mbd of production capacity.

To increase oil output, Iran must inject gas in low pressure oil fields, adopt advanced reservoir production control techniques, carry out major drilling with extensive use of horizontal drilling, and develop new offshore fields and wells. It is making efforts to develop its offshore fields to enhance its oil production capacity. Iran is also rebuilding the offshore oil fields damaged during the Iran-Iraq War. But it needs foreign investment and technology to carry out the programme to enhance offshore oil output and develop new fields.7 The Salman 1,40,000 bd, Dorood 1,10,000 bd, Forozan 60,000 bd, and Abuzan 40,000 bd account for the bulk of Iran's offshore production. It has discovered a new offshore oil field in the Persian Gulf. This new Darian oil field is located near the South Pars gas field which could produce 3,000 bpd, and it has also discovered Changuleh oil field in southern Iran which contains reserves of more than 1 billion barrels.8

In the early 1990s, a number of international oil companies showed interest in developing Iran's offshore oil fields in the Persian Gulf. Iran signed a contract to develop and rehabilitate the Abuzar field with McDermott and France's ETPM in 1993. But this contract fell into financial crisis and finally was taken over by the state-owned Iranian company in November 1994. In February, the NIOC signed a deal with Australia's Transfield Construction to develop the Abuzar offshore oil field.9 The U.S. company Conoco of Houston entered Iran in March 1995 to develop offshore oil fields. A deal was signed between Conoco and the NIOC to develop the Sirri A and E offshore oil fields in March 1995. This contract would have brought the combined production of the two Sirri A and E offshore oil fields to 1,20,000 bd, but it could not materialise due to the Clinton Administration's pressure for its cancellation, and finally it was given up.10 The NIOC-Conoco contract had not yet been approved by the Majlis. On March 17, 1995, President Clinton signed an executive order banning Conoco's contract as well as any "contract for the financing of the development of petroleum resources in Iran".11 The legislation called for the imposition of sanctions against foreign companies that would invest more than $20 million in oil and gas projects in Iran or more than $40 million in Libya. Moreover, the US put strict limitations on the purchase of Iranian oil by US companies, and introduced new sanctions which affected other ongoing negotiations between the US companies and Iran.

After the Conoco deal's cancellation, in July 1995, Iran was successful in negotiating with Total of France and the Royal Dutch Shell Group an agreement to develop the oil fields. In July 1995, the NIOC announced that it would invite foreign companies to invest in oil projects. Despite the US pressure and sanctions not to invest in Iran's hydrocarbon, many European and Asian countries were keen to have contracts with Iran to develop Iranian oil and gas fields. The imposition of the US unilateral sanctions on Iran's petroleum industry badly damaged Washington's credibility when the Iranian government signed a deal with the French Company Elf Aquitaine and the Italian Company ENI to develop the Dorood oil field near Kharg island in the Persian Gulf on March 1, 1999. " The 10-year deal intended to boost the field's recoverable reserves from 600 million barrels to 1.5 billion barrels, was estimated to be US $998 million."12 In the following month, the French oil company Elf Aquitaine made its second deal with Iran. Together with Bow Valley Energy of Canada, Elf signed "a contract to develop the Balal offshore oil field which had recoverable reserves to 100 million barrels. Elf had 80 per cent interest in the US $ 300 million project".13 In the Iranian perception, every buy-back deal signed nibbled at the credibility of the US' Iran-Libya Sanction Act. An Iranian official has claimed that each international contract by Iran drove another "nail into the coffin" of the US embargo.14

In reality, the Clinton Administration's sanctions on the Iranian petroleum industry "was part of an intensive campaign aimed at isolating and crippling Iran economically".15 The imposition of sanctions was partly a success and foreign companies did not come forward to invest in the Iranian petroleum industry. The US sanctions have hit the Iranian petroleum industry and constrained it from developing and exploring new oil and gas fields. Its repercussions are clearly visible in the Caspian Sea pipelines proposals where the US is seeking East-West pipelines routes to bypass Iran, though the routes are costly and politically unstable and the Iranian pipelines routes are cheaper, easily accessible and stable.

