Politics and oil production have always been deeply intertwined throughout Iranian history, with state actors playing a decisive role. This trend continued on April 21 of this year, when the Trump White House announced it would not be extending waivers on secondary sanctions for international buyers of Iran’s oil beyond May 2 with a stated mission of bringing the country’s exports down to zero. Any violators would be cut off from US financial institutions.

The countries granted the waiver included China, India, Turkey, Greece, Italy, Japan, South Korea and Taiwan. Expectations of a breakthrough in negotiations between the United States and Iran have come to naught, as both Turkey and India have begrudgingly agreed to halt imports of Iran’s oil.

Iran’s ambassador to the UN, Majid Takht Ravanchi, recently wrote in an OpEd to the Washington Post: “Throughout history, Iranians have always resisted the imposition of others’ will and have survived for millennia...The language of threats and intimidation is anathema to Iranians, who have always demonstrated that respect begets respect.” The sanctions, he noted, would not bring about any change in policy.

Production is falling

To be clear, Iran is an energy juggernaut with the world’s second largest gas reserves (after Russia) and third largest conventional oil reserves. It is currently, despite the sanctions, the third largest oil producer in the Middle East and third largest gas producer in the world. Trump’s policies caused the price of Brent crude to go above $80 a barrel for the first time since 2014 last year.

March export figures for Iran were 1.1 million barrels a day, exports dropped to under 1 million barrels in April. The last hope for Tehran – Beijing – halted imports of Iranian oil in May, following other consumers. The situation in the Iranian oil sector has become critical.

Isolated from the global oil market, Iran will not be able to stop its production decline. Since the mid-1970s, oil production in the country has dropped from 6 to 2.7 million barrels a day and continues to fall.

To reverse this trend, Iran has to improve the recovery factor at large, ageing fields, which is now around 25%. Without foreign investment and technology, it will be almost impossible.

Investors disappointed

The situation in the Iranian oil and gas sector has worsened over several decades.

“Investors have…been discouraged by the severity and inflexibility of buy-back contracts, historically the sole vehicle for international upstream investment in Iran. In the absence of significant external contributions, internal investment has fallen short of the minimum needed to deliver sustainable growth. This situation has been exacerbated by endemic organizational inefficiencies and an increasing call on oil revenues to prop up other sectors of the state economy”. Wood Mackenzie

In 2016, after the partial lifting of sanctions, an upstream fiscal framework called the Iran Petroleum Contract (IPC) was announced. The stated goal was to attract $130 billion of foreign and local investment into the upstream sector via 50 development projects estimated to hold 28 billion barrels of oil equivalent (boe).

However, concern over further US sanctions and the IPC’s own commercial flaws led to only three deals being signed. The most significant was the $5 billion South Pars Phase 11 project by Total, China’s CNPC and Iran’s National Oil Company. Total left the project after the US refused a sanctions waiver, while CNPC has not made significant progress.

Window of opportunity

Three quarters of Iran’s territory remains largely unexplored, meaning there is great potential for finding even more hydrocarbons. Since 2007, the National Iranian Oil Company (NIOC) has discovered over 200 trillion cubic feet of gas resources with a success rate of 60%.

A major deciding factor in whether (and when) this potential is developed with the help of IOCs may be America’s domestic politics. With little chance of a softer policy from the Trump White House, Iran’s best bet may be to hope for a less hostile administration in the future (either in 2020 or 2024) that would be willing to return to the 2015 Iran nuclear deal framework in some format. That deal had added 1 million barrels a day to the nation’s oil and condensate production within two years. If done correctly, a partial lifting of sanctions could spur a new golden era for Iranian oil sector.