Markets & Policies

Iran Energy Future: black gold and the new green

Iran is by far one of the most interesting actors in the global energy arena. Owner of abundant resources, the Islamic Republic led by Rohani, after years of sanction, is determined to increase the hydrocarbon production, while quickly ramping up the renewable capacity.

With almost 160 thousand million barrels, Iran holds the world’s fourth largest proved oil reserves, and with 33.5 Tcm the largest natural gas reserves (BP Statistical Review of Word Energy, 2017).
And still, despite the resource wealth and despite having an economy heavily reliant on the revenues generated by the hydrocarbons, the energy sector is still underdeveloped, as it was hit hard by international economic sanctions.
The sanctions scheme, adopted by the EU, the UN and the US has limited the sale of Iranian oil, prevented investments in the Iranian energy sector by the US and Europe, forced EU banks and insurance companies to stop dealing with the country, effectively limiting its ability to access the global market.
The energy sector was severely affected, and despite the efforts of Iranian energy companies to fill the gap left by the withdrawal of IOCs, the loss of cooperation with Western partners had a significant effect.
Oil production was reduced by 1 mb/d between 2011 and 2013. Oil export went from 2.6 mb/d to 1.3 mb/d [1]. While the gas sector continued to expand, the sanctions prevented access to the latest LNG technology.

The Nuclear Deal and the Post-Sanctions Iranian Energy Sector

On 16 January 2016 the Joint Comprehensive Plan of Action (JCPOA) between France, Germany, the UK, Russia, China and the US on the one hand and Iran on the other, was implemented.
Mostly known as the nuclear deal, the JCPOA allowed the lifting of several sanctions against Iran and removed many constraints on Iran’s energy sector. European IOCs are allowed back into the country, along with banks and insurance companies.
Despite expectations were running high, progress so far has been limited.
Many Memoranda of Understandings have been signed with several IOCs, but concrete developments are still to come, for a variety of reasons.
First of all, international energy companies, banks, insurance companies and investors are extremely cautions since, while some sanctions are still in place, new ones could be implemented, potentially by the US now led by Donald Trump.
Another reason behind this slow recovery is the hostility and the mistrust of part of the Iranian political establishment towards international cooperation with western partners.

Back in the Game

 Despite international caution and domestic mistrust, Iran has shown determined to get back in the oil market as quickly as it can.
In fact, Iran has re-established its pre-sanctions position, ramping up oil production that has jumped from 2,836 tb/d in 2015 to 3,518 tb/d in 2016 and since then it has steadily grown, reaching 3,827 tb/d in September 2017[2].
Iran showed its unwillingness to adhere to the OPEC oil cut deal, but at the same time supporting it as a very important advancement in the cooperation among oil producers.
OPEC has accepted the non-adherence of Iran to the deal and while it is open to future cooperation with the Islamic Republic, it has implicitly acknowledged that after years of sanctions, Iran now deserves to produce with no restrictions of any kind.
However, advancing its hydrocarbon industry is not the only concern in the Iranian energy sector. Among international commitments, domestic outrage and market uncertainties, Iran has set new ambitious goals with respect to the renewables sector.

Green Revolution 2.0

The Iranian renewable energy sector is still largely underdeveloped, with capacity of just 360 MW, despite consistent potential.
In fact, according to a recent study of Professor Christian Breyer of the University of Lappeenranta in Finland, Iran is among those countries in the Middle East that could easily have exclusively renewable electricity systems. The transition from fossil to renewable generation would be in fact encouraged by very advantageous prices, as low as 40-45 euros per megawatt hour.
Iran has demonstrated its willingness to develop the renewable energy sector already with the five-year plan (2010-2015) that implemented feed-in tariffs to allow the leading electricity utilities of the countries to sign contracts with renewable energy producers at guaranteed prices, with the aim of increasing the competitiveness of renewables.
Little progress has been achieved so far, but recently the government has set new ambitious goals in terms of increasing installed capacity. According to a senior energy official, Iran has the target of adding 5 GW of renewable power generation by 2022.
A first step to meet this target will be the construction of a 30 MW solar plant in Jajarm, situated in the North Khorasan Province, following an agreement between the Renewable Energy Organization of Iran and a group of Swiss investors.

Why is Iran Going Green?

A variety of reasons are behind this new course in the Iranian energy landscape.
First of all there are economic considerations linked to the decrease in oil prices that seem destined to remain at current levels for a while, and the losses can hardly be compensated by an increase in production.
In the current scenario, many countries with economies heavily reliant on hydrocarbon-generated revenues are undertaking reforms that go towards economic diversification.

Other two reasons are playing a vital role, both linked to the environmental impact of oil and gas, but in two different ways.
The first one is domestic pollution, which is becoming a huge problem in cities, due to vehicle fumes, and in oil-rich provinces, due to gas flaring.
The problem of air-quality has reached alarming levels, provoking outrage in Teheran and other cities.
Decreasing the use of natural gas and oil in favor of renewable sources would be beneficial to the air- quality and therefore to public health and public opinion.
The second problem linked to environmental concerns relates to the commitments taken by Iran in occasion of the Cop21. To be compliant Iran should reduce its GHG emissions by 12 percent by 2030 at minimum, thus implying heavy cuts in the domestic use of oil and gas.
Honoring international commitments as those of the Paris Agreements is a crucial step to regain respect internationally and to be treated as an outstanding member of the international community.

Uncertain Future

After having been economically and politically limited for years, the JCPOA represented a milestone in the foreign relations of Iran, as an opportunity to return to the international arena and fully develop its economy, free of any constraints.
However things are not as they were before the sanctions, low oil revenues and increased environmental conscience require new efforts to those with the ambition of becoming an outstanding international interlocutor. Iran certainly is one of them.
With a considerable untapped renewable energy potential Iran could diversify its energy production and its economy away from hydrocarbons, securing a more stable financial future and reducing pollution.
This would benefit public health and public opinion domestically, and demonstrate its commitments towards a more sustainable future internationally.

Iran is clearly determined to increase its renewable capacity. However, much of its success will depend on its capacity to attract foreign investors, scared by the possibility of further future sanctions, especially now that the US Administration is not as friendly as it was at the time of the nuclear deal.