Q&A: Will new Iran sanctions dent Iran's oil industry?

The European Union's tough new Iran sanctions, which go into effect today, aim to pinch Iran where it will hurt the most: Iran's oil industry. Oil accounts for roughly 80 percent of Iran's exports, and Tehran derives more than half of its revenue from its energy sector.

Long a major oil and gas supplier, Iran now faces a decline in production, an urgent need to expand its refining capabilities, and a predicted surge in Iraqi oil output – all of which could significantly affect a regime that has become one of the Middle East's most powerful nations.

As Iran begins to feel the squeeze from this third set of sanctions – United Nations' June 9 sanctions were followed by tougher US measures adopted July 1 before the EU weighed in this week – the Monitor examines the status of Iran's oil industry and the challenges facing it.

How robust is Iran's oil sector?

Iran's output is declining because many of its oil fields are aging. Last month, the Paris-based International Energy Agency (IEA) predicted that Iran's production would drop by 18 percent by 2015, to about 3.3 million barrels per day (b.p.d.).

Iran is developing new fields, most notably the South Pars natural-gas field. The South Pars is the Iranian portion of the world's largest gas reservoir, located in the Persian Gulf.

Though Iran is a major oil exporter, it has very limited refining capacity, and therefore imports 30 to 40 percent of its gasoline for domestic use – making it especially vulnerable to sanctions such as those the EU has adopted. It is striving to reduce imports, however, and brought them down by 8 percent last year.

How will sanctions affect it?

The United Nations passed a fourth round of sanctions against Iran in June, but did not include measures the United States sought to dent Iran's oil industry, which accounts for roughly 80 percent of the country's exports.

So the US passed its own sanctions, signed by President Obama on July 1, to penalize companies that invest in Iran's energy sector, export refined petroleum products to Iran, or supply services or technology used for refining petroleum. The law also prevents firms that do business with blacklisted Iranian companies and banks from accessing the US financial system.

The European Union also agreed last month to impose its own sanctions, including bans on new investment; technical assistance; and the transfer of technology, services, and equipment to Iran's energy sector. The EU sanctions were finalized yesterday and go into effect today.

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