Image: Protests in Iran
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Iran has grappled with inflation near 25 percent even as other major oil producers in the region have seen inflation rates drop sharply. The country also has 20 percent unemployment.
updated 6/22/2009 2:24:36 PM ET 2009-06-22T18:24:36

Political uncertainty and unrest in the wake of Iran's disputed presidential election are casting a deeper pall on the country's prospects of a near-term economic recovery, with the vital oil sector likely to witness a stasis it can ill afford amid faltering production and investments.

Under the best of circumstances, President Mahmoud Ahmadinejad may have been able to seize upon President Barack Obama's overtures to Iran and gradually bring about an end to the U.S.-led international isolation the country's oil sector has endured.

But the mass protests and cries of foul by opposition rival Mir Hossein Mousavi and his followers over alleged election fraud could prove to be a further impediment to bringing in foreign oil firms, many of whom have avoided Iran because of U.S. sanctions and Western concerns about the country's disputed nuclear program.

"Seeing how the aftermath of the elections have played out — with this deep cleft with the ruling elite being quite exposed now, it's quite hard to see Ahmadinejad even being on the winning side after meeting protests with violence," said Samuel Ciszuk, Middle East energy analyst with London-based IHS Global Insight.

The hardline government will likely "have to deal more with domestic issues for the rest of the year, at least, with a clear focus on solving the domestic situation."

It's a delay Iran cannot afford.

The economy was a major issue in the run-up to the June 12 election, with critics accusing Ahmadinejad of squandering the country's windfall from oil's record rally in the first half of 2008 on populist projects aimed at appeasing his core rural constituency.

The country, which according to the U.S. Energy Information Administration is home to the world's third largest proven crude oil reserves, has grappled with inflation still near 25 percent even as other major oil producers in the region have seen inflation rates drop sharply.

Unemployment remains high at almost 20 percent, and the collapse of oil prices in the second half of last year threatened to sharply erode the Tehran government's ability to sustain the subsidy program it uses to curry favor with its supporters.

Compounding these problems is Iran's continuing battle with declining oil output — an annual fall of between 4 to 8 percent, or roughly 200,000 to 350,000 barrels per day, according to analysts. The International Monetary Fund last year said Iran needs roughly $90 per barrel to stay in the black in terms of its budget — one of the highest levels among the Organization of the Petroleum Exporting Countries member states.

Rounding off its litany of troubles is that its new export projects are riddled with delays and a lack of gas treatment facilities to cope with the new output means that production is being burned off instead of sold.

To boost economic growth, Iran needs to compensate for that decline through investments and technology, the two main elements it has been unable to secure enough of because of the sanctions.

"The political situation has brought the country to a standstill," said Raja Kiwan, a Dubai-based analyst with consultancy PFC Energy. "We can all see that it's a temporary situation, but it does not do the country any favors at a time when its already reeling from low oil prices."

Had the election gone smoothly, Ahmadinejad may have been able to continue an earlier push of courting Chinese and Russian firms to invest in major export projects like the South Pars gas field.

Those deals not only helped show the hard-line president was standing up to the West, but also offered a temporary substitute for the absence of Western firms. Iran had earlier announced that China's CNPC would take over from Total S.A. as the major investor in the project because of what it said was the French oil giant's reluctance to move forward with the venture.

Such efforts could now falter.

"Where we saw Chinese willingness to sign contracts, perhaps over the past month of so, that might actually disappear because I would expect every foreign investor ... would want to wait and see what happens," said IHS Global Insight's Ciszuk.

Even if they do not back out or steer clear, the active participation of companies like CNPC and Malaysia' Petronas in Phase 11 of the South Pars project will do little to offset Iran's need for downstream — or refining and treatment — technology. Analysts say that as much as 70 percent of such technology like building liquefaction plants to handle the gas lies with U.S. firms.

Its absence is already being felt in the Iranian oil sector, with the difficulties confronting the massive Aghajari gas injection project offering a window into the problems the country faces.

The project, inaugurated earlier this month, involves pumping about 2 billion cubic feet of gas per day from several South Pars phases to re-pressurize the aging Aghajari oil field where output has fallen from a peak of almost 1 million barrels per day to about 200,000 barrels per day. Experts, however, have voiced doubts that production can be raised much above 300,000 barrels per day, and many say that delays in South Pars Phases 6-8 mean it is unlikely the project will fully come online before October.

South Pars' problems are another example.

Many of the project's phases are suffering delays, even those that involve European firms, and analysts have said that the lack of treatment facilities to process the gas on site means that the some of the new production has had to be flared or burned off.

Such a step, which Iran has resorted to for years to deal with some of its associated gas production, may not have been necessary if the country was able to secure the necessary technology and investments from the West.

The current political crisis has underscored that challenge.

"The Iranians are going to be very much inward focused for a while, and that begs the question of how they're going to attract the level of investment they need," said Kiwan.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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