Natural Gas Reserves and Production

After Russia, Iran has the second largest gas reserves in the world, estimated at 23 trillion cubic metres.16 Such a huge amount of reserves has strengthened its position in the world energy market. Table 3 shows that Iran is far ahead of the other Gulf states in gas reserves. After Iran, Qatar has the second largest gas reserves among the Gulf states. Saudi Arabia is far behind Iran with regard to gas reserves, though it currently produces more gas than Iran. One of the important features of Iranian gas is that about two-thirds of it is non-associated gas, and the remaining is recoverable only in joint production with oil. About half of the total gas reserves have been discovered as a result of exploration after the Revolution of 1979.

Table 3. Natural Gas Reserves

(Billion Cubic Feet)

Year Saudi Iran Kuwait Iraq UAE Oman Qatar Bahrain


1990 1,81,347 5,00,000 48,600 95,000 2,00,800 9,260 16,310 6,476

1991 1,80,355 6,00,350 48,600 95,000 2,00,400 7,200 1,63,200 6,250

1992 1,84,048 6,00,350 48,600 95,000 1,99,300 9,900 1,62,000 6,010

1993 1,82,600 6,99,200 52,400 1,09,500 2,04,600 1,69,000 2,27,000 5,810

1994 1,85,360 7,30,000 52,400 1,09,500 2,04,600 2,00,00 2,50,000 5,900

1995 1,85,400 7,41,609 52,400 1,09,500 2,04,600 22,248 2,50,000 5,295

1996 1,85,400 7,41,609 52,400 1,09,500 2,04,600 25,200 2,50,000 5,295

Source: International Energy Statistics Sourcebook: Oil and Gas Journal.

Geographically, Iran's gas fields are more scattered than its oil fields. But southern Iran also dominates in gas reserves as in the case of oil reserves. Nearly 80 per cent of Iran's gas reserves are located in southern Iran.17 The oldest onshore gas field is Khangiran which is located near Sarakhs in the northeast and very close to Turkmenistan. Proven reserves in Khangiran are estimated at around at 514 bcm. In northern Iran, there is also a small field in Gorgan, and the Iranian government has announced the discovery of a gas field near Bander Anzali on the Caspian Sea. Exploration in the Caspian Sea area is on.

The major gas fields in southern Iran are the onshore gas fields of Kangan and Nar, and the offshore gas fields, North Pars and South Pars. Kangan is the only other gas field besides Sarakhs that was developed before the Iranian Revolution. The Kangan onshore gas field is linked via a pipeline to the Caspian port city of Astara through which gas passed to the former Soviet Union. Now the Kangan gas is basically used to meet domestic consumption and for reinjection. Iran's largest non-associated gas fields are Kangan and Sarakhs located in southern and northern Iran respectively. The Aghar-Dalan gas fields which will supply gas via a 200-mile pipeline for reinjection into oil fields in the Southern Fars region is yet to be completed.

Among the discovered gas fields in Iran, the South and North Pars gas fields have the largest amounts of gas. The First Five-Year Plan (1989-90/1993-94) allocated funds for the development of the North and South Pars gas fields which would serve exports to Japan and Europe. In 1992, the NIOC signed a contract to develop the gas reserves of the offshore South Pars field to a Consortium led by TPL of Italy and including Saipam of Italy, Machinoimport of Russia and Mitsubishi Corporation of Japan.18 The South Pars gas field is considered an extension of Qatar's North field into Iranian waters and is the largest gas field in the world. Iran is competing with Qatar in extraction from this field as well as in marketing. By the end of 1993, when the Consortium had developed the infrastructure at the South Pars gas field, and had already drilled two wells, the NIOC announced suspension of the project. Again, in late 1994, the development of the South Pars gas field was awarded to the newly-created NIOC subsidiary, Petroleum Development and Engineering Corporation (Petco). The on and off situation created problems for the completion of the project. After completion of the first phase of the development of the South Pars field, an agreement was signed between the NIOC and Total for the second and third phases of the South Pars project. The latest studies and surveys have indicated that the South Pars field in Iran could be even bigger than the Qatari section of the field. It has been estimated that the South Pars gas production would rise to 70 bcm per year after completion of the project's final seventh phase.

Iran signed a deal with Royal Dutch Shell to develop the North Pars field in 1995. In February 1995, Iran and Oman agreed on the joint development of the Hengam-Khasib gas field near the Iranian island of Hengam in the Strait of Hormuz. This field has 28,300 mcm of reserves.

