Iran is OPEC's second largest oil producer and holds 9% of the world's oil reserves and 15% of its gas reserves. Additionally, Iran is a focal point for regional security issues. 

Iran's economy, which relies heavily on oil export revenues, was hit hard by record-low oil prices during 1998 and early 1999, but with the sharp rebound in oil prices over the past year, has begun to recover. Besides persistent unemployment (over 15%) and inflation (30-35%), other problems faced by Iran's economy include: a rapidly growing, young population with limited job prospects; heavy dependence on oil revenues (about half the state's budget and 80% of the country's hard currency earnings); $12 billion in external debt (including a high proportion of short-term debt); expensive state subsidies on many basic goods; a large, inefficient public sector and state monopolies (bonyads, which control 20% or more of the economy and constitutionally are answerable only to supreme leader Ayatollah Ali Khamenei); a serious drought; and international isolation and sanctions. 

In September 1999, President Khatami (elected in a landslide in May 1997 on a reform agenda) announced an ambitious (and controversial) program to privatize several major industries, including communications, post, rail, petrochemicals, and even upstream oil and gas to an extent, as part of the "total restructuring" of the Iranian economy called for in the country's latest five-year economic plan (which began in March 2000). The five-year plan also called for a wide range of fiscal and structural reforms, including a partial float of the rial, and aims to attract $10 billion in oil, gas, and petrochemicals investment. Implementation of these plans, however, has been delayed in the past by lack of domestic political consensus (as well as the Iranian constitution), and likely will be in the future as well. In November 1999, for example, the powerful (and conservative) "Council of Guardians" rejected a bill which would have exempted foreign companies in an offshore free-trade zone from threats of nationalization. More recently, the Council of Guardians vetoed planned reforms to Iran's mining sector. 

Iran is attempting to diversify by investing some of its oil revenues in other areas. Iran also is hoping to attract billions of dollars worth of foreign investment to the country by creating a more favorable investment climate (although in 1999 it attracted only $1.1 billion, down 10% from 1998 levels). This would involve a variety of measures, including possible constitutional amendments, reduced "red tape," reduced restrictions and duties on imports, creation of free-trade zones, and increased safety of foreign investments. 

On February 18, 2000, Iran held its sixth parliamentary elections since the 1979 Islamic revolution, with an overwhelming victory for the reformist coalition. In the wake of the election, U.S. President Clinton called for a "constructive partnership with Iran." The effect of Iran's elections on the country's energy sector at this point remains uncertain. 

SANCTIONS 

The US Iran-Libya Sanctions Act (ILSA) of 1996 imposes mandatory and discretionary sanctions on non-U.S. companies investing more than $20 million annually in the Iranian oil and gas sectors. Also, in 1995, President Clinton signed executive orders prohibiting US companies and their foreign subsidiaries from conducting business with Iran, while banning any "contract for the financing of the development of petroleum resources located in Iran." In response, U.S.-based Conoco was forced to abrogate a $550-million contract to develop Iran's offshore Sirri A and E oil and gas fields. Following this, France's Total and Malaysia's Petronas were awarded the contract. On August 19, 1997, Executive Order 13059 reaffirmed that virtually all trade and investment activities by US citizens in Iran are prohibited. In March 2000, US Secretary of State Albright announced that the United States would lift certain sanctions against Iranian luxury goods. Other sanctions remain in effect, however. 

Several countries have been looking to invest in the Iranian oil sector, but have been awaiting expiry of ILSA in 2001. Japan, for instance, sent a high-level delegation to Iran (Japan's third-largest oil supplier) in August 2000 for energy talks aimed at deepening cooperation between the two countries in energy development. Also, in March 2000, Japan's trade ministry (MITI) resumed long-term trade insurance for Japanese companies in Iran. 

CASPIAN ENERGY

Iran sees itself as a natural transit route for oil and gas exports from the landlocked Central Asian countries to world markets. This vision is complicated, however, by political considerations, particularly the US policy opposing pipelines through Iran (the United States has made the construction of an oil pipeline from Baku, Azerbaijan to Ceyhan, Turkey the centerpiece of its Caspian policy). 

Aside from acting as a transit center for other countries' oil and gas exports from the Caspian, Iran has potentially significant Caspian reserves of its own, including up to 15 billion barrels of oil and 11 trillion cubic feet of natural gas. It is important to note, however, that almost none of this is "proven" to be recoverable (although preliminary seismic surveys conducted by Lasmo and Shell indicated 2.5 billion barrels of oil). Currently, Iran has no oil or gas production in the Caspian region. 
 
CRUDE SWAPS

In order to get around restrictions in dealing with Iran, several firms have proposed oil "swaps" involving the delivery of Caspian (Azeri, Kazakh, Turkmen) oil to refineries in northern Iran, while the same amount of Iranian oil is exported through Persian Gulf terminals. According to Iranian Oil Minister Bijan Namdar-Zangeneh, Iran is planning to retool its oil infrastructure to accommodate such swaps, including construction of a $400-million, 240-mile pipeline from the Caspian area via Iran's Caspian port of Neka to refineries in northern Iran SSS and to Tehran. In February 2000, the National Iranian Oil Company (NIOC) awarded a Chinese consortium (led by Sinopec and CNPC)a $100-million contract for technical aspects of the project, which is expected to transport 175,000 bbl/d of Caspian crude within two years, and possibly up to 370,000 bbl/d (at a cost of $220 million). European oil trading company Vitol is involved in financing the project. Iran also plans to boost capacity at its northern refineries at Arak, Tabriz, and Tehran to about 800,000 bbl/d to process this oil. In January 2000, US Ambassador to Azerbaijan, Stanley Escudero, said that transit of oil from Azerbaijan would be a "mistake." 
 
