The real problem with Iranian oil

April 22, 2016 12:51 PM

Even as the international sanctions placed on Iran come to an end, the country’s oil industry faces a serious challenge from within. Internal conflict within the Iranian government threatens the future of Iran’s oil industry and could significantly hinder Iran’s economic growth in the process. This can be traced to the legacy of the 1979 Revolution, 1951 oil crisis and even to the discovery of oil in the Middle East.

In 1900, a British businessman and land speculator named William Knox D’Arcy acquired a concession from Nassir al Din Shah, ruler of Persia, to look for oil. In 1908, just as failure and bankruptcy loomed, D’Arcy’s team struck oil in southwestern Iran. His discovery inaugurated the era of Middle-Eastern oil, and Western companies soon found oil in neighboring Iraq, Bahrain, Kuwait and Saudi Arabia. It also led to the creation of the Anglo-Iranian Oil Company (later British Petroleum and now BP), which alone operated and was the primary benefactor of the oil production.

Iran’s tumultuous relationship with foreign oil companies first arose during the Anglo-Iranian oil crisis in the 1950s and continues to plague the country today. In 1951, the Iranian government, under the leadership of Prime Minister Mohammad Mossadeq, unilaterally nationalized all of Iran’s oil resources and refining facilities after Britain refused to renegotiate its oil contract for a more even distribution of profits. This prolonged conflict led to the expulsion of British citizens from Iran, a British embargo of Iranian oil that devastated Iran’s economy, and ultimately a CIA sponsored coup.

Even after the United States and UK returned the Shah to power as monarch, the National Iranian Oil Company (NIOC) has continued to operate all of Iran’s petroleum facilities. After the Islamic Revolution in 1979, Iran’s new constitution codified Iran’s long-standing antipathy towards foreign oil companies by forbidding foreign ownership of all Iranian natural resources. Even production sharing agreements, which enable foreign oil companies to operate in other Middle-Eastern countries, were entirely forbidden in the new Iran.

As the international sanctions imposed on Iran for uranium enrichment are now being lifted, this legacy of antagonism towards Western oil companies looms large against Iran’s efforts to rehabilitate its oil industry. Those sanctions (imposed in 2011 and 2012) worked by crippling Iranian oil at the source, and now that the sanctions are easing, Iran is struggling to repair the damage. The sanctions restricted the flow of technology and supplies into the country and caused massive deterioration of Iran’s already poorly maintained oil production and refining facilities. 

Furthermore, an Eropean Union ban on issuing insurance for tankers carrying Iranian oil shut down Iran’s crude oil export business because 90% of the world’s tanker fleet falls under European law. Only some exports to China and India continued during the sanctions regime.

Now that the nuclear agreement (JCPOA) has effectively ended the sanctions, Iran faces a significant challenge of reconstructing its oil industry, from exploration and production to transportation infrastructure to refining capacity. All of this takes cash, of which Iran has little. The bottom line is Iran needs foreign investment, which is in direct conflict with Iran’s Islamic revolutionary ideology. 

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About the Author

Ellen R. Wald, Ph.D. is an energy historian.  She is currently working on a book about Western involvement in the post-war Mid-East energy industry.  She teaches Middle East history at Jacksonville University. She can be reached at ellenrwald@gmail.com. Her website is www.ellenrwald.com