Iran’s New Oil Discovery in Khuzestan Will Change Little

Published November 17th, 2019 - 08:25 GMT
/AFP
/AFP

On Sunday last week, Iranian President Hassan Rouhani announced to a crowd of supporters in the central city of Yazd: ‘I am telling the White House that in the days when you sanctioned the sale of Iranian oil, the country’s workers and engineers were able to discover 53 billion barrels of oil’. Mr Rouhani’s claim relates to the discovery of a new 2400 km2 oil field by Iranian authorities in the South-West province of Khuzestan.


The find which would constitute Iran’s second largest oil field after one in Ahvaz, also in Khuzestan, would increase the country’s proven oil reserves by about a third. Iran’s oil ministry announced the discovery formally on Monday, naming the site Namavaran and noting that it had been under exploration since early 2016.

By international standards, it is a huge find. Recent high-profile oil field discoveries such as Exxon’s announcement of a new extraction site in Guyana, possessing some 6 billion barrels, are a fraction of the size. Commentators took to both social and conventional media to announce the discovery as a huge boon to Iran’s flailing economy, a sentiment echoed by Mr Rouhani: ‘this is a small gift from the government to the people of Iran’, a vindication that Iran is ‘a rich country, despite enmity and cruel sanctions’.

Yet on closer inspection, Mr Rouhani’s announcement looks little more than a well-timed publicity stunt. Whilst an increase by a third in proven oil reserves could, in theory, significantly bolster Iran’s export capacities, a shortage of reserves is not an issue in a country that already contains the world’s fourth largest proven deposits of crude oil and the world’s second largest deposits of natural gas. Three factors mitigate against Iran reaping financial benefits from its recent discovery.

a shortage of reserves is not an issue in a country that already contains the world’s fourth largest proven deposits of crude oil and the world’s second largest deposits of natural gas. Three factors mitigate against Iran reaping financial benefits from its recent discovery.

The first factor, often overlooked by financial journalists, is geological. As Ellen Wald, an energy historian and Senior Fellow at the Atlantic Council notes, the oil discovered is a particularly heavy form of crude, both difficult and expensive to recover. In total, the recovery rate of the oil is estimated to be only 10%. With extraction constraints, Ms Wald estimates that as little as 2.2 billion barrels of oil may be extractable from the site. Though still a significant increase, this estimate is far more modest than the headline grabbing figures cited by Mr Rouhani.

More importantly, Iran lacks the refining capacity to convert crude oil into more useful petrochemical compounds. Iran’s National Oil Refining and Distribution Company (NIORDC) claims that it is capable of refining 1.8 million barrels per day in its 10 refineries, yet energy experts believe that this is an inflated estimate.

As sanctions continue to bite Iran’s oil sector, its national energy providers are attempting to diversify into other forms of petrochemical production. The NIORDC noted in a statement last month that ‘The Islamic Republic has been taking various measures to counter the US’s actions and alleviate the impacts of the unjust sanctions on its economy and increasing the country’s refining capacity has become a major goal’.

Yet a number of important constraints exist on enhancing the country’s limited refining capacity. In the first instance, prohibitions on the import of advanced technological components as well as metal building materials limit the supply of parts to construct, repair and upgrade refining facilities.

Yet a number of important constraints exist on enhancing the country’s limited refining capacity. In the first instance, prohibitions on the import of advanced technological components as well as metal building materials limit the supply of parts to construct, repair and upgrade refining facilities.

Yet Iran also faces a scarcity of another key commodity essential to the refining process: water. Water shortages in much of the country are acute and water is an essential requirement for cooling processes in oil refining. It is estimated that producing a single gallon of gasoline requires 0.61-0.71 gallons of water. Diverting limited supplies of water away from farming towards industry carries significant risks in a country which employs significantly more people in agriculture than in the petrochemical industry.

The UN estimates that Iran currently uses 3.8 billion cubic metres of water a year more than is replaced by rainfall. A fast falling water table augurs badly for increased refining capacity in the long term. Plans to build a petrochemical plant near the Iranian city of Firouzabad have already stalled due to water scarcity and desalination remains a difficult option given a shortage of usable energy.

Plans to build a petrochemical plant near the Iranian city of Firouzabad have already stalled due to water scarcity and desalination remains a difficult option given a shortage of usable energy.

Yet the most obvious limitation on reaping maximum benefits from the Namavaran field is where oil can be sold to. Iran has struggled to export its large quantities of crude oil since US President Donald Trump unilaterally withdrew from a landmark 2015 nuclear deal last year. Since May, as Mr Trump moved to end temporary sanctions waivers to 8 main buyers of Iranian oil, holdouts such as China, India and Turkey have moved to find other international oil suppliers.

Iran is still exporting some crude via unconventional means and to other international pariahs such as Syria, but exports have been cut by around 2 million barrels per day to 500,000 barrels from a peak of 2.5 million barrels per day in early 2018. Mr Rouhani claims that Iran will continue to sell oil by any means possible but noted in a speech last week: ‘We have never had so many problems in selling oil. We never had so many problems in keeping our oil tanker fleet sailing’.

