Iran’s Oil Comeback: The Awakening of a Giant?


The lifting of economic and trade sanctions in relation to Iran’s nuclear programme means that the Islamic Republic should be able to export its oil freely to a wide range of customers, just as it did before the imposition of sanctions. Since Iran was not a negligible producer, other producers fear that the timing of its comeback to the market is bad news, as it may lead to lower oil prices for longer, especially if OPEC sticks to its existing strategy. The key questions that the international community is subsequently debating are: will Iran flood the oil market and, more importantly, is it able to do so? As this article argues, the sanctions were only partially responsible for Iran’s energy problems, and their removal will not solve the country’s long standing impediments to production, which, in the absence of sound and robust reforms, will prohibit a rapid expansion in Iranian capacity, as they have done for decades now.

2016 started well for the Islamic Republic of Iran. On January 16, economic and trade sanctions in relation to its nuclear programme were lifted after lengthy negotiations with the P5+1 (the five permanent members of the United Nations Security Council—China, France, Russia, the UK, and the United States—plus Germany). The measure removes restrictions on Iran’s crude oil exports and allows the country to access foreign exchange reserves of nearly US $60 billion held in international banks.1
This means that, in principle, Iran will be able to export its oil freely and to a wide range of customers, just as it did before the imposition of sanctions. Since Iran was not a negligible producer, other producers fear that the timing of its comeback to the market is bad: that, in an already well supplied market, additional supplies will depress the oil price further, all other things being equal. A continued rapid ramp up of Iranian production will also create interesting dynamics within OPEC as Iran increasingly challenges Saudi Arabia’s leadership of the organisation.
However, the sanctions were only partially responsible for Iran’s energy problems. Several longstanding impediments—both technical and political—remain which will prohibit a rapid expansion in Iranian capacity.

Oil and Gas Giant

The oil and gas markets will certainly not ignore a country like Iran.
According to the BP Statistical Review of World Energy (2015),2 the Islamic Republic sits on the largest proven gas reserves in the world (34 trillion cubic metres, more than 18 percent of world total) and the fourth-largest proven oil reserves (158 billion barrels, the equivalent of more than 9 percent of world total), after Venezuela, Saudi Arabia, and Canada.

United States and European Union (EU) sanctions imposed in late 2011 and in 2012, which were targeted more towards the energy sector, led to a decrease in oil production from 4.3 million barrels per day (Mb/d) in 2011 to 2.8Mb/d in 2015.3 Still, even at this level, Iran remained an important producer, ranking seventh in the world after Saudi Arabia, Russia, the United States, China, Canada, and Iraq. Gas production continued to increase albeit at a slower rate and Iran remained the third-largest gas producer after the United States and Russia.
The impact of the sanctions was as visible on the country’s crude sales as on production. According to the Energy Information Agency (EIA), they led to a drop of almost 1Mb/d in the country’s crude oil and condensate exports in 2012 compared to 2011, a time when Iran was the third-largest exporter of crude oil after Saudi Arabia and Russia, exporting around 2.5Mb/d.4 Exports further shrank to 1.1 Mb/d by mid-2013.5 In terms of natural gas, 98 per cent of production goes to the domestic market with very limited export capacity.

Figure 1: Iranian Crude Oil Exports, 1986-2012 6 


When the sanctions were lifted, the international community expected a boost to Iran’s oil production, and even more so to its exports, given the build-up of inventory during the sanctions period.

Iranian officials argued that 500,000 barrels a day could be immediately added to the country’s exports capacity, then another half million barrels brought in within months.7 Nevertheless, significant uncertainty about the country’s potential capacity remains.
The International Energy Agency (IEA) expects around 0.3Mb/d of additional crude to flow to the global market by the end of first quarter of 2016, although the agency adds that “this is still highly speculative.”8 With respect to production, the EIA estimates crude oil production will grow by about 0.3Mb/d in 2016 and by 0.5Mb/d in 2017.9 The administration, however, adds that these figures are subject to Iran’s ability to mitigate production decline rates and meet technical challenges among other factors.