 

Energy
	Petroleum (thousand barrels per day)		Production of Electricity (million kw/h) (1)
	Production	Export(2)		Steam	Gas and Combined Cycle	Hydro- Electric	Diesel	Total
(Figures in parentheses indicate percentage change over the previous period)
1376	3,623	2,496		65,629	19,298	6,908	475	92,310
	(0.4)	(-2.2)		(5.2)	(24.7)	(-6.3)	(22.1)	(7.6)
1377	3,666	2,333		63,988	26,487	7,014	374	97,862
	(1.2)	(-6.5)		(-2.5)	(37.2)	(1.5)	(21.3)	(6.0)
1378	3,373	2,205		70,689	31,156	4,943	419	107,207
	(-8.0)	(-5.5)		(10.5)	(17.6)	(-29.5)	(12.0)	(9.5)
1379s	3,762	2,605		77,846	33,302	3,637	359	115,144
	(11.5)	(18.1)		(10.1)	(6.9)	(-26.4)	(14.3)	(7.4)
(Figures in parentheses indicate percentage change over the previous period)
1379s:
Q1	3,637	2,501		18,920	7,764	1,014	101	27,831
	(7.7)	(15.8)		(6.1)	(29.0)	(7.0)	(29.5)	(11.7)
Q2	3,739	2,627		21,814	11,062	1,137	115	34,128
	(2.8)	(5.0)		(15.3)	(38.9)	(12.1)	(13.9)	(21.9)
Q3	3,893	2,718		18,463	7,706	682	74	26,925
	(4.1)	(3.5)		(15.4)	(-30.3)	(-40.0)	(35.7)	(-21.1)
Q4	3,777	2,575		18,649	6,570	804	69	26,092
	(-3.0)	(-5.3)		(1.0)	(-14.7)	(18.1)	(-6.8)	(-3.1)
1380 :
Q1s	3,560	2,381		19,343	9,226	1,088	82	29,739
	(-5.7)	(-7.5)		(3.7)	(40.4)	(35.3)	(18.8)	(14.0)
Q2s	3,514	2,356		23,513	11,939	1,251	125	36,828
	(-1.3)	(-1.0)		(21.6)	(29.4)	(15.0)	(52.4)	(23.8)
Q3	3,436	2,213		19,004	9,138	979	63	29,184
	(-2.2)	(-6.1)		(19.2)	(-23.5)	(-21.7)	(49.7)	(-20.8)
Source: Ministry of Petroleum, Ministry of Energy
(1) Excludes electricity generated by large manufacturing establishments and private institutions. (2) Includes crude oil export and net export of oil products.

OIL

Iran holds 90 billion barrels of proven oil reserves, or roughly 9% of the world's total. The vast majority of Iran's crude oil reserves are located in giant onshore fields in the Khuzestan region near the Iraqi border and Persian Gulf terminus. Current Iranian production is accounted for by the following fields: Ahwaz-Bangestan (250,000 bbl/d currently, with plans to increase to 600,000 bbl/d over the next 8 years at a cost of $2.5 billion), Marun, Gachsaran, Agha Jari, and Bibi Hakimeh. Most of Iran's crude oil is low in sulfur, with gravities in the 30°-39° API range. During the first seven months of 2001, Iran produced about 3.9 million bbl/d of oil, around 100,000 bbl/d above its average output of 3.8 million bbl/d for 2000. Iran's current sustainable crude oil production capacity is estimated at around 3.9 million bbl/d, which is nearly 500,000 bbl/d above Iran's latest (September 1, 2001) OPEC production quota of 3.406 million bbl/d. In August 2001, Iran's oil minister denied a report (in Middle East Economic Survey) that Iranian production had hit 4.1 million bbl/d. With consumption of about 1.2 million bbl/d, Iran currently is a net exporter of around 2.7 million bbl/d. Around half of Iran's oil exports go to Asian markets, with the remainder going to Europe and Africa. 

It is possible that with sufficient investment, Iran could increase its oil production capacity significantly. Iran produced 6 million bbl/d in 1974, but has not surpassed 3.8 million bbl/d on an annual basis since the 1978/79 Iranian revolution. It is believed that Iran may have maintained production levels at some older fields only by using methods which have permanently damaged the fields. Also, Iran's oilfields are -- according to Oil Minister Zanganeh -- experiencing a depletion rate of 250,000-300,000 bbl/d per year, and are in need of upgrading and modernization. Despite these problems, Iran has ambitious plans to double national oil production -- to around 8 million bbl/d -- by 2020, and is counting on foreign investment to do so. Over the next four years, Iran is aiming to double foreign investment in the hydrocarbons sector to $24 billion. 

In October 1999, Iran announced that it had made its biggest oil discovery in 30 years, a giant onshore field called Azadegan located in the southwestern province of Khuzestan, a few miles east of the border with Iraq. According to Iran's Oil Minister Zanganeh, the Azadegan field could contain oil reserves of up to 24 billion barrels, with potential production of 300,000-400,000 bbl/d. On November 1, 2000, agreement was reached between Japan and Iran for Japanese firms (Japex and Indonesia Petroleum, both majority-owned by the Japan National Oil Company -- JNOC) to have priority negotiating rights to develop Azadegan. In January 2001, the Majlis approved development of Azadegan by foreign investors using the so-called "buyback" model (see below). A contract was signed in July 2001. In September 2000, the U.S. Treasury Department announced that it was investigating Conoco to determine whether or not the company had violated U.S. sanctions in helping to analyze seismic information collected on Azadegan by NIOC. 