The gas sector in Iran is relatively less developed than the oil sector. Earlier, gas production agencies did not pay much attention to developing the gas sector and treated it as a byproduct of oil production for reinjection or for domestic purposes. Till recently, gas was used as a byproduct of oil and most of it was flared. But in the 1990s, the need for reinjection of gas into fields has entirely reversed the dependency and now oil production depends on gas.

Table 4 demonstrates that gas production in Iran was adversely affected as a result of the Revolution and the Iran-Iraq War. In 1981, gas production reached its lowest point. Low gas production and increased domestic consumption forced the government to withdraw its reinjection policy. Since 1990, the government has again adopted the reinjection policy to raise its reserves and production capacity. Iran is the second largest gas producer among the Gulf states after Saudi Arabia.

Table 4. Natural Gas Production

(Billion Cubic Feet Per Year)

Year Saudi Iran Kuwait Iraq UAE Oman Qatar Bahrain


1975 - 1493.6 175.2 122.2 - - 5.3 3.1

1976 - 1699.8 185.2 113.8 - - 50.4 2.2

1977 121.0 1756.1 186.1 141.0 97.3 129.5 70.5 109.3

1978 102.2 1746.9 188.0 115.7 123.5 107.5 46.7 116.2

1979 208.6 913.3 205.5 48.8 63.5 35.9 26.9 65.0

1980 310.2 289.0 291.3 18.0 139.5 12.0 38.2 90.0

1981 435.0 53.0 339.9 71.0 227.9 12.0 205.0 172.9

1982 493.1 269.1 219.4 38.3 308.0 49.1 168.9 179.3

1983 384.2 498.0 144.7 20.1 203.7 86.4 87.1 193.8

1984 386.0 460.0 144.0 18.5 265.0 142.0 98.0 194.3

1985 232.0 440.0 144.0 21.6 316.0 80.0 200.0 226.3

1986 328.7 489.3 144.4 21.0 362.1 48.2 206.2 215.7

1987 802.5 647.6 162.1 46.2 574.3 62.4 165.6 175.6

1988 899.3 619.9 174.6 110.4 600.0 73.2 204.2 184.9

1989 1079.8 793.9 222.8 200.8 790.7 80.4 256.3 193.8

1990 1317.3 854.7 147.8 140.7 1092.1 88.2 265.1 209.8

1991 1591.7 779.1 15.5 21.6 1474.2 91.2 251.0 157.0

1992 1346.9 873.5 83.0 49.3 993.8 109.6 279.0 165.8

1993 1134.5 1017.7 157.8 67.5 859.1 125.4 282.1 180.2

1994 1119.7 994.7 164.7 87.8 845.7 125.3 243.1 182.7

1995 1335.0 1127.8 211.6 121.0 859.3 153.6 476.7 185.3

Source: International Energy Statistics Sourcebook: Oil & Natural Gas Journal.

With the second largest gas reserves in the world, Iran will become a gas exporter in the coming years. But in order to export gas, a pipelines network is essential. This will take time. Iran is seeking a diverse set of buyers and not one as it was doing in the 1970s. Its traditional buyers like Western European and the South Asian countries are more interested in a long-term arrangement. But the high cost of pipelines and political complexities of building the pipelines through various countries have become a major obstruction. Financially, it is not feasible for Iran to bear the entire cost of the infrastructure for transporting gas. Some countries like France and Canada are interested in investing in Iran's gas sector and to import it but pipelines' security is a matter of concern. India too is interested in Iranian gas, but since the pipeline has an agreement to pass through Pakistan, security concerns have held back the country. The construction of a 3,300-km-long pipeline with a capacity of almost 36 bcm per year linking Iran's Bandar Abbas to India's Calcutta had been proposed in 1990. The Australian BHP Corporation proposed the construction of a pipeline to transport Iranian gas to the west coast of India stretching from Qeshm island and running along the Iranian and Pakistan coasts up to India. But this project, which could have also connected the South Pars offshore field of Iran and Qatar, was also given up.19

The National Iranian Gas Company is in charge of the development of the gas fields and pipelines network. Gas is primarily used in reinjection, petrochemical feedstock, industrial and household use, and for export.

