At first glance, it seems that rising oil prices (33 percent growth in 2018) and low production costs can still generate petrodollars for Iran, even though its exports have declined by 40 percent to around 1.5 million barrels per day (mb/d) since the U.S. withdrew from the nuclear deal and announced the reimposition of sanctions in May.
In reality, however, Iran’s oil industry suffers heavily from financial shortfalls and continuing embargoes on technology which can cripple not only the oil industry, but eventually the whole economy. Oil constitutes 60 percent of Iran’s exports and a third of the government budget.
Washington allows the purchase of Iranian oil only through deposits in a special account that Iran can only use to purchase humanitarian goods, meaning Iran cannot use it’s oil revenues to revitalize the oil industry infrastructure and increase efficiency.
Investment and operating needs
Iran needs at least $20bn in annual investments in upstream (oil and gas exploration, development, and production) projects—of which 80 percent was expected to come from foreign partners in the absence of sanctions—to fulfill both employment plans and development projects.
The National Iranian Oil Company (NIOC), with 87,500 workers is responsible for the upstream sector. NIOC receives 14.5 percent of oil export revenues, but derives no revenue from domestic sales. Iran’s net oil export revenue was $55bn last year. This means NIOC's finances and investment plans will be hit hard by falling exports.
Another major problem is that 80 percent of Iran’s active oil fields are old and lose about 8-12 percent of their production capacity annually. The average oil flow from a single well in 1980s was 12,500 b/d, but now it has declined to one tenth of that figure. Four decades ago, Iran was producing above 5 mb/d of oil from 400 wells, but according to OPEC figures, it produced just 3.8 mb/d last year from 3,130 wells and has had to drill 216 new ones in that time.
Iran also has to re-inject about 30 billion cubic meters of gas into its oil fields to decelerate the production fall, meaning a significant increase in production costs.
If the low oil production cost mentioned earlier can offer a glimmer of hope to Iran, other expenses cancel out that advantage.
The operating expenditures of Iran’s oil and gas industry are also very high. According to official figures, the value of Iran’s oil and gas industry facilities and properties is about $400 billion, and about $20 billion annually (2.5 times more than global average) is needed for maintaining and upgrading the aging facilities.
Then there are the huge subsidies the government provides to domestic consumers. Iranians use 660 million barrels of oil and 215 billion cubic meters of gas annually, and the government is burdened with $45.1bn in fossil fuels consumption subsidies (equal to 10 percent of GDP) last year, about 55 percent more than in 2016. This is a built in shortcoming in Iran’s hybrid economy of heavy state ownership and a weak private sector.
Human resource challenge
Iran’s Oil Minister Bijan Zanganeh said in September 2017 that during Mahmoud Ahmadinejad’s presidency (2005-2013), the number of Oil Ministry employees tripled to 220,000. These numbers have since decreased, but pensions are still due to retirees. The NIOC has always guaranteed good pensions to its employees.
According to official figures, the number of retired workers is currently about 85,000, with an average of 56 million rials ($1,100) pension per month based on the official government exchange rate.
According to unions, the average oil worker salary is about 80 million rials ($530 based on a free market exchange rate). While this is still considered a good salary in Iran, many professional oil and gas workers have been leaving the country to work in Gulf states since Iran’s currency began to nosedive earlier this year.
The Iranian government had planned to create at least 600-700 thousand new jobs on the back of foreign investment in oil, gas, and petrochemical projects, but those plans have been scrapped due to sanctions, and now layoffs are imminent because of the declining production and closing of some fields.