Since 1995, NIOC has made several sizable oil discoveries, including the huge (3-5 billion barrels) Darkhovin onshore oilfield, located near Abadan and containing low sulfur, 39° API crude oil. In late June 2001, Italy's ENI signed a nearly $1 billion, 5 1/2-year buy-back deal to develop Darkhovin. ENI has a 60% stake in the project, with NIOC holding the remaining 40%. Ultimately, production at Darkhovin is expected to reach 160,000 bbl/d. 

In other news related to "buy-back" deals, Spain's Cepsa is set to develop the Cheshmeh-Kosh field for $300 million. Cepsa is to raise crude production at the field from 30,000 bbl/d to 80,000 bbl/d within four years. Also, a deal to develop Bangestan is possible in 2002. Bidders include TotalFinaElf, Shell, and BP. 

In February 2001, NIOC announced the discovery of a very large offshore oil field, named Dasht-e Abadan, in shallow waters near the port city of Abadan. According to a top NIOC official, Dasht-e Abadan could contain reserves "comparable" in size to Azadegan. 
 

FOREIGN INVESTMENT

The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and "local and foreign national persons and legal entities." "Buyback" contracts, for instance, are arrangements in which the contractor funds all investments, receives remuneration from NIOC in the form of an allocated production share, then transfers operation of the field to NIOC after the contract is completed. This system has drawbacks for both sides: by offering a fixed rate of return, NIOC bears all the risk of low oil prices. If prices drop, NIOC has to sell more oil or gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them. U.S. law permits American companies to buy the bid packages ($10,000 each), but not to submit proposals. In late August 2000, Iran's deputy oil minister, Seyyed Mehdi Hoseyni, said that $8 billion worth of buyback contracts on various oil reservoirs would be finalized soon (an estimated $10 billion in buyback deals reportedly had been signed to that point). Projects include the following oilfields: Salman, Darkhovin, Sa'databad-Sarvestan, Cheshme-Kosh, Foroozan-Esfandiar, and Dehloran. Recently, Iran appears to have had some second thoughts about buybacks (including charges of corruption, insufficient benefits to Iran, and also worries that buybacks are attracting too little investment), and reportedly is considering substantial changes (or even abolition) of the system. Also, as of April 2001, no buyback contract had been signed for more than a year. 

The first major project under the buyback investment scheme became operational in October 1998, when the offshore Sirri A oil field (operated by Total and Malaysia's Petronas) began production at 7,000 bbl/d (Sirri A currently is producing around 20,000 bbl/d). The neighboring Sirri E field began production in February 1999, with production at the two fields expected to reach 120,000 bbl/d. 

In April 1999, Iran awarded Canada's Bow Valley Energy, along with the former Elf Aquitaine (now TotalFinaElf), a buyback contract to develop the offshore Balal field. The field, which contains some 80 million barrels of reserves, will produce up to 40,000 bbl/d, possibly by the end of 2002. In February 2001, ENI-Agip acquired a 38.25% share in Balal from TotalFinaElf, which continues to hold a 46.75% stake in the field. Bow Valley holds a 15% share. 

In March 1999, France's Elf Aquitaine and Italy's ENI/Agip were awarded a $1-billion contract for a secondary recovery program at the offshore, 1.5-billion-barrel Doroud oil and gas field near Kharg Island. The program is intended to boost production from current levels of around 130,000 bbl/d to as high as 220,000 bbl/d within four years. 

In November 2000, Norway's Statoil signed a series of agreements with NIOC to explore for oil in the Strait of Hormuz area. The two companies also will cooperate on developing a gas-to-liquids processing plant for four southern onshore fields, and possibly will develop the Salman offshore field at a cost of $850 million, with eventual production of 130,000 bbl/d. Iran appears to be accelerating its plans to boost production of natural gas liquids (NGL), as well as liquefied petroleum gas (LPG). NGL expansion plans, including a $500 million plan to build two NGL plans on the south coast of Iran, are aimed mainly at making ethane feedstock available for Iran's growing petrochemical industry. 

As of early October 2001, Australia's BHP Billiton Ltd. appeared close to signing a $359 million buyback contract to develop Foroozan-Esfandiar. BHP Billiton would be expected to increase production at the fields three-fold, to 150,000 bbl/d, from around 50,000 bbl/d at present. 

ONSHORE DEVELOPMENTS 

NIOC's onshore field development work is concentrated mainly on sustaining output levels from large, aging fields. Consequently, enhanced oil recovery (EOR) programs, including gas injection, are underway at a number of fields, including Marun, Karanj, and the presently inactive Parsi fields. EOR programs will require sizeable amounts of natural gas, infrastructure development, and financing. 

Although NIOC has run into difficulties in implementing EOR programs at some of its fields mentioned above (i.e., Agha Jari, Binak, Kupal, and Ramshahr) fields, it has been successful in many other cases. One example is NIOC's development work at Gachsaran, which contains in-place reserves of 53 billion barrels and a large-scale gas injection capacity which should help increase production. 

