Iran: Unstable, troubled oil giant

Country struggles with falling oil production, soaring domestic use as dispute over nuclear program drags on.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Iran just isn't backing down.

The Bush Administration has accused the country of funneling explosives into Iraq for use against U.S. troops. Meanwhile, the diplomatic sparring over Iran's nuclear program drags on.

Iran's president signaled Wednesday that he has no intention of meeting the United Nations' upcoming deadline to halt its uranium enrichment program and risks facing further sanctions.

"Iran will not retreat one iota in its path to nuclear victory," Mahmoud Ahmadinejad said in a speech, according to Iran's state-run news agency IRNA. Tehran says its nuclear program is for power generation only but several Western countries suspect it's designed to produce a weapon.

The head of the U.N. nuclear watchdog agency, Mohammed ElBaradei, is due to present his report this week to the U.N. Security Council on whether Iran has complied with a recent resolution and halted its uranium enrichment program.

But despite the political bravado, and events in the region that have arguably increased Tehran's political clout, the country's oil industry is in serious trouble.

Oil production, which peaked at about 6 million barrels a day in the late 1970s, now hovers at around 3.5 million, according to the U.S. Energy Information Administration (EIA). With worldwide production at about 84 million barrels daily, Iran ranks as the world's fourth-largest producer.

Moreover, a growing population and economy, combined with huge government subsidies, is leading to a surge in domestic consumption, according to the energy agency.

"Everybody's buying cars, everybody's buying air conditioners," said Peter Beutel, an oil analyst at Cameron Hanover, referring to the growing wealth of many Iranians. "They are saying, with some justification, that they need nuclear power to continue their oil exports."

Oil exports account for as much as half of the Iranian government's total budget, according to the EIA.

And Tehran could very well keep living off its oil wealth, if it can get its rich energy deposits out of the ground. With an estimated 137 billion barrels, the country's oil reserves are second only to Saudi Arabia's 264 million barrels, according to EIA. And it has the world's second-largest reserves of natural gas behind Russia.

But the nation's oil fields, which lie in the southwestern part of the country near the Iraq border, were severely damaged during the 1980s Iran-Iraq war. Repairing the fields has been tough, partly due to American sanctions imposed after the 1979 revolution but also due to a poor investment climate.

Now, some experts say, just as the country needs foreign investment to keep exporting oil, such funding is getting increasingly tricky to come by as U.S. officials hound foreign companies to keep out of the country.

A Japanese company that was interested in developing a large project in Iran reportedly got cold feet after some dissuading from the U.S. government.

Adam Sieminski, chief energy economist at Deutsche Bank, said the State Department is looking into a deal that Royal Dutch Shell (Charts) and the Spanish firm Repsol have to develop liquefied natural gas in Iran.

But Sieminski played down the notion that U.S. sanctions, which largely keep firms like ExxonMobil (Charts), Chevron (Charts) and ConocoPhillips (Charts) out of the picture, have kept Iran from pumping more oil.

He said oil equipment is readily available in Europe or Japan, and that it's the business deals Iran offers - usually ones not very favorable to foreign firms - that have kept investment at bay.

"Iran's biggest problem is getting out of its own way," said Sieminski. "Its contract system leaves very little profit for the companies that come in, and as a consequence they don't get a lot of help."

He noted that Iran was far from alone in erecting man-made barriers to oil production.

Venezuela has made terms that discourage foreign investment, and Mexico has banned it altogether for decades. For its part, the United States keeps millions of barrels a day off world markets by not opening up its coastal waters for drilling.

As far as military action taking out Iran's oil exports, most analysts deemed that unlikely.

But the idea of the United States or Israel striking Iranian nuclear sites, followed by Iran using oil as a weapon by cutting off supplies - or worse, sinking tankers in the narrow Strait of Hormuz - would be a nightmare, experts agree.

"My feeling is that at the last minute there will be some sort of flexibility," said Manouchehr Takin, an energy analyst at the Center for Global Energy Studies in London. "The alternative is just too bleak."

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.