Domestic Consumption

As far as energy domestic consumption, especially oil, is concerned, a significant growth in demand has been seen over the years. The share of domestic consumption in total production is very high. In 1999, oil consumption in Iran increased 11.8 per cent, more than in both China and India which were 10 per cent and 6.9 per cent respectively.20 The reasons for the growing oil consumption in Iran are decline in real prices in the domestic market and high growth rates of the population. The fast growing domestic consumption makes export more difficult every year. The government has two options for lowering oil consumption: curtail consumption of refined products, and invest to enhance oil production capacity.

Iran has made an attempt to decrease its oil consumption rates but has failed so far. The steady growth in domestic demand has been triggered partly by population growth, partly by underpricing of oil and gas, and partly because of inefficient use of energy resources.21 The growing domestic demand for oil has become a source of concern for the government. To deal with the problem, the government has adopted a two-pronged policy to contain rising domestic energy demand-to increase energy prices and substitute use of oil by gas substitutes.

Raising energy prices is one of the important instruments for controlling demand. But increasing of the energy prices has its limitations, primarily because of the political ramifications. After the Revolution, energy consumption fell sharply as economic growth stalled. The war necessitated large-scale rationing of essential products like wheat, sugar, meat, and energy. After the war, rationing was gradually dismantled. Increasing energy prices, however, was a sensitive issue. Despite the problems, the Oil Ministry recommended an increase in energy prices. In August 1994, the Majlis approved the Second Five-Year Plan which included slashing of subsidies on energy. In November 1994, the Majlis approved the increase of energy prices from March 1995. The price increases, however, immediately led to protests and social tension that erupted into riots in southern Tehran.

As far as substituting oil with gas is concerned, the expansion of the gas network is expected to slow down the rate of increase in oil consumption. Gas is unlikely to replace oil in the foreseeable future. The policy of substituting oil with gas is based on the logic that oil and gas are not equally exportable. Deputy Oil Minister for International Affairs, Mehdi Huseini, stated at the 5th Annual International Conference on "The Impact of the Middle East-Caspian Oil on Global Energy Markets", that "Iran's drive for development of gas fields are among the basic measures for expansion of exports and replacing oil fuel with gas".22 The government is seeking to export more oil in order to get more revenues which the Iranian economy needs.

Oil Export

Iran's oil production was affected by the Revolution and the eight-year war with Iraq. Consequently, its oil export was affected too. As Table 2 shows, there were fluctuations in oil production in the 1980s as a result of the Revolution and the war with Iraq, but in the 1990s, oil production bypassed the problem of fluctuations and moved upward and towards stability. Fluctuation in oil exports was a constant problem because of Iraqi threats in the Persian Gulf. Iran's oil importers feared the loss of their oil tankers. Therefore, they turned towards other oil producing countries like Saudi Arabia and Kuwait. In order to boost its oil exports, Iran lowered its oil prices, offered special insurance to compensate any Iraqi threats to tanker traffic in the Gulf, and also extended credit as an incentive. Despite these special offers, some of its customers turned towards Saudi Arabia and Kuwait.

On the other hand, barter trading continued without major gains. Iran was dissatisfied with it because of the failure of some of its partners to deliver materials which had been promised. In mid-1985, Iran again offered discounts on its oil. Despite efforts to remain competitive (which included barter, discounts, rebate incentives and the shuttling of oil from Kharg Island by tanker to a safer lifting place), Iran's revenue from oil exports fell considerably. In order to increase its exports, the Ministry of Foreign Affairs adopted barter and bilateral agreements as one of the main instruments of Iran's foreign policy. Thus, Iran faced many problems till 1988. But after the war, the situation improved and oil production as well as exports increased.

In the 1990s, Iran's oil exports increased remarkably. The destination of Iran's export of oil is shown in Table 5. A large portion of its oil is exported to European and Asian countries. In Asia, it exports to Japan, India, China, Korea, Philippines, Pakistan, and other countries. In Europe, its oil goes to Italy, France, Germany, Britain, Netherlands, and a few other countries. Iran exports most of its oil to the Organisation for Economic Cooperation and Development (OECD) countries. Table 5 clearly shows that oil exports have fluctuated over the years.

