Will foreign investors avoid Iran's energy sector?

Last week I discussed the possible financial sources of Iran's political unrest. I concluded that post by wondering whether foreign investors would now deem it too risky to invest in Iran's energy sector. An article published yesterday by the Associated Press discussed renewed worries some foreign investors now have about political risk in Iran. Without large-scale foreign investment in its energy sector Iran's energy exports, and thus the vast majority of its foreign exchange and government revenue, will soon waste away.

According to the U.S. government's Energy Information Agency (EIA), Iran's oil fields suffer natural production declines of 8-11% per year, constituting 400,000-700,000 barrels per day of crude oil production lost each year.

As all energy producers must do, Iran compensates for natural production decline with the development of new fields and by stretching the production of old fields through enhanced recovery techniques. But the easy finds have already been exploited and new production and recovery is much more technically challenging. For example, Iran seeks to boost the production of its South Pars natural gas field in order to pump pressurized natural gas into declining oil fields to extract additional crude oil. According to the EIA Iran is highly dependent on foreign expertise to achieve its increasingly difficult production goals.

Steady or declining production combined with rising domestic consumption will mean falling net Iranian oil exports, reaching zero by perhaps 2015. Iran requires foreign partners in its energy sector to avoid this outcome. Yesterday's AP story about rising political risk for investors in Iran darkens the outlook for Iran's financial and economic stability.