Industry Spotlight: Oil and Gas (2024)
/By Brooke Lowe, Research Associate
Introduction
When AIC last reported on the oil and gas industry in Iran in 2019, the situation in Iran looked much different from how it is today. This industry spotlight will evaluate how the oil and gas sector has changed in recent years, following the shift of leaders and changing political and social landscape in Iran.
Crude Oil
Ebrahim Raisi was elected President of Iran in 2021; upon taking office he faced a complex geopolitical landscape, marked by international sanctions and tensions surrounding Iran's nuclear program. Iran's oil exports were experiencing significant price fluctuations and demonstrated vulnerability to the impacts of sanctions. Raisi's administration therefore focused on increasing oil exports and mitigating the impacts of sanctions, while also attempting to diversify the nation's economy to reduce its dependence on oil revenues.
Through diplomatic efforts and engagement with international partners, Iran has managed to restore some oil exports to pre-sanction levels in certain markets. One key factor in the improvement in exports is Raisi’s focus on regional relations, which has opened up additional markets in which to trade. These markets include Syria regionally and Venezuela globally, as both of these states also face US sanctions. Iran has additionally established foreign front companies, which it utilizes to circumvent US and Western sanctions. Furthermore, the war in Ukraine has resulted in notably improved levels of Russian- Iranian cooperation, benefiting Iranian markets by increasing rates of trade and thus Iranian profit. In fact, in 2023, Iran’s crude oil exports hit new highs, surging in August 2023 (despite US sanctions) as Tehran continued to sell to China and other non-western buyers. It is estimated that Iran’s oil exports in August 2023 reached 3.15 million barrels per day, which is the highest since 2018.
China has historically maintained a robust economic relationship with Iran and continues to act as a significant player in Iran’s crude oil sector. Despite international sanctions imposed on Iran over its nuclear program, China has consistently expressed reservations about the effectiveness and fairness of such measures and has argued that dialogue and diplomacy should be prioritized over punitive ones. The Belt and Road Initiative (BRI), which launched in 2013, has further strengthened economic ties between the two nations. For instance, China National Petroleum Corporation (CNPC) has invested significantly in Iran's energy projects, exemplified by the South Pars gas field development. In addition to energy, China has expanded its trade with Iran in various sectors, contributing to the strengthening of bilateral economic relations.
Russia, meanwhile, is another significant energy trading partner for Iran, with the two states signing a deal for energy cooperation in 2022. The two nations have collaborated on various projects, such as the construction of the Bushehr Nuclear Power Plant. Additionally, Russia has opposed unilateral sanctions on Iran and has criticized the imposition of restrictions, particularly those related to the Iranian nuclear program. The two nations, though competitors on the oil market, continue an “oil for gas” exchange as Russia supplies Iran with gas in exchange for Iranian oil, emphasizing cooperation between the two states. If oil for gas exchange agreements are finalized, Iran will import 20 billion cubic meters of gas from Russia, whilst Russia will import significant amounts of Iranian oil in return. As both states face sanctions from the West, cooperation between the two countries is expected to continue in coming years.
Beyond expanding trade measures as outlined above, Iran has continued to invest in its oil infrastructure, pumping nearly $29 billion into it in the past two years, with the aim to modernize facilities, enhance production techniques, and attract more foreign investment. A further less discussed, but still prominent aspect of Iran’s oil industry recovery are the creative solutions it has found to circumvent sanctions including barter arrangements and illicit oil smuggling routes. However, it is unknown how much revenue is generated by these illicit routes.
Natural Gas
The natural gas industry in Iran has also undergone significant changes between 2019 and 2024, with the election of Ebrahim Raisi as President in 2021, and his shift in energy policies serving as a crucial turning point.
In 2019, Iran was already a major player in the global natural gas market, possessing the second-largest proven natural gas reserves in the world after Russia. The country's energy sector was a critical component of its economy, accounting for a substantial portion of its revenue through oil and gas exports. However, due to the re-imposition of harsh economic sanctions by the United States in 2018, Iran's energy sector faced considerable challenges.
The election of Ebrahim Raisi as President in 2021 brought a new perspective to Iran's energy policies. Raisi, known for his conservative stance, emphasized self-reliance and energy security as top priorities for the nation. This approach represented a departure from the more conciliatory stance of his predecessor, Hassan Rouhani, who had sought engagement with the international community.
One of the immediate changes in Iran's natural gas industry following Raisi's election was an increased focus on domestic consumption and energy self-sufficiency. The government implemented policies to reduce the country's dependence on natural gas imports, which had increased during the sanctions period. Iran has managed to decrease natural gas imports while substantially increasing exports. This involved investing in energy-efficient technologies, improving the efficiency of the domestic gas distribution network, and encouraging the use of alternative energy sources such as renewables.
Furthermore, Raisi's administration prioritized the development of Iran's gas infrastructure. This included investments in the expansion of gas pipelines, storage facilities, and production capacities. In July of 2022, the National Iranian Oil Company and Russian controlled energy cooperation Gazprom negotiated and signed a memorandum of understanding worth $40 billion. This deal states that Gazprom will provide support to the National Iranian Oil Company in the expansion of the Kish and North Pars offshore gas fields, in addition to six oil fields. By bolstering the domestic infrastructure, Iran aimed to strengthen its position as a regional natural gas supplier, reducing its vulnerability to international sanctions and fluctuations in global energy markets.