Table 5. Oil Exports

(Thousand Barrels/Day)

Destination 1992 1993 1994 1995 1996

North America of which 7.9 28.4 10.4 1.7 39.5

Canada 7.9 28.4 10.4 1.7 39.5

United States - - - - -

Latin America 125.0 70.0 80.0 40.0 60.0

Eastern Europe 185.0 100.0 150.0 175.0 155.0

Western Europe of which 1,195.0 1,340.0 1,165.0 1,250.0 1,145.5

France 144.3 239.9 151.5 208.9 171.5

Germany 18.1 50.1 40.3 31.6 18.2

Italy 214.8 204.1 134.4 228.6 264.8

Netherlands 206.8 193.2 170.7 101.4 103.6

United Kingdom 31.3 43.8 25.9 23.4 15.9

Middle East 30.0 30.0 30.0 20.0 20.0

Africa 45.0 45.0 60.0 120.0 190.0

Asia and Far East of which 938.0 983.8 1,149.7 1,013.1 1,020.0

Japan 354.8 367.2 441.8 380.3 429.6

Oceania of which 2.1 2.8 4.9 1.2 -

Australia 2.1 - - - -

OECD 1,439.6 1,618.0 1,522.0 1,552.0 1,533.0

Total World 2,528.0 2,600.0 2,650.0 2,621.0 2,630.0

Source: Direct Communications to the Secretariat; United Nations, Energy Statistics Yearbook.

Iran and the OPEC

Iran is one of the influential member states of the OPEC since it is the second largest oil producer within it, next to Saudi Arabia. It has generally struggled within the OPEC on three issues: low oil production, high prices, and increase in its own oil quota. It has insisted that low oil production and high prices would give more revenues for its economic development. On the other hand, Saudi Arabia, Kuwait, and the UAE, do not support the Iranian oil policy wholly. In their view, oil production and prices should be moderate because producers and consumers should not suffer at each other's cost. And the world economy should not be adversely affected. The recent hike in oil prices would have had a serious effect on the world economy, if the OPEC countries had not raised their oil output in order to bring down oil prices to some extent.23 Initially, Iran opposed OPEC's decision to raise oil output, but later accepted it due to fear of loss of its share in the world oil market.24 Iran had already raised its production in order to maintain its 15 per cent share of OPEC's total output.

Iran looks at the OPEC as a price-setting agency. It considers that world oil price should be decided by bargaining over price rather than by supply and demand. It has always sought to raise its own share of production in the OPEC. On the other hand, it does not want the OPEC to raise overall oil production figures. Lower oil prices mean less foreign exchange for the state coffers, and consequently an adverse impact on economic development.

In order to reduce its dependency on oil revenues Iran has sought to diversify its economy. This has been going on since 1950. However, it has been unable to do so and is still heavily dependent on oil revenues which provide 90 per cent of the state's foreign exchange earnings.25

Institutional Changes

The history of Iran's petroleum industry and its commercial exploitation goes back to 1901 when a British subject, William D'Archy, was granted the right for exploration and exploitation of petroleum in Iran, except in the five northern provinces which fell under Russian influence. For the first time in West Asia, oil was discovered in commercial quantities at Masjid-e-Sulayman in Iran in 1908 and that paved the way for the creation of the Anglo-Persian Oil Company in 1909, which later became British Petroleum, and the first shipment of oil from West Asia was made by that company in 1912 from Abadan, on the Shatt al-Arab.26 The company later changed its name to the Anglo-Iranian Oil Company (AIOC). Disputes over oil exploration and exploitation between the Iranian government and the AIOC began from the very beginning, but reached their peak in the 1930s and 1940s. Ultimately, oil production was nationalised by Musaddiq (the prime minister of Iran, 1951-53) in 1951.27 The overthrow of Musaddiq in a CIA sponsored coup in August 1953 was a major setback for the oil industry. CIA's involvement in the overthrow of the Musaddiq government was acknowledged by US Foreign Secretary Madeleine Albright in March 2000.28 The fall of the Musaddiq government resulted in the replacement of AIOC by the Consortium in 1954. The Consortium was composed of various companies with varying shares in extraction of oil in Iran. British Petroleum, Royal Dutch Shell, Gulf Oil, Socony, Mobil, EXXON, Standard Oil of California and Texas, Compagnie Francaise des Petroles, and Iricon Agency were the key oil companies in the Consortium. From the very beginning of the Consortium's creation, the Iranian government fought very hard to gain some degree of control over oil production but in vain. At the same time, Iran had been engaged in joint ventures in areas outside the control of the Consortium since the 1960s. In these deals, Iran had a 50 per cent partnership, with equal say in all matters.