Crude oil exports have been slashed by more than 80% since sanctions hit last year. Sanctions busting efforts have proved partially successful but carry substantial risks too. Often reliant on foreign intermediaries and backroom dealings, sanctions busting has facilitated institutional corruption in Iran as large sums of cash and goods change hands through unofficial channels and intermediaries take a significant cut of deals.

Iran is still exporting some crude via unconventional means and to other international pariahs such as Syria, but exports have been cut by around 2 million barrels per day to 500,000 barrels from a peak of 2.5 million barrels per day in early 2018.

With these obstacles in mind, how might we explain Mr Rouhani’s announcement? It appears that declarations of new economic opportunities serve to shore up public confidence in Mr Rouhani’s government and the national economy. Much reporting on Mr Rouhani’s speech narrowly focused on the oil discovery but provided little context on the real motivations behind his statements.

As Maysam Behravesh, an Analyst at Gulf State Analytics, notes ‘the announcement was partly meant for domestic audiences and aimed at enhancing his administration’s profile in the face of increasing criticism against its economic performance’. Yet in his statements, Mr Rouhani took aim at political adversaries, particularly the judiciary who he claims are engaging in a ‘factionally driven and discriminatory crackdown on corruption’. To Mr Behravesh, ‘the bare fact is that the new field is unlikely to be developed anytime soon or make any meaningful difference in terms of alleviating Iran’s economic predicament under the US’s maximum pressure’.

As Maysam Behravesh, an Analyst at Gulf State Analytics, notes ‘the announcement was partly meant for domestic audiences and aimed at enhancing his administration’s profile in the face of increasing criticism against its economic performance’.

Mr Rouhani is right to fear Iran’s worsening economic outlook.

The World Bank estimates that Iran’s economy will contract by around 9% this year, on the back of plummeting oil and gas exports. Only Libya and Venezuela are expected to perform worse economically in 2019. This would constitute Iran’s worst economic performance since 1984.

While Mr Rouhani last month spoke about the country’s ‘Resistance Economy’ overcoming the storm of US sanctions, few positive indicators exist suggesting a positive financial outlook. While the Iranian rial has appreciated against the US dollar in recent months and inflation and unemployment remain lower than expected, the most likely outcome for Iran is an economic stabilisation at a far lower level than has existed in recent years. Iranian households have experienced significant pain due to sanctions.

According to the IMF, consumer prices increased by 35% between September 2018 and September 2019. While many note that Iran’s long history as a state under punitive sanctions make it better prepared than most to withstand international isolation, Mr Rouhani acknowledges that the country faces its ‘most difficult time in decades’.

Saeed Jalil is currently Iran's chief nuclear negotiator /AFP

It is far too early to talk about an economic collapse in Iran. As Djavad Salehi-Isfahani, a Virginia based economist notes, the country’s economy is hovering slightly above its July 2015 level, when the nuclear deal first came into effect and the cheap cost of labour in the country means that unemployment has failed to skyrocket as predicted by many, not least those close to Mr Trump. Yet increasing dissatisfaction with economic management may increase pressure on Mr Rouhani who faces challenges from Iran’s hostile judiciary and a newly resurgent hardline political faction lead by Saeed Jalil, who Mr Rouhani defeated in the 2013 Presidential election.

Yet increasing dissatisfaction with economic management may increase pressure on Mr Rouhani who faces challenges from Iran’s hostile judiciary and a newly resurgent hardline political faction lead by Saeed Jalil, who Mr Rouhani defeated in the 2013 Presidential election.

Following announcements this week on the imposition of rationing on gasoline purchases and a reduction in fuel subsidies, riots have broken out in a number of Iranian cities, most notably in Ahvaz, the capital of Khuzestan province. Many in Khuzestan, which contains as much as 80% of the country’s oil reserves have grown increasingly dissatisfied with Iran’s struggling administration.

At the same time as Mr Rouhani announced the discovery of new oil fields, Khuzestanis took to the streets in their hundreds to protest the suspicious death of Hassan Heidari, a well-known Arab-Iranian poet, who demonstrators argue was poisoned by the country’s Revolutionary Guard Corps. Mr Rouhani will remember well demonstrations and riots which spread throughout the country in 2007 when former President Mahmud Ahmadinejad announced fuel rations.

At the same time as Mr Rouhani announced the discovery of new oil fields, Khuzestanis took to the streets in their hundreds to protest the suspicious death of Hassan Heidari, a well-known Arab-Iranian poet

Though it is likely that the Iranian administration will weather this storm, a potential long term economic blockade and worsening living conditions are already leading to growing riots and protests across cities in Iran, as the government raises oil prices by as much as 50%


The views expressed in this article do not necessarily reflect those of Al Bawaba News.


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