Sanctions can and do hurt Iran. Financial Times

25 May 2010

Financial Times.

Sanctions and underinvestment have cut Iran's oil production capacity by at least 300,000 barrels per day, depriving the country of billions of dollars of revenues.

The slow development of new oilfields and the poor condition of many existing wells have caused the fall, according to Iranian and western experts.

"Oil production capacity has dropped by probably about 300,000-400,000 bpd," said a former senior official in Iran's government. His figures were consistent with those of a western oil official. The period over which the dip has taken place is uncertain. Oil industry experts, however, say it has come about since Mahmoud Ahmadi-Nejad became president in 2005.

At that time, capacity was about 4.2m bpd; today it has fallen to about 3.8m or 3.9m. A major cause has been the government's decision to sack many of the oil industry's most experienced managers.

The latest figures issued by the central bank suggest that actual output is substantially below even the reduced capacity, with Iran producing 3.53m bpd during the second quarter of last year, compared with 4.1m recorded in 2005. Iran's oil ministry has denied any fall in the country's production capacity.

The financial loss has been cushioned by gas exports. The former official said that Iran was selling the daily equivalent of 320,000 barrels of gas condensates, helping make the "fall in oil revenues [less] visible". Iran has the world's second largest oil and gas reserves but needs foreign investment to raise its output. The official target is to produce 5.1m bpd of oil and 1bn cu m of gas per day by 2015.

Massoud Mir-Kazemi, the oil minister, has told parliament that Iran must invest at least $25bn every year in the energy sector or risk becoming a net importer of oil. Sanctions imposed because of the country's nuclear ambitions have discouraged foreign investment and made it harder for Iran to obtain western oil technology.

Western oil majors, notably France's Total and Royal Dutch Shell, have declined to develop Iran's energy sector because of US penalties. Chinese companies have signed multi-billion dollar contracts, but experts say these projects have not led to any significant progress. "China charges Iran at western prices but gives us its low-quality products and pursues a too-familiar Communist policy of slow work," said the former official.