OFFSHORE DEVELOPMENTS 

The Doroud 1&2, Salman, Abuzar, Foroozan, and Sirri fields comprised the bulk of Iran's offshore output, all of which is exported. Iran plans extensive development of existing offshore fields and hopes to raise its offshore production capacity to 1.1 million bbl/d by 2003 (from around 600,000 bbl/d now). It is estimated that development of new offshore Persian Gulf and Caspian Sea oil fields will require investment of $8-$10 billion. 

Aside from acting as a transit center for other countries' oil and gas exports from the Caspian, Iran has potentially significant Caspian reserves of its own, including up to 15 billion barrels of oil and 11 trillion cubic feet of natural gas. It is important to note, however, that almost none of this is "proven" to be recoverable (although preliminary seismic surveys conducted by Lasmo and Shell indicated 2.5 billion barrels of oil). Currently, Iran has no oil or gas production in the Caspian region, although in March 2001, NIOC signed a $226-million deal with Sweden's GVA Consultants and Iran's Sadra to build an oil rig in the Caspian Sea off Mazandaran province. This marks Iran's first exploration attempt in the Caspian. Iran's position is that the Caspian should be divided equally, as opposed to several other Caspian states' position that median lines should be used, as is done in lakes. As of October 2001, no agreement has been reached among Caspian Sea region states on this matter. On July 23, 2001, tensions flared in the Caspian Sea region when an Iranian gunboat intercepted two BP oil exploration vessels off Azerbaijan's coast. Following the incident, BP suspended exploration in the disputed block (which Iran calls Alborz). 

The 105-million barrel Balal field, discovered in the 1970s by an ARCO/Murphy consortium, was never developed even though an oil pipeline connecting the field to the Lavan Island export terminal was laid. As mentioned above, Canada's Bow Valley Energy Ltd. is now conducting detailed engineering work, including a 3-D seismic survey, on the Balal field. Balal likely will require extensive water injection and other secondary recovery methods, especially in later years. 

On November 14, 1999, Shell announced that it had been chosen for a buyback project to develop the Soroush and Nowrooz offshore oil fields, both of which were closed during the 1980-1988 Iran-Iraq war. These fields are located offshore about 50 miles west of Kharg Island and contain estimated recoverable reserves of around 1 billion barrels of mainly heavy oil. Soroush was one of the original 11 projects put out for tender by NIOC in 1995, and the project calls for Shell to increase output at Soroush-Nowrooz to 150,000 bbl/d by 2003. As of September 2001, Shell reportedly was attempting to move the $800 million Soroush-Nowrooz development project ahead quickly, with first production now expected by November/December 2001. 

NIOC also would like to develop five oil and gas fields in the Hormuz region (Henjam A (HA), HB, HC, HD, and HE), the A field near Lavan Island, the Esfandir field near Kharg Island, and two structures near the South Pars gas field. According to NIOC, the five Henjam fields hold an estimated 400 million barrels of oil and have a production potential of 80,000 bbl/d. Other Iranian oil fields slated for increases include Doroud, Nosrat, Farzam, and Salman (to 130,000 bbl/d by 2004 from 105,000 bbl/d at present). 

REFINING AND TRANSPORTATION

As of January 2001, Iran had nine operational refineries with a combined capacity of 1.48 million bbl/d. In order to meet burgeoning domestic demand for middle and light distillates, Iran has imported refined products since 1982, and is attempting to boost its refining capacity to 2 million bbl/d. Two planned grassroots refineries include a 225,000-bbl/d plant at Shah Bahar and a 120,000-bbl/d unit on Qeshm Island. The $3-billion Shah Bahar refinery project was approved by the government in late 1994 and would be built by private investors. 

Iran exports crude oil via four main terminals -- Kharg Island (by far the largest), Lavan Island, Sirri Island, and Ras Bahregan. Refined products are exported via the Abadan and Bandar Mahshahr terminals. Many Iranian oil export terminals were damaged during the Iran-Iraq War, but all have been rebuilt. Iran operates the largest oil tanker fleet within OPEC, with 25 ships. 

CRUDE SWAPS

In order to get around restrictions in dealing with Iran, several firms have proposed oil "swaps" involving the delivery of Caspian (Azeri, Kazakh, Turkmen) oil to refineries in northern Iran, while the same amount of Iranian oil is exported through Persian Gulf terminals. According to Iranian Oil Minister Bijan Namdar-Zangeneh, Iran is planning to retool its oil infrastructure to accommodate such swaps, including construction of a $400-million, 240-mile pipeline from the Caspian area via Iran's Caspian port of Neka to refineries in northern Iran and to Tehran. In February 2000, the National Iranian Oil Company (NIOC) awarded a Chinese consortium (led by Sinopec and CNPC) a $100-million contract for technical aspects of the project, which is expected to transport 175,000 bbl/d of Caspian crude by the end of 2002, and possibly up to 380,000 bbl/d (at a cost of $220 million). European oil trading company Vitol is involved in financing the project. Iran also plans to boost capacity at its northern refineries at Arak, Tabriz, and Tehran to about 800,000 bbl/d in order to process this oil. Currently, however, despite capacity of around 50,000 bbl/d, only 15,000-20,000 bbl/d of Turkmen oil are being shipped to Neka, and then on to Tehran by the existing Neka-Tehran pipeline. An equivalent amount of Iranian oil is then made available for export via Kharg Island terminal on the Persian Gulf. 
 