The 1979 Revolution changed the entire situation. The provisional government cancelled unilaterally all agreements in March 1979 which were concluded under the Shah with the Consortium. There was no separate ministry for oil and gas till 1980. In the Shah's era, the minister of finance and economy represented Iran at the OPEC ministerial level meetings, but all matters in relation to the oil and gas sectors the from long-term planning to day-to-day operations, were looked after by the state-owned NIOC. The Shah sought that the NIOC chief report directly to him rather than to the Cabinet.

But after the Revolution, a separate Ministry of Petroleum was established in 1980 that dealt with oil, gas and petrochemicals. However, the NIOC retained its control over exploration and development of oil fields, and refining and distribution of oil products. The chairman of the NIOC is the minister of petroleum, and there is no difference between the government, the ministry, and the NIOC. The NIOC is operating through four subsidiaries: the National Iranian Offshore Oil Corporation; the National Iranian Drilling Corporation; the National Iranian Tanker Corporation, and the National Refined Product Distribution Company.

In March 1992, the NIOC's function and role were redefined and it was divided into two distinct upstream and downstream divisions. Refining and distribution of products came under the newly-created division; and exploration, production and marketing of crude oil fell under another division. The National Iranian Gas is in charge of exploration and development of gas fields and the pipelines network for both domestic use and exports. Despite these institutional changes, the NIOC is still by far the largest company in Iran. The NIOC is the oldest oil company in West Asia. It was ranked the fifth largest oil company in the world in 1993.


Possession of large amounts of oil and gas has made Iran an important country on the world's energy map. It is the second largest oil and gas producing country in the Gulf after Saudi Arabia. After Russia, Iran is the second largest owner of gas reserves in the world. Iran's vast oil and gas wealth, much of it still unexplored, can benefit both the producer and consumers. Iran will get revenues and the consumer the energy. European and South Asian countries need energy for their economic development and the vast energy resources of Iran can provide them what they need.

Iran's oil production was severely affected due to the Revolution and the Iran-Iraq War in the 1980s. In the early years of the war, oil production almost came to a halt. This shows that any tension in the region or war can paralyse oil production and its transportation. Fearing the loss of oil tankers many Iranian oil buyers turned towards Saudi Arabia and Kuwait for the safe supply of oil. This explicitly shows the region's oil supply vulnerability. For safe supply of oil, the region must be tension free. But the regional leaders' desire to build military power to dominate the region may jeopardise the security of the entire region and subsequently the safe supply of oil.

In the 1990s, Iran's oil production and exports stabilised, but could not reach the level of the mid-1970s. The reason is clearly that oil fields are getting older, so, Iran needs new oil wells and fields to maintain that production capacity. In order to increase its oil production, the quest for new oil wells and fields is necessary, and this requires foreign capital and technology. On the other hand, the US has put restrictions on the foreign investors not to invest in Iran's oil and gas industry. Despite the US sanctions, many European and Asian countries have invested in the development of the oil and gas industry of Iran. The US sanctions on Iran's oil and gas industry have been only partly successful in restricting foreign countries' investment in Iran's oil and gas industry.

The rapidly growing internal energy consumption has become a source of concern for the government because it can lower exports and consequently will affect the balance of payments and the budget. So, the government has taken some measures to cut down oil demand at home and minimise its implications. It has made serious efforts to increase oil production, raise prices, and replaced oil with gas. It is trying to replace use of oil with gas in order to maintain its oil exports target. But replacement of oil with gas will only slow down oil consumption and not replace it. On the other hand, the government is striving to increase its oil production to minimise the implications of growing consumption demand.

Iran is very anxious to export its energy in large amounts to various countries but pipelines politics has prevented it from realising its goal. Easy, safe and cheap pipelines have become a victim of the "Great Game".


