Global Processing

Iran election turmoil bad news for oil sector

June 22, 2009
Political uncertainty and unrest in the wake of Iran''s disputed presidential elections are casting a deeper pall on the country''s prospects of a near-term economic recovery. Under the best of circumstances, President Mahmoud Ahmadinejad may have been able to seize upon President Barack Obama''s overtures to Iran and gradually bring about an end to the U.S.-led international isolation the country''s oil sector has endured. But the mass protests and cries of foul by opposition rival Mir Hossein Mousavi and his followers over alleged election fraud could prove to be a further impediment to bringing in foreign oil firms, many of whom have avoided Iran because of U.S. sanctions and Western concerns about the country''s disputed nuclear program. The country, which according to the U.S. Energy Information Administration is home to the world''s third largest proven crude oil reserves, has grappled with inflation still near 25 percent even as other major oil producers in the region have seen inflation rates drop sharply. Unemployment remains high at almost 20 percent, and the collapse of oil prices in the second half of last year threatened to sharply erode the Tehran government''s ability to sustain the subsidy program it uses to curry favor with its supporters. Compounding these problems is Iran''s continuing battle with declining oil output -- an annual fall of between 4 to 8 percent, or roughly 200,000 to 350,000 barrels per day, according to analysts. The International Monetary Fund last year said Iran''s per-barrel production costs are $90, one of the highest among the Organization of the Petroleum Exporting Countries member states. Rounding off its litany of troubles is that its new export projects are riddled with delays and a lack of gas treatment facilities to cope with the new output means that production is being burned off instead of being sold. To boost economic growth, Iran needs to compensate for that decline through investments and technology, the two main elements it has been unable to secure enough of because of the sanctions. Had the election gone smoothly, Ahmadinejad may have been able to continue an earlier push of courting Chinese and Russian firms to invest in major export projects like the South Pars gas field. Those deals not only helped show the hard-line president was standing up to the West, but also offered a temporary substitute for the absence of Western firms. Such efforts could now falter. Its absence is already being felt in the Iranian oil sector, with the difficulties confronting the massive Aghajari gas injection project offering a window into the problems the country faces.