In a market which is already well-supplied, any additional increases in production will put further downward pressure on the oil price, everything else being equal.
A combination of factors led to a fall in the price of oil from its highs of more than $100 per barrel (/bl) before summer 2014, to less than $35/bl 18 months later: resilient supply growth from both OPEC and non-OPEC countries; weaker demand from Asia and a record build-up of oil inventories. Given such conditions, it is not surprising to see many experts agreeing that the oil price is likely to stay low for longer, especially if Iran increases its exports. As it was put by the UAE’s energy minister Suhail bin Mohamed al-Mazroui, “anyone who will introduce more supply in the current situation will make it worse.”10
Should OPEC decide to reverse its current strategy and introduce production cuts to stop the oil price from declining further, it may not be backed by Iran. Iranian officials have stated that their country would not consider curtailing its oil growth momentum until its exports have increased by 1.5Mb/d over current levels.11
Such a position is reminiscent of Iraq’s stance back in 2010, when the then Iraqi oil minister, Hussein Al Shahristani, stated that his country would consider abiding by OPEC quotas once its crude production increased to at least 4Mb/d in two to three years, adding that any talk of a specific limit before then would be premature.12

Flooding the oil market?

Iran’s stance is understandable, especially since in 2014 the combined share of global production of its three Arab OPEC-member neighbours—Kuwait, Saudi Arabia and the UAE—reached its highest level since 1981, at nearly 30 per cent.
However, a collapse in the oil price is not a desirable outcome for any oil producer. Iran may not be as reliant on oil revenues as some of the other producers, particularly in the region, but oil is still the single most important source of support for its economy and for its government, accounting for 46 per cent of government revenues.13

Flooding the market and bringing prices down can therefore hardly be in the best interests of Iranian politics—especially since it seems unlikely that global demand will rise strongly enough to absorb an additional source of supply: After a resilient 2015 (1.5Mb/d), the IEA expects global oil demand growth of 1.2Mb/d in 2016, close to its long term average.
However, sceptics would argue that the Iranian comeback will not result in a significant increase of global supplies, reflecting their suspicion that Iranian crude supplies already managed to find their way to the global market during and despite the sanctions—if true, this would indeed limit the impact of the sanctions being lifted now.

Longer term

When a longer period is considered, additional questions emerge. Iran may well have the technical capabilities to increase its oil production, but it may take a while before the country reaches its past peak of more than 6Mb/d in 1974. Experience shows that several oil producing countries that have faced wars and sanctions have struggled to increase their production to previous highs. Libya and Venezuela are good examples, as they continue to struggle to sustainably reverse their production declines. Iraq is another case: it took the country more than 35 years to reach its previous peak of 3.5Mb/d in 1979.
In the 40 years after its peak production was reached, Iran has witnessed a revolution (the Islamic Revolution), a war (the Iran-Iraq war), and a series of sanctions going back to the mid-1990s, when the US imposed unilateral sanctions that prevented mainly American companies from investing in Iran or supplying it with equipment, in addition to putting political pressure on non-American companies entering the country. These sanctions and more recent ones have restricted Iran’s access to the outside technology and capital needed to maintain and increase oil production.
But sanctions alone do not provide sufficient justification for Iran’s production performance since its peak. The country’s discouraging attitude towards foreign investment is equally to blame.

Figure 2: Oil Production in Iraq, Iran, Libya and Venezuela 1965-2014



Risk and Reward

Although the oil industry was nationalised in 1951, Iran remained open to international companies. From the Islamic Revolution, however, until 1995, private investment in oil and gas was prohibited, in line with the Iranian Constitution.
The Iran-Iraq war in the 1980s left the oil industry in dire need of rehabilitation, and the Iranian Government had to modify its policy towards the international oil companies (IOCs). As a result, a new type of contractual arrangement, called Buyback, was introduced to bring in capital while keeping the IOCs’ involvement as minimal as possible. Under such an arrangement, the IOC was able to invest in the country’s closely controlled oil sector for a limited period of time (five to ten years) and deliver a specific work program. Once the program was completed (for instance when production started or reached a certain target), the company handed over the project to the National Iranian Oil Company (NIOC) and received, in return, an agreed fixed fee in addition to recovering some of its expenses.