NATURAL GAS

Iran contains an estimated 812 trillion cubic feet (Tcf) in proven natural gas reserves -- the world's second largest and surpassed only by those found in Russia. The bulk of Iranian natural gas reserves are located in non-associated fields, and have not been developed, meaning that Iran has huge potential for gas development. Besides domestic consumption, which is expected to increase more than 70% by 2005, Iran also has the potential to be a large natural gas exporter. In 1999, Iran produced about 1.9 Tcf of natural gas. Currently, natural gas accounts for around 44% of Iran's total energy consumption, but the government plans billions of dollars worth of investment in the gas sector during its current Five-Year Development Plan. 

Iran's largest non-associated natural gas field is South Pars, geologically an extension of Qatar's 241-Tcf North Field. South Pars was first identified in 1988 and originally appraised at 128 Tcf in the early 1990s. Current estimates are that South Pars contains around 280 Tcf of gas, of which a large fraction will be recoverable, and over 17 billion barrels of liquids. Development of South Pars is Iran's largest energy project, and already has attracted around $20 billion in investment. Gas from South Pars largely is slated to be shipped north via the planned 56-inch, $500 million, IGAT-3 pipeline (a section of which is now being built by Russian and local contractors), as well as a possible IGAT-4 line, and then reinjected to boost oil output at the mature Aghajari field (output peaked at 1 million bbl/d in 1974, but has since fallen to 200,000 bbl/d), and possibly the Ahwaz and Mansouri fields (which make up part of the huge Bangestan reservoir in the southwest Khuzestan region). South Pars gas also could be exported, both by pipeline and possibly by liquefied natural gas (LNG) tanker. 

On September 29, 1997, Total (now TotalFinaElf) signed a $2-billion deal (along with Russia's Gazprom and Malaysia's Petronas) to explore South Pars and to help develop the field during Phase 2 and 3 of its development. NIOC estimates that South Pars has a natural gas production potential of up to 8 billion cubic feet per day (Bcf/d) from four individual reservoirs. Phase 1, which is being handled by Petropars (owned 60% by NIOC), has been delayed several times and now is scheduled for partial completion by the end of 2002, involves production of 900 million cubic feet per day (Mmcf/d) of natural gas and 40,000 bbl/d of condensate. This first phase is being carried out by the Petroleum Development and Engineering Company (PEDEC), an affiliate of NIOC, while TotalFinaElf's consortium is responsible for Phases 2 and 3. In August 1999, Total signed a $110-million contract with Hyundai Heavy Industries for construction of twin undersea pipelines from South Pars to onshore facilities at Assaluyeh. Work also has begun (also by Hyundai) on a major terminal at Assaluyeh to handle South Pars production from phases 2 and 3. Phases 4 and 5, estimated to cost $1.9 billion each, are being handled by ENI and Petropars, and involve construction (by Aip and Petropars) of onshore treatment facilities at the port of Bandar Assaluyeh. Phases 6 through 8, which are to produce a combined 3 Bcf/d of gas and 120,000 bbl/d of condensate, are being handled by Petropars and, in part, by the UK's Enterprise Oil (which has a 20% stake), while several international bidders reportedly have been short-listed for phases 9 through 12 (in early 2001, Chevron reportedly withdrew its bid on these phases). Phases 9 and 10 are expected to supply the domestic market while phases 11 and 12 are slated for LNG export. Companies reportedly interested in all or parts of phases 9-12 (expected to cost $4 billion) include BG, TotalFinaElf, Petronas, and Shell. 

In addition to South Pars, the 48-Tcf North Pars development may also be part of Iran's long-term natural gas utilization plans. Development plans call for 3.6 Bcf/d of natural gas production, of which 1.2 Bcf/d would be re-injected into the onshore Gachsaran, Bibi Hakimeh, and Binak oil fields. The other 2.4 Bcf/d would be sent to the more mature Agha Jari oil field. Negotiations on the field stalled in 1995, but Shell reportedly renewed its interest in 1998. A feasibility study on the field is scheduled to be completed in late 2001, and will determine whether or not North Pars natural gas is needed for injection into mature southern oil fields. 

Besides North and South Pars, Iran aims to develop the 6.4-Tcf, non-associated Khuff (Dalan) reservoir of the Salman oil field. Salman straddles Iran's maritime border with Abu Dhabi, where it is known as the Abu Koosh field. NIOC is seeking to develop the Khuff reservoir, which could lead to the production of 500 Mmcf/d of non-associated natural gas, along with the 120,000 bbl/d of crude oil that is now being produced from a shallower reservoir. Salman natural gas could either be exported to Dubai's Jebel Ali or to domestic locations at Qeshm Island and Badar Mogham. The project cost is estimated at slightly under $600 million for a two-platform development. 

Iran has made several significant natural gas field discoveries over the past year or so. These include: the 800-Bcf Zireh field in Bushehr province; the 4-Tcf Homa field in southern Fars province; the huge, 14-Tcf Tabnak natural gas field located in southern Iran. Iran's other sizable non-associated natural gas reserves include the offshore 47-Tcf North Pars natural gas field (a separate structure from South Pars), the onshore Nar-Kangan fields, the 13-Tcf Aghar and Dalan fields in Fars province, and the Sarkhoun and Mand fields. 

The dual Aghar-Dalan field development has been one of National Iranian Gas Company's recent successful natural gas utilization projects. Since coming online in mid-1995, the Aghar and Dalan fields have produced approximately 600 Mmcf/d and 800 Mmcf/d, respectively. Natural gas from both fields is processed at a $300-million gas processing facility at the Dalan field, which is also the location of a 40-MW, natural-gas-fired power plant. Most of the treated natural gas from the Dalan processing plant is carried through a 212-mile pipeline for re-injection in the Marun field and other oil fields in Khuzestan province. 
 