1. Petroleum Economist, vol. 67, no. 9, September 2000, p. 37.

2. Petroleum Economist, vol. 67, no. 5, May 2000, p. 37

3. Middle East Economic Digest, July 21, 1995, pp. 26-32.

4. Anthony H. Cordesman and Ahmed S. Hashim, eds., Iran : Dilemmas of Dual Containment (Boulder: Westview Press, 1997), pp. 102-103; Geoffrey Kemp, "The Persian Gulf Remains the Strategic Prize," Survival, vol. 40, no. 4, winter 1998-99, pp. 142-43; Petroleum Economist, vol. 67, no.6, June 2000, p. 60.

5. Oil is generally found in conjunction with gas which provides pressure and allows oil to flow to the surface.

6. Feruidun Fesharaki, Revolution and Energy Policy in Iran (London: The Economist Intelligence Unit, 1980).

7. Middle East Economic Digest, July 21, 1995, pp. 26-32.

8. BBC, SWB, Third Series, MEW/0668, November 25, 2000.

9. Cordesman and Hashim, n. 4, pp. 13-104.

10. The Middle East and North Africa 1999, 42nd ed. (London: Europa Publications Ltd., 1998), p. 488; Cordesman and Hashim, n.4, p. 104.

11. Cordesman and Hashim, n.4, p.104.

12. Keesing's Record of World Events, vol. 45, no. 3, 1999.

13. Keesing's Record of World Events, vol. 45, no. 3, 1999.

14. Petroleum Economist, vol.67, no.2, February 2000, p.26.

15. n. 10, p.488.

16. Voice of the Islamic Republic of Iran external service, Tehran: November 19, 2000, cited in BBC, SWB, Third Series, MEW//0668, November 25, 2000.

17. Saeed Rahnema and Sohrab Behdad, eds., Iran After the Revolution : Crisis of An Islamic State (London : I.B.Tauris, 1995), p. 155.

18. n. 10, p.493.

19. The Observer, November 22, 2000.

20. Petroleum Economist, vol. 67, no.9, September 2000, p. 37.

21. International Energy Agency (IEA), Middle East Oil and Gas Paris, EIA/OECD, 1995, pp.232-236.

22. BBC, SWB, Third Series, MEW/0666, November 11, 2000.

23. Petroleum Economist, vol. 67, no. 10, October 2000, pp. 28-29.

24. Middle East International, no. 22, April 7, 2000, pp. 15-16; The Statesman, April 4, 2000.

25. Middle East International, no. 22, April 7, 2000, pp. 15-16.

26. Colbert C. Held, Middle East Patterns :Places, Peoples and Policies (Boulder : Westview Press, 1989), p.112.

27. Homa Katouzian, Musaddiq and the Struggle for Power in Iran (London, New York, 1990). The author has described how Musaddiq fought to acquire political power, the circumstances that had compelled him to undertake oil nationalisation and how nationalisation led to the fall of his government. See James A. Bill and W.M. Roger Louis, eds; Musaddiq, Iranian Nationalism and Oil (London: I.B. Tauris, 1988). The book sketches Musaddiq's policies, his struggles to establish democracy in Iran, leading to oil nationalisation. It also describes the British and American policy towards Musaddiq and how they collaborated in overthrowing his government and their interests in overthrowing him. Also see Sunil Kanti Ghosh, The Anglo-Iranian Oil Disputes (Calcutta: Elite Press, 1960), in which the author has made a detailed analysis about various agreements between the Iranian government and the AIOC since its birth and finally nationalisation of oil by Musaddiq; Fakhreddin Azimi, Iran: The Crisis of Democracy 1941-53 (London: I.B. Tauris, 1989). The author has sketched Iran's problems and how Musaddiq succeeded in gaining political power and nationalised oil. See also Sussan Siavoshi, Liberal Nationalism in Iran: The Failure of a Movement (London: Westview Press, 1990); H.E. Chehabi, Iranian Politics and Religious Modernism: The Liberation Movement of Iran Under Khomeini (London: I.B. Tauris, 1990).

28. Keesing's Record of World Events, vol. 6, no. 3, 2000; BBC, SWB, Third Series, ME/3806, April 4, 2000.