Another significant change was Iran's approach to international energy partnerships. Under Raisi, the country sought closer ties with neighboring nations, particularly in the context of natural gas trade. Iran began negotiations with countries like Iraq and Pakistan to develop cross-border natural gas pipelines and export agreements. These efforts were part of a broader strategy to diversify Iran's natural gas export routes and reduce its reliance on traditional markets, such as Europe and Asia.
However, it is essential to acknowledge that the impact of sanctions remained a significant challenge during this period. Iran still faces gas shortages and monitors its citizens' use of gas, threatening to cut off Iranian citizens' supplies of gas if they overconsume. While Iran made strides in its domestic energy policies and regional partnerships, sanctions continued to limit its access to global financial markets and technology transfer. This hindered the full realization of Iran's natural gas potential and the ability to attract foreign investments in its energy sector. The future of Iran's natural gas industry will continue to be shaped by its ability to navigate international geopolitics and economic constraints while maximizing the potential of its vast gas reserves.
Renewable Energy
Under President Ebrahim Raisi, Iran has unfortunately struggled to effectively harness and utilize its renewable energy potential. Despite the country's abundant solar and wind resources, progress in the renewable energy sector has been hindered by various challenges. Insufficient investment in renewable infrastructure, a lack of comprehensive policies and incentives to attract private investors, and ongoing international sanctions have impeded Iran's ability to transition to cleaner energy sources. These setbacks have not only limited the nation's capacity to reduce its carbon footprint but also hindered its economic diversification and energy security efforts. As a result, Iran has fallen short of fully capitalizing on the renewable energy opportunities available during President Raisi's presidency, leaving it reliant on fossil fuels and susceptible to the volatility of global energy markets.
In 2019, Iran's renewable energy sector was still in its nascent stages, despite having abundant renewable resources, including solar and wind energy. International sanctions, which were imposed on Iran prior to President Raisi's election, hindered the country's access to advanced technology and financing needed for renewable energy projects. However, some progress was made, with the government setting targets for renewable energy capacity expansion and introducing incentive schemes for private investors.
President Ebrahim Raisi's election brought slight momentum to Iran's renewable energy sector. As part of his administration's efforts to reduce the country's dependence on fossil fuels and strengthen its environmental commitments, several key initiatives were undertaken:
Domestic Investment and Technology Development: President Raisi's government prioritized domestic investment and technology development in the renewable energy sector. This approach aimed to reduce reliance on foreign suppliers and promote the growth of Iranian clean energy companies. Incentives were introduced to encourage local manufacturing of solar panels, wind turbines, and other renewable energy components.
Renewable Energy Targets: Iran set ambitious targets for renewable energy capacity expansion, with a focus on solar and wind power. These targets aimed to increase the share of renewable energy in the national grid and reduce greenhouse gas emissions. The government implemented policies to streamline project approvals and facilitate grid integration for renewable energy projects.
International Collaboration: The Raisi administration sought international collaboration to attract foreign investment and expertise in the renewable energy sector. Iran engaged in negotiations and partnerships with neighboring countries, regional organizations, and international institutions to enhance its renewable energy infrastructure and share best practices.
Policy and Regulatory Reforms: President Raisi's government implemented policy reforms to create a conducive environment for renewable energy development, such as doubling its non-hydropower renewables target to hit 10 GW by 2025..
Despite these initiatives, Iran lacks much tangible proof of the success of its efforts towards renewable energy. Nonetheless, the initiatives addressed above provide hope for the potential of Iran’s renewable energy industry, with Iran possessing the capabilities though lacking the initiative to fully push these policies and developments through.
Future Outlook
Looking into 2024 and beyond, several factors will shape Iran’s oil and gas industry trajectory, including economic sanctions, geopolitical tensions, technological advancements, and global energy transition efforts.
Economic sanctions have been a major challenge for Iran's oil and gas industry. The country has faced numerous restrictions on its exports due to political disputes with Western nations. These sanctions have limited foreign investments, technology transfers, and access to international markets.
Geopolitical tensions are another critical factor affecting Iran's oil and gas industry outlook. The region has long been characterized by conflicts and rivalries among various actors such as Saudi Arabia, Iraq, Syria, Israel, and the United States. These geopolitical dynamics create uncertainty about stability in the Persian Gulf region and can disrupt oil supplies or deter foreign investors from engaging with Iran. Ongoing political negotiations and diplomatic efforts will play a crucial role in determining whether these tensions ease or escalate further.
The global energy transition is another significant factor that will shape the future of Iran's oil and gas industry in 2024 and beyond. The world is increasingly shifting towards renewable sources of energy to combat climate change and reduce dependence on fossil fuels. This transition poses a challenge for oil-producing countries like Iran, as demand for hydrocarbons may decline over time. However, it also presents opportunities for diversification into cleaner energy sources such as natural gas, solar power, and wind energy. Given Iran's abundant reserves of natural gas and favorable conditions for renewable energy production, it can leverage these resources to adapt to changing market demands.
