Iran's oil industry: Maintaining strategic significance amidst waning influence

Iran, a country rich in oil resources, has been grappling with the complexities of sustaining its oil production and exports. The country's domestic firms, while playing an increasingly significant role, often lack the necessary capital, technology, and expertise to maintain output levels.

The oil sector in Iran has been significantly impacted by historical events such as the Iran-Iraq War, which left it in need of rebuilding. This has resulted in Iran's oil production remaining below its peak levels of the 1970s, despite the country's large reserves and advancements in drilling and extraction technologies.

Iran's reliance on oil revenues is evident, with the share of oil revenues in its public budget consistently exceeding 25% in most years. Oil also accounts for nearly 9% of its GDP. However, the country spends the most on energy subsidies worldwide, which puts a strain on its economy.

Any meaningful expansion beyond current levels would require substantial investment in infrastructure, technology, and field rehabilitation. But the upside would be limited due to underinvestment and limited foreign involvement, a consequence of Iran nationalising its oil industry in 1951 and prohibiting foreign investment under the Iranian Constitution after the 1979 Islamic Revolution.

The imposition of sanctions has further exacerbated these challenges by limiting access to financing, curtailing technology transfers, raising trade costs, and reducing overall competitiveness.

Despite these obstacles, if sanctions are eased or lifted, Iran could potentially increase its oil production and exports. However, the upside would be limited due to underinvestment and limited foreign involvement. Iran holds about 19% of the Middle East's proven oil reserves and has a population of around 86 million, providing a significant potential for growth if the right conditions are met.

Interestingly, China is expected to have a larger share of Iran's oil exports in the coming years. This stems from China's strategic planning and long-term investment in energy resources, as well as its position as a major global oil consumer aiming to secure stable supply sources.

In 2016, during a brief window of relief, Iran failed to capitalise on international interest, deterred by legal and regulatory hurdles that remain largely unchanged. Approximately 10 key trade partners contribute to roughly 85% of Iran's non-oil exports, with more than 50% of its non-oil exports in 2023-2024 consisting of petrochemical products and gas condensates.

Under the buyback contract model, international oil companies invest only up to the point of first production, at which time the project is transferred to the National Iranian Oil Company. This model, while limiting foreign involvement, allows for some level of investment and technology transfer.

The fiscal breakeven oil price for balancing Iran's budget in 2025 is $163 per barrel, the highest among Middle Eastern oil exporters. If stronger penalties are introduced and enforced aggressively, Iran's oil exports could fall, creating upward pressure on global oil prices, assuming other factors remain unchanged.

In conclusion, Iran's oil industry faces significant challenges, but also presents opportunities for growth. The key to unlocking this potential lies in addressing the underlying issues of underinvestment, limited foreign involvement, and the impact of sanctions, while also leveraging strategic partnerships with countries like China.