 Natural Gas Trade

Although Iranian domestic consumption is growing rapidly, Iran continues to promote export markets for its natural gas. Possibilities include Turkey, Armenia, Ukraine (Kiev reportedly is interested in building an Iran-Armenia-Georgia-Crimea-Ukraine line), Europe (possibly via Ukraine), Pakistan, India, Taiwan, South Korea, and coastal China. These exports could be either via pipeline or by LNG tanker, with possible LNG export terminals at Asaluyeh or Kish Island. Although India and Iran in 1993 signed a memorandum of understanding on an overland natural gas pipeline, regional political and security concerns to date have blocked completion of a feasibility study. Reportedly, Pakistan and Iran at one point had agreed to a natural gas line from South Pars to Multan, Pakistan, with a possible extension to Hazipur-Bijapur-Jagdishpur in northern India. In early February 2001, there were reports that India and Iran were negotiating over an offshore gas pipeline option, which would run from Iran to Gujarat, India. However, this could be much more costly and technically difficult than an overland line. Also, problems at India's Dabhol natural gas power facility have called into question the financial viability of India's LNG import plans. In other news, in August 2001, NIOC awarded Japan's JGC and France's Technip a "front-end" engineering and design contract for an 8-9 million-ton-per-year LNG export plant. This is Iran's third ongoing LNG export project, although it is more likely that only one or possibly two will go forward. 

In 1996, Iran and Turkey signed a $20-billion agreement that calls for Iran to supply Turkey with natural gas over a period of 22 years. Exports of Iranian natural gas to Turkey were slated to start in 1999 at an initial rate of 300 Mmcf/d and rise to a level of 1,000 Mmcf/d in 2005. In November 1998, Turkey began construction of a 623-mile pipeline that could transport natural gas westward from Iran. In January 2000, Iran said that it accepted Turkey's request to delay the purchase of Iranian natural gas until September 2001 (on August 2, 2000, the two countries signed a protocol for pumping to begin on July 30, 2001). Turkey said that it had been unable to complete its portion of the pipeline due to economic problems. In August 2001, the pipeline opening was delayed once again, with deliveries now set to begin in early December 2001. 

In July 2000, Iran's Oil Minister Zanganeh stated that Iran was open to selling gas to Kuwait. Iran has been involved in a border dispute with Kuwait and Saudi Arabia over demarcation of the border through the northern Gulf continental shelf. This region contains the huge (7-13 Tcf) Dorra gas field, which Iran had begun drilling in early 2000 but stopped after complaints by Kuwait. Saudi Arabia and Kuwait signed a bilateral agreement in July 2000 on dividing up the Dorra gas field equally between the two countries, and now are working on a final deal with Iran. Besides Kuwait, Iran also is reported to have discussed possible gas exports to the United Arab Emirates, although in April 2001, NIOC denied such a plan, as has Crescent Petroleum, the UAE company reportedly involved in the deal. 

Besides natural gas exports, Iran also has discussed importing natural gas from Azerbaijan, and already imports some natural gas from Turkmenistan. This natural gas is for use in Iran's northern areas, far from the country's main natural gas reserves in the south. Natural gas imports from Turkmenistan doubled in early 2001, reaching nearly 80 Bcf in the first half of the year, via the Korpeje-Kurt Kui pipeline. 
 

Development Of Gas-Pipeline Network

The capacity of the refineries in Iran in 1999 was stepped up by 9 percent in comparison with the figures for 1998. The refineries' capacities was boosted to 183 million cubic meters per day. 

In the sector for the transfer of the natural gas in 1999, about 933 kilometers of pipelines for high-pressure natural gas was laid down. This figure is 25 percent more than that for 1998. By and large, by the end of 1999 a total of 12,730 kilometers of high-pressure natural-gas pipelines were laid down. 

In 1999, another 4,400 kilometers of new pipelines were added to the distribution system. This shows a growth of 50 percent in comparison to the performances of 1998. At the end of this year the total natural gas-pipeline networks was increased to 51,000 kilometers. 

In 1999, with a growth of 27 percent comparing with that of 1998, a total of 261,000 new natural gas-outlet connections were permitted in the country. The total outlet connections in the country reached 3 million at the end of 1999. 

In this manner, in 1999 the benefits of the natural gas became available to close to 544,000 new families, while at the same time the total families enjoying this blessing peaked at 6 million. 

At the same time, with the 24 new urban areas which were settled in 1999, the number of the towns which were connected to the system of natural gas-transfer network reached to a total of 346.

Supply Of Natural Gas To Industries,Industrial Townships And Power Plants

Transfer of natural gas to industries, industrial townships and power plants, has been among the priorities of the National Iranian Gas Co (NIGC) in recent years. 

Until the end of 1998, the aggregate number of units using natural gas has come to 1,860 units. 

In 1999, natural gas was transferred to 548 new industrial units and as a result the number of the big industrial consumers was increased to more than 2,400 units. Also transfer of natural gas to 28 industrial townships was put on the NIGC's agenda by then. 

By the end of 1999, 16 industrial townships had been supplied by piped natural gas. The remaining industrial townships will have natural gas by the current Iranian year end (March 20, 2001). 

In 1999 and in continuation of completing the transformation of the power plants by making them natural gas-operated, 31 power plants were made gas efficient and received natural gas. At present, about 92 percent of the thermal power plants of the country operate on natural gas. 

