Petroleum had been the main industry in Iran since the 1920s. Iran was the world's fourth largest producer of crude oil and the second largest exporter of petroleum at the peak of its oil industry in the mid-1970s. The war with Iraq cut Iran's production in the 1980s, although Iranian oil reserves remained the fourth largest in the world following the end of hostilities in 1989.
Nationalization of the oil industry in 1951 resulted in temporary political and financial chaos. Production did not resume until late 1954. As part of the nationalization process, the government formed the National Iranian Oil Company (NIOC). As owner, the government directed NIOC policy. As a result of the Consortium Agreement reached in 1954 between the government and a consortium of foreign oil companies, industry control of the oil companies was left virtually intact, but the agreement greatly increased the government's share of income from each barrel of oil produced. The combination of the larger share of income and rising oil production provided the government with increased revenues with which to finance industrial development. In addition, slow but steady progress was made in reestablishing Iran's relations with Western powers in the aftermath of nationalization. The resolution of the oil crisis in 1954 (nationalization of oil and the signing of the Consortium Agreement) led to a policy of increased economic and political cooperation between Iran and states outside the Soviet sphere of influence. In 1961, Iran joined with other major oil-exporting countries to form OPEC, whose members acted in concert to increase each country's control over its own production and to maximize its revenues.
Following the quadrupling of oil prices in the last quarter of 1973, prices remained relatively stable from 1975 to 1978. During this period, Shah Mohammad Reza Pahlavi encouraged a high level of oil production and increased spending on imported goods and services and on military and economic aid to a small number of Iran's allies. The bazaar did not benefit from the 1974-78 oil boom. As a consequence, bazaar members helped lead and finance the Revolution. The series of national reforms and development programs that the Shah had embarked on in the 1950s came to be known in 1963 as the "White Revolution".
Following the 1979 Iranian Revolution, Khomeini's government shifted the emphasis by decreeing a policy of oil conservation, with production reduced to a level sufficient to do no more than meet foreign exchange needs.
The efforts, initiated by the Shah, to develop the petrochemical industry were thwarted by the Iran-Iraq War. The Shah had begun construction of a large petrochemical plant at Bandar Shahpur (now Bandar-e Khomeini) to produce fertilizers and sulfur. The plan was to expand production to include aromatics and olefins in a joint venture with Mitsui, a Japanese consortium. The plant, which cost US$3 billion, had almost been completed at the time of the Revolution. Iraqi planes bombed the still-unfinished plant in late 1986. Other petrochemical plants were completed soon after 1979, including the Khemco sulfur plant on Khark Island and a fertilizer plant at Marv Dasht near Shiraz.
In 2000, Iran, which was the world's fourth largest producer of crude oil, averaged about 3.72 million barrels per day (Mbbl/d). Average crude production had been 3.56 Mbbl/d in 1999 and 3.63 Mbbl/d in 1998. At the end of 2000, Iran had the second largest natural gas reserves (23 trillion cubic meters) and the fifth largest crude oil reserves [89.7 billion barrels (Gbbl)] in the world according to the Oil & Gas Journal (2000b). These figures apparently did not include 1999 or 2000 Iranian reserve additions. Petroleum continued to provide the bulk of Iran's foreign exchange.
As of late 2002, Iran held 90 billion barrels of proven oil reserves, or roughly 9% of the world's total. The vast majority of Iran's crude oil reserves were located in giant onshore fields in the southwestern Khuzestan region near the Iraqi border and the Persian Gulf. Most of Iran's existing oil production at the time was accounted for by the following fields: Ahwaz-Bangestan (150,000-170,000 bbl/d current production, with plans to increase to 400,000 bbl/d), Marun, Gachsaran, Agha Jari, and Bibi Hakimeh. Most of Iran's crude oil was low in sulfur, with gravities in the 30°-39° API range. During 2002, Iran produced about 3.5 million bbl/d of oil. Iran's sustainable crude oil production capacity was estimated by mid-2003 to be at around 3.75 million bbl/d, which was around 250,000 bbl/d above Iran's most recent OPEC production quota of 3.597 million bbl/d, made on 1 February 2003.
The gross domestic product of Iran was estimated to be $110.8 billion in 1999. Although inflation was high, according to the Iranian Central Bank, it dropped to about 13% in 2000 compared with 14.5% in 1998 and about 50% in 1995. Iran's economy, which relied heavily on oil export revenues (around 80% of total export earnings, 40%-50% of the government budget, and 10%-20% of GDP), was hit hard by the plunge in oil prices during 1998 and early 1999, but with the rebound in oil prices thereafter, had recovered somewhat. For 2002, Iran's real GDP grew by around 4%. For 2003 it was expected to grow at a slightly higher, 4.3% rate. Relatively high oil export revenues the past year or two allowed Iran to set up an oil stabilization fund. For 2003, Iran's budget anticipated a price of around $18.50 per barrel, well below levels at the time.
On 29 October 2004 Iran and China announced the signing of a deal on Chinese investment in Iran's oil fields and the long-term sale of Iranian natural gas to China that could eventually be worth $100 billion. The gas deal entailed the annual export of some 10 million tons of Iranian liquefied natural gas (LNG) for a 25-year period. The deal was noted to have the potential to reach 15-20m tons a year, taking the total value to as much as $200bn. Delivery could not begin for at least five years, as Iran had to first build the plants to liquefy the natural gas. This stunning development was widely considered a major blow to the Bush administration's sanctions on Iran. The Iran-Libya Sanctions Act (ILSA) penalized companies investing more than $20 million in Iran's oil and gas sector. Iranian officials were hopeful the deal would lead to a fundamental rethinking of doing business with Iran on the part of European countries, India, Japan, and even Russia.
Iran possessed abundant fuels from which to generate energy, ranking second in the world in natural gas reserves and third in oil reserves. Nevertheless, in 2005 Iran spent US$4 billion dollars on fuel imports, mainly because of inefficient domestic use. Oil industry output averaged about 4 million barrels per day in 2005 and 2006, compared with the peak output of 6.6 million barrels per day reached in 1976. In the early 2000s, industry infrastructure was increasingly inefficient because of technological lags.
In 2007 Iran had 19,161 kilometers of natural gas pipelines, 8,438 kilometers of oil pipelines, 7,936 kilometers of pipelines for refined products, 570 kilometers of pipelines for liquid petroleum gas, and 397 kilometers of pipelines for gas condensate. Iran's central pipeline infrastructure was designed for the distribution of natural gas for domestic use and for the domestic transit of oil, including from offshore oil fields to processing centers. That structure was subsequently supplemented as the natural gas industry and the fuel export industry expanded. Since 2000 several new natural gas pipelines were planned. In 2006 plans called for new pipelines to exploit markets in Armenia and Pakistan. In 2007 a new 160-kilometer line to Armenia began operations. However, a 2,600-kilometer line to Pakistan, which potentially also could supply India, remains in the negotiation stage. Some had failed by 2008 because of geopolitical considerations (for example, US opposition to a key Iranian role in delivering Central Asian oil and gas to the West), and some, such as the gas export line from Iran to Turkey, function at reduced capacity.
Natural gas had also become important to Iran's economy, output of which in 2006 was 105 billion cubic meters. A large share of Iran's natural gas reserves are believed to remain untapped, although gas already accounted for nearly one-half of energy consumption. With massive government investments planned, the share of gas in energy production was expected to rise quickly in ensuing years. In 2007 Iran's estimated income from exports was US$76.5 billion (free on board-f.o.b.), 85 percent of which came from petroleum and natural gas.
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