Iran's nuclear stance may reflect oil declines

Nick Snow
Washington Correspondent

WASHINGTON, DC, Dec. 27 -- Iran may need to develop nuclear power plants to meet domestic energy requirements because its crude oil operations are seriously declining, a Johns Hopkins University researcher suggests.

Recent analyses by former National Iranian Oil Co. officials project that the country's oil exports could disappear in 12-19 years, according to Roger Stern, a graduate student in the Geography and Environmental Engineering Department at Johns Hopkins's Whiting School of Engineering in Baltimore.

"It therefore seems possible that Iran's claim to need nuclear power might be genuine, an indicator of distress from anticipated export revenue shortfalls. If so, the [Iranian] regime may be more vulnerable than is presently understood," he said in an article published online in the Dec. 26 Proceedings of the National Academies of Science (www.pnas.org).

Stern said that most of Iran's oil export revenue comes from monopoly rents derived from the difference between the market and competitive prices. In Iran and other producing countries that subsidize domestic demand, pressure on exports can occur when demand grows more quickly than supplies, he said.

"This is what happened to Iran. Since 1980, energy demand growth (6.4%) has exceeded supply growth (5.6%), with exports stagnant since a 1996 peak," Stern said.

The country's recent oil production decline and resulting failure to meet its Organization of Petroleum Exporting Countries quota in all but 22% of the months since the Iran-Iraq War ended may signal that exports already are dropping, he said.

Stern said that Iran's 8% oil depletion rate, which is higher than the 5-6% global average, can be combined with the country's 5% oil demand growth to determine a 10% export decline rate. He said a former petroleum minister has suggested that Iran's oil depletion rate is closer to 10%, which implies a 12% export decline rate (EDR).

"Both 10% and 12% EDR estimates are conservative. These estimates ignore offshore production, where depletion is higher, and assume refinery leakage and depletion to be linear, whereas depletion recently increased," said Stern.

Investment's role
Foreign investment in Iranian oil and gas operations may be falling short of what is needed to arrest declines in production and exports, he continued. Such investment has averaged $2.1 billion/year since 2000, which exceeds the $1.6-1.9 billion/year amount he estimated was necessary to halt export declines. "However, Iran's post-2004 production decline is inconsistent with this expectation," he said.

Stern said that Iran itself makes it harder to extrapolate further what effect lagging investments will have on its oil exports. In 2006, it withheld oil production data, which it previously routinely reported to comply with an annual International Monetary Fund certification, although it issued forecasts that seven new projects due to come on stream in 2006-10 would add as much as 990,000 b/d of production, he said.

Some of the projects face problems, Stern said. Reports in the oil trade press and from Iranian and Japanese sources suggest that the Azadegan project, which is scheduled to add 125,000 b/d of production by 2009, doesn't have a contract. "Therefore, the project cannot produce by 2009 or even 2010 unless a contract is agreed [to] almost immediately, which seems unlikely," Stern said.

Negotiation problems have been compounded by Japan's displeasure with Iran's apparent violations of the nuclear nonproliferation treaty, he continued.

Stern said that another project, the Ahvaz expansion, which is scheduled to add another 255,000 b/d of production in 2009, is equally questionable. NIOC, which is building the project alone, has not led a major project since the 1978 revolution, he said.

"We would expect that if a project of Ahvaz's great size were proceeding without foreign help, it would be a cause for national pride and, therefore, well reported. We find no reports, however," he said.

"Of course, Ahvaz could be proceeding with reportage only in Farsi, which we do not read. This would be atypical, given that English, French, or Italian reporting exists for all other [Iranian] projects. Hence, we believe that neither Ahvaz nor Azadegan will be built on schedule," said Stern.

Iran's ability to attract foreign investment for oil and gas projects may be restricted further by a unique buyback investment vehicle, he continued. In most petroleum exporting countries, foreign exploration and development firms offer capital, technology, and management in exchange for a share of the extracted resource, he explained.

"Iran's constitution considers such arrangements as foreign ownership, which it prohibits. This prohibition has affected disinvestment and deterioration in Iran's petroleum infrastructure, most of which was built before the Iranian Revolution. Compounding the problem is NIOC's inability to lead major project construction," Stern said.

Contact Nick Snow at nsnow@cox.net.

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