The consumption of natural gas in the power plants of the country attained 9 percent growth in 1999 and reached 21.9 billion cubic meters. The natural gas consumption share of the power plants in the consumption basket of the power plants during the recent years has climbed to 80 percent from 61 percent at the beginning of the 2nd 5-Year Economic Development Plan (March 1995-2000). 

By and large, the production of natural gas in 1999 was afforded a considerable growth reaching 13.8 percent compared with the previous year. The production was bolstered from 50.8 billion cubic meters to 57.8 billion cubic meters. The consumption of natural gas instead of replacement energies has led to a reduction of consumption in kerosene by 13.2 percent, 5 percent in diesel fuel, and 16 percent in furnace fuel during that year in comparison with the figures for 1998. 

Power plants rank first in consumption of natural gas and in 1999 close to 39 percent of total consumed natural gas was allocated to this sector. The household, and commercial and industrial sectors rank next with 33 percent and 28 percent respectively. 

In 1999 the industrial sector had a consumption growth rate of 19 percent and therefore allocated the highest rate of consumption to itself in 1998. 

The replacement of other energy sources with natural gas in 1999 was equivalent to 367 million barrels of crude oil and this gave rise to a saving of $2 billion. 

Natural Gas and 2nd And 3rd Development Plans

During the 2nd Plan, the capacity of the existing refineries in the country was bolstered by more than 60 million cubic meters per day and close to 3,700 kilometers of gas-transfer pipelines were added to the gas distribution system. While the efforts for network establishments and installation of gas connections were more than 7 percent and 29 percent respectively. 

On the other hand, about 15,000 kilometers of network installation and more than 1 million new gas connections were added to the gas distribution system in this period. 

Meanwhile, some of the qualitative objectives of the gas sector in the country's 3rd 5-Year Economic Development Plan are to be mentioned as follows: 

• Boosting of the natural gas share in securing the energy needs of the country to the optimal point; 
• Securing the security and optimization of the natural gas supply system; 
• Cost-effective administration of different units in the gas sector; 
• Optimal consumption of natural gas resources; 
• Promotion of Iranian gas-industry in international energy trade; 
• Promotion of the service quality to consumers of the natural gas; and 
• Promotion of Training and Research in the Gas Industry. 

• The effecting of structural changes. 

This task was implemented in 1999 by relegating the authorities and responsibilities within the framework of subcompanies, including five gas-refinery companies and 25 provincial gas-distribution companies, and all the authorities were compiled on the general principles. 
• Preparation of a suitable ground for promotion of human resources qualities 

In 1999 the ratio of consumed natural gas to the manpower went up by 88 percent from 1.8 million cubic meter/employed-person at the beginning of the Second Plan to 3.3 million cubic meter/employed-person and the common ratio to the manpower increased by 83 percent from 124 subscriber/employed-person at the beginning of the Second Plan to 227 subscriber/employed-person in 1999. 
• Establishment of Research and Development (R&D) system 
• Creation of a suitable condition for promotion of scientific knowledge, self-sufficiency and self-dependency in activities related to the natural gas distribution. 

The NIGC has already arrived at 90 percent self-sufficiency in production of items needed for urban gas distribution. 
Some other variables which can help promote the process of up-to-dating of the gas industry effectively are: 
• Completion of the national dispatching system; 
• Promotion of security levels and maintenance of the gas distribution system; 
• Improvement of the services to the subscribers in order to secure the safety of all in the society; 
• Promotion of the training and research levels; and 
• Creation of suitable grounds for cooperation of different entities and institutions in the country with the NIGC. 

Natural Gas Exports

Although consumption is growing rapidly, Iran continues to promote export markets for its natural gas. Possibilities include Turkey, Europe, Pakistan, India, Taiwan, South Korea, and coastal China, either via pipeline or LNG tanker. Although India and Iran in 1993 signed a memorandum of understanding on an overland gas pipeline, regional political tensions (e.g. between India and Pakistan) to date have blocked completion of a feasibility study. Reportedly, Pakistan and Iran also had agreed to a gas line from South Pars to Multan, Pakistan, with a possible extension to Hazipur-Bijapur-Jagdishpur in northern India. A deep water gas pipeline from Iran to India also has been discussed, although this would be very expensive (several times the cost of an overland line) and technically difficult. 

In 1996, Iran and Turkey signed a $20-billion agreement that calls for Iran to supply Turkey with natural gas over a period of 22 years. Exports of Iranian gas to Turkey were slated to start in 1999 at an initial rate of 300 Mmcf/d and rise to a level of 1,000 Mmcf/d in 2005. In November 1998, Turkey began construction of a 623-mile pipeline that could transport gas westward from Iran. In January 2000, Iran said that it accepted Turkey's request to delay the purchase of Iranian natural gas until September 2001 (on August 2, 2000, the two countries signed a protocol for pumping to begin on July 30, 2001). Turkey said that it had been unable to complete its portion of the pipeline due to economic problems. 

In July 2000, Iran's Oil Minister Zanganeh stated that Iran was open to selling gas to Kuwait. Iran has been involved in a border dispute with Kuwait and Saudi Arabia over demarcation of the border through the northern Gulf continental shelf. This region contains the huge (7-13 Tcf) Dorra gas field, which Iran had begun drilling in early 2000 but stopped after complaints by Kuwait. Saudi Arabia and Kuwait signed a bilateral agreement in July 2000 on dividing up the Dorra gas field equally between the two countries, and now are working on a final deal with Iran. 
 

