Iranian Oil Production Verging On Disaster

The Oil & Gas Journal (5/5/08) published an analysis of the Iranian oil industry that begins:

“The Iranian oil and gas industry approaches its 100th anniversary bloated, corrupt, and nearly bankrupt, managing four times the employees but two thirds of the oil production it had before the Islamic Revolution of 1978-79.”

The piece provides details supporting each of those allegations and it outlines the history of the industry, starting with the discovery of oil in 1908 by a predecessor company of BP. Oil was nationalized in 1951 with a very successful agreement between the new National Iranian Oil Company (NIOC) and a group of IOC’s including BP in a 75 -25 split of oil revenues. Substantial expansion of the size and scope of Iranian upstream and downstream activities progressed with the development of a highly skilled local technical and managerial structure until the Iranian Revolution.

Events in Iran since the Revolution are an eerie echo of what has happened in Venezuela since the advent of Chavez. Skilled workers and foreign capital and technology have fled. Corruption has become rampant along with incompetence. Production of over 6 mb/d fell to below 3 mb/d after the Revolution and is currently about 3.8 mb/d. The pre-revolutionary head count of 32,000 employees has grown to 112,000.

Since the Revolution Iran has exported $801.2 billion of oil but nobody knows where that money has gone. “Certainly none of it was invested in Iranian oil infrastructure which badly needs renovation and repair, upstream and downstream.” The author claims the Iranian petro-industry is “on the brink of bankruptcy” although such a claim is not documented.

It is clear that Iran, Venezuela, Mexico, Nigeria, and Iraq together represent an enormous percentage of the world’s oil deposits and production that is being mismanaged. The political and management dysfunctions in all of these countries simultaneously is a major reason for the world’s current energy crisis. If these countries all operated in a standard capitalist mode, I suspect oil would be below $50 a barrel and the ultimate supply crisis might be five or ten or even fifteen years beyond when we will see it fairly soon. There seems to be little hope that any of these countries will make a dramatic change in their oil productivity soon.

Posted in Categories: Commodities, Contributor, External Research.

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