Such restrictive terms are very unpopular with oil companies, who favour contracts that allow them to invest in a country over a long period of time, since oil and gas projects typically last decades. Furthermore, under the Buyback, the contractor had little incentive to reduce long-term costs and improve efficiency, because the fields would come under the control of the government at the handover date. This helps explain why Iran has been suffering from declining production, low rates of recovery from existing fields, and little exploration.15
In order to achieve significant production growth rates, Iran will have to call on the expertise, technology and capital (both financial and human) of the international oil industry. Investors have more opportunities than there exist financial and human resources required to develop them. Inevitably, priorities will need to be established. A rational investor will therefore allocate resources to those opportunities that offer reasonable returns at an acceptable level of risk: it is a simple balance of risk and reward.


Of course, Iran has an alluring potential, but that, on its own, will not be enough to attract investment. In assessing an opportunity, investors should consider several factors, whereby the geological potential is only one of them. The price of oil, costs, availability of infrastructure, political risk and contractual terms all must be carefully evaluated. The fall in the price of oil since 2014 has forced companies to become much more selective.
More specific to Iran, political risks remain particularly high: the deep rooted tensions between Iran and the US in particular have not evaporated, let alone the tensions between Iran and some of its Gulf neighbours, especially Saudi Arabia, which seem to be worsening. Although energy-related sanctions have been lifted, other sanctions, such as those for terrorism or human rights abuses, remain in place, in addition to the ‘snap back’ provisions in the nuclear deal, whereby sanctions can be re-applied if Iran violates the terms of the deal. All these factors increase the risk premium of operating in Iran.

Then there are the contractual terms. In 2014, Iran announced the introduction of a new arrangement known as the Iran Petroleum Contract (IPC). Some of the contract’s headline terms have been revealed, such as a longer period and more lenient cost recovery mechanism compared to the old Buyback, which is clearly an improvement. The additional details required to thoroughly understand the contracts, however, are yet to be published. When it comes to the contractual and fiscal terms, the devil is in the detail, and without more information, any judgement about the competitiveness of the IPC will be inadequate.

Opportunities and Challenges

The re-emergence of Iran brings with it opportunities and challenges for the Iranian people, the Middle East, international investors and the global community.
From the perspective of its implications for the oil market, Iran cannot be under- or over-estimated. Having the oil reserves is one thing, but converting them into production, exports and sustainable wealth is another thing. The excitement surrounding Iran’s comeback tends to draw some similarities with the opening of Iraq’s oil sector in 2009; it didn’t take the companies who rushed into Iraq too long to realise that their venture was not going to be as smooth as they hoped for.
Iran’s energy problems were not caused solely by sanctions and will therefore not be completely relieved by the removal of these sanctions. In the absence of fundamental reform, the country’s longstanding impediments to production will prohibit a rapid expansion in its oil and gas capacity, as they have done for decades now.

1.  Katzman, Kenneth Congressional Research Service, “Iran Sanctions”, Jan 2016. Available online:

2.  BP, “Statistical Review of World Energy 2015”. Accessed 4 February 2016. Available online:

3.  International Energy Agency (IEA), “Oil Market Report”, Jan 2016. Available online:

4.  Energy Information Administration (EIA), “Nuclear accord creates potential for additional crude oil production from Iran”, Aug 2015. Available online:

5.  Katzman, ibid

6.  Energy Information Administration (EIA), “International Energy Statistics”. Accessed 2 February 2016. Available online:

7.  Dipaola Anthony and Kalantari Hashem, “Iran Kicks off Plan to Boost Oil Exports as Sanctions Lifted”, Bloomberg, Jan 2016. Available online:

8.  IEA, ibid.

9.  Energy Information Administration (EIA), ‘Short Term Energy Outlook’, Jan 2016. Available online:

10.  Hume Neil, Sheppard David, Raval Anjli and Bozorgmehr Najmeh “Iran storms back into glutted oil market with price at 13-year low”, Financial Times, Jan 2016. Available online:

11.  Nasdaq, “Iran Won’t Join Immediate OPEC Production Cut”, Jan 2016. Available online:

12.  Surk, Barbara (2010) ‘Iraq to Consider Abiding by OPEC Quotas After Crude Production Increases, Oil Minister Says’, Associated Press, August.,-Oil-Minister-Says-

13.  International Monetary Fund (IMF), “Islamic Republic of Iran – 2015 Article IV Consultation”, Dec 2015. Available online:

14.  BP Statistical Review of World Energy, ibid.

15.  Nakhle, Carole ‘Can oil and gas markets adjust to rising Persia?’, Carnegie Endowment for International Peace, October 2014. Available online:


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