NEW FIELD DEVELOPMENTS PROJECTS

On September 29, 1997, Total (now TotalFinaElf) signed a $2-billion deal (along with Russia's Gazprom and Malaysia's Petronas) to explore South Pars and to help develop the field during Phase 2 and 3 of its development. NIOC estimates that South Pars has a gas production potential of up to 8 billion cubic feet per day (Bcf/d) from four individual reservoirs, possibly beginning in 2001. Phase 1, currently scheduled for completion by the end of 2000, involves production of 900 million cubic feet per day (Mmcf/d) of natural gas and 40,000 bbl/d of condensate. This first phase is being carried out by the Petroleum Development and Engineering Company (PEDEC), an affiliate of NIOC, while TotalFinaElf's consortium is responsible for Phases 2 and 3. In August 1999, Total signed a $110-million contract with Hyundai Heavy Industries for construction of twin undersea pipelines from South Pars to onshore facilities at Assaluyeh. Work also has begun (also by Hyundai) on a major terminal at Assaluyeh to handle South Pars production from phases 2 and 3. As of early September 2000, reports indicated that phases 2 and 3 were ahead of schedule and would come online by September 2001. 

In addition to South Pars, Iran aims to develop the 6.4-Tcf, non-associated Khuff (Dalan) reservoir of the Salman oil field. Salman straddles Iran's maritime border with Abu Dhabi, where it is known as the Abu Koosh field. NIOC is seeking to develop the Khuff reservoir, which could lead to the production of 500 Mmcf/d of non-associated gas, along with the 120,000 bbl/d of crude oil that is now being produced from a shallower reservoir. Salman gas could either be exported to Dubai's Jebel Ali or to domestic locations at Qeshm Island and Badar Mogham. The project cost is estimated at slightly under $600 million for a two-platform development. 

The 47-Tcf North Pars development will be integral to Iran's long-term gas utilization plans. Development plans call for 3.6 Bcf/d of gas production, of which 1.2 Bcf/d would be re-injected into the onshore Gachsaran, Bibi Hakimeh, and Binak oil fields. The other 2.4 Bcf/d would be sent to the more mature Agha Jari oil field. Negotiations on the field stalled in 1995, but Shell reportedly renewed its interest in 1998. 

During 2000, Iran made several significant gas field discoveries. These include: the 800-Bcf Zireh field, located north of the Kangan field in the province of Bushehr; the 4-Tcf Homa field in southern Fars province; the huge, 14-Tcf Tabnak gas field located in southern Iran. 

In July 2000, Italian firm ENI signed a $3.8-billion deal with Iran to develop the South Pars region for gas. The deal reportedly was the largest between Iran and a foreign company since the 1979 Islamic Revolution.

OIL AND GAS INDUSTRIES

Organizations: National Iranian Oil Company (NIOC) - oil and gas exploration and production, refining and oil transportation (reportedly reorganized in September 2000); National Iranian Gas Company (NIGC) - manages gathering, treatment, processing, transmission, distribution, and exports of gas and gas liquids; National Petrochemical Company (NPC) - handles petrochemical production, distribution, and exports. 

Major Foreign Oil Company Involvement: BG, ENI, Gazprom, Petronas, Royal Dutch/Shell, TotalFinaElf 
Major Oil Fields: Gachsaran, Marun, Ahwaz Bangestan, Agha Jari, Rag-e-Safid, Parsi, Bibi Hakimeh 
Major Refineries (capacity, bbl/d) (1/1/00E): Abadan (400,000), Isfahan (265,000), Bandar Abbas (232,000); Tehran (225,000), Arak (150,000), Tabriz (112,000), Shiraz 40,000), Kermanshah (30,000), Lavan Island (20,000) 

Major Oil Terminals:Ganaveh, Kharg Island, Lavan Island, Sirri Island, Cyrus, Ras Bahregan, Larak Island 

Gas Pipeline System: IGAT-1 transports associated gas from Khuzestan area oilfields to consumption centers in the north; IGAT-2 transports non-associated gas from the Kangan and Nar fields on the Persian Gulf coast near Bandar Taheri; IGAT-3, which would run from South Pars to Tehran, is planned. 

ENVIRONMENT 

In the context of its oil-based economy, environmental issues in Iran only recently have become important. Ongoing air pollution in urban areas, which reached a crisis level in Tehran in December 1999, have highlighted the need to improve Iran's environmental record. The rush to develop oil and gas resources in the Caspian Sea makes oil pollution in the Caspian a real environmental threat. 

Huge increases in energy consumption over the past 20 years have contributed greatly to pollution levels as Iran's carbon emissions have nearly tripled over the same time span. Large numbers of old, inefficient cars on the road lacking catalytic converters account for much of the country's air pollution. Together with the widespread use of low-quality, leaded gasoline, this combination has led to noxious, black smoke spewing from cars creating a cloud of smog above many cities, especially Tehran. 

In addition, Iran's abundance of fossil fuel resources has tended to discourage the country's incentive to shift to cleaner alternative energy sources for its energy needs. As Iran continues to struggle with air pollution in the 21st century, however, the country likely will need to take a variety of tough measures in order to avert an environmental crisis. 
 

Energy-Related Carbon Emissions (1998E): 79.4 million metric tons of carbon (1.3% of world carbon emissions) 
Per Capita Energy Consumption (1998E): 72.4 million Btu (vs US value of 350.7 million Btu)