Sanctions choke off Iran oil output

Iran's oil production fell by 50,000 barrels a day to 3.38m b/d in February, according to the International Energy Agency.

Story highlights

  • Iran's oil production has fallen to a 10-year low
  • Tehran's oil output had already been in long-term decline
  • Iranian output could fall further when a European Union oil embargo comes into effect

Iran's oil production has fallen to a 10-year low and could drop to levels last seen during the Iran-Iraq war in the 1980s as sanctions over its nuclear programme disrupt an industry already suffering from years of underinvestment.

The country's crude production fell by 50,000 barrels a day to 3.38m b/d in February, according to the International Energy Agency. The last time it was that low was in late 2002, IEA statistics show.

Tehran's oil output had already been in long-term decline as previous US sanctions deterred foreign oil companies from investing, starving Iran of the technology needed to boost its flagging production.

The data come amid heightened diplomatic tensions over Iran's nuclear programme. Barack Obama, the US president, issued a new warning to Tehran on Wednesday, calling for it to re-enter international arms talks in good faith.

"The window for solving this issue diplomatically is shrinking," Mr Obama said after talks with David Cameron, the UK prime minister. "I'm determined to prevent Iran from getting a nuclear weapon."

Late last year, the IEA forecast that Iranian production capacity would decline by 890,000 b/d to just under 3m b/d by 2016 as a result of tighter sanctions.

Oil is Iran's lifeline and the drop in output would further increase economic pressures on Tehran just as a power struggle is under way between competing conservative factions following parliamentary elections on March 2. Oil exports provide half of Iran's government revenues and account for 80 per cent of the country's total exports, according to estimates from the US Department of Energy.

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A string of unscheduled production outages from South Sudan to Syria have reduced global supply, despite Saudi Arabian output running at a 30-year high. That, combined with geopolitical jitters about Iran, has pushed oil prices up 20 per cent since last December. In the US, economists fear rising petrol prices could jeopardise the country's slow return to economic health.

"There is a need for more production," Daniel Poneman, the US deputy secretary of energy, said on a visit to Kuwait. "Oil prices are not consistent with the global economic recovery."

Yet Iranian output could fall even further. In its monthly market report, the IEA said that from July onwards -- when a European Union oil embargo comes into effect -- Iranian exports could be curtailed by around 800,000 b/d to 1m b/d, about a third of the current total.

Analysts say Iran may be forced to shut down some production if it cannot sell the crude it pumps. If it does so, output could fall to levels not seen since the end of the Iran-Iraq war in the 1980s.

The IEA based its figures on the 500,000-600,000 b/d of oil Iran exported to the EU before the advent of sanctions and the assumption that its other buyers would also scale back volumes in order to avoid falling foul of sanctions.

Iran is one of the world's great hydrocarbon powers, with the largest conventional oil reserves after Saudi Arabia and Venezuela and the biggest natural gas reserves after Russia. But its oilfields are old and dwindling, with annual rates of decline in some cases exceeding 10 per cent.

Most producing countries have succeeded in slowing output falls with advanced reservoir management technology and enhanced oil recovery squeezing more crude out of mature fields. But tough US sanctions designed to isolate Tehran over its nuclear ambitions have restricted its access to such knowhow.

The outlook brightened in the late 1990s and early 2000s when some European oil companies considered substantial investments in Iran's gas industry. But in the past few years companies such as Total of France, Royal Dutch Shell and Repsol of Spain have pulled out as sanctions tightened.

"It's very difficult for the Iranians to get hold of the technology that would stem the decline," said Samuel Ciszuk, an oil supply analyst at KBC Energy Economics. "As a result, they're really struggling to maintain production."