Iran's Falling Oil Output Means Less Revenue, Clout

http://online.wsj.com/article/SB10001424052748704569204575328851816763476.html

By SPENCER SWARTZ and BENOîT FAUCON

LONDON—Iran's beleaguered oil industry could be on its way to passing an ignominious milestone: being replaced by its onetime nemesis, Iraq, as the Middle East's second-biggest oil producer.

That possible drop in standing, largely a result of economic sanctions and Iranian mismanagement, raises the prospect of less revenue for Tehran at a time when new sanctions are piling up against the regime.
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The Paris-based International Energy Agency this week forecast Iran's oil-pumping capacity to drop about 18%, or roughly 700,000 barrels a day from current levels, to 3.30 million barrels a day by 2015.

The IEA is an energy adviser to the U.S. and other industrialized nations that have concerns over the nature of Iran's nuclear program. But the agency's forecasts are generally regarded among oil analysts as industry benchmarks, and its assessment of Iran's production decline has been echoed by other industry analysts recently.

Iraq has become the most important investment spot for major oil companies because of its huge, undeveloped reserves, the fourth biggest after Saudi Arabia—the Mideast's top oil producer—Canada and Iran.

If the IEA's Iran forecast pans out, and if projections for Iraqi production increases prove accurate, the Islamic state's output in five years will trail Iraq for the first time in three decades.

That would ultimately lead to Iran getting a smaller production quota in the Organization of Petroleum Exporting Countries—meaning less revenue for the oil-dependent government in Tehran. That prospect also implies Iran having less weight within OPEC, where influence is tied to output capacity.

Highlighting Iran's unease with its situation, Iranian troops in December briefly occupied an Iraqi oil field in southeast Iraq in an apparent claim to ownership of the field. The two countries fought an eight-year war in the 1980s.
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Iran's oil-field problems predate its recent standoff with the West and the latest round of sanctions. Revolution and eight years of fighting with neighbor Iraq through the 1980s took their toll, with output plunging from a high of 6 million barrels a day from the mid-1970s. Oil infrastructure was damaged, and oil expertise fled the country. Many of Iran's oil fields are older than those of their Mideast neighbors, and so are declining much faster.

Iran has to replace roughly 300,000 barrels a day of production each year from old fields just to keep its total output from falling.

More recently, many foreign oil companies—sought out by Tehran for their expertise and capital—have been deterred by the increased politicization of Iran's energy sector under President Mahmoud Ahmadinejad, who came to power in 2005.

U.S. pressure in recent years on foreign companies that have long done business in Iran has succeeded in sidelining several big investors.

The latest sanctions by the U.S., European Union and United Nations threaten further damage. U.S. and EU measures, in particular, will make it even more difficult for Iran's oil and natural-gas industries to access badly needed funding, technology and new equipment.

"The new European and U.S. sanctions will kill a dying patient, which is (Iran's) oil exploration and production," said Fereidun Fesharaki, an Iranian specialist at FACTS Global Energy, a consultancy.

Iran's bleak situation is in stark contrast to Iraq. International oil companies have snapped up development blocks and rushed into big investment commitments since Baghdad opened its oil fields to competitive bidding last year. Many analysts conservatively estimate Iraq could boost its oil production capacity by at least a million barrels a day to a total of 3.5 million barrels a day by 2015.

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European Pressphoto Agency

Many of Iran's oil fields are older than those of its Mideast neighbors.
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iranoil0625

Both Iran and Iraq have a history of proving forecasters wrong, however. Iraqi oil officials have repeatedly predicted and missed projections to boost output. Iran, meanwhile, has sustained prodigious output despite decades of dire predictions, war and sanctions.

Iran recently signed tentative deals with Turkey and Brazil to develop gas-export projects, and the country has attracted billions of dollars in oil-drilling investment from Chinese companies. Iran says the new wells it is drilling are offsetting its naturally declining production.

"The new sanctions will make things more challenging, but we have been dealing with this for a long time," said an official from Iran's national oil company.

Write to Spencer Swartz at spencer.swartz@dowjones.com