Why Iran is facing a crippling energy crisis

As the cold season was approaching, Iranian authorities confidently boasted that European countries, rattled by the omission of the Russian natural gas supplies from the global markets, would turn to them for discounted gas, and that deprivation would give Iran the upper hand to set preconditions for the revival of the Joint Comprehensive Plan of Action (JCPOA).

State media and pundits brandished a “harsh winter” for the Europeans when their dire need of the new gas providers would be out in the open. Europe survived the winter by working out alternative suppliers, including Algeria, Azerbaijan, Norway and the Netherlands, and never felt compelled to bypass or dilute the sanctions to purchase the Iranian gas.

But Iran experienced one of the most excruciating winters of recent times marked by massive outages and disruption to the supply of gas to households. On social media, Iranians quipped out of despair that the harsh winter which was supposed to befall Europe has instead haunted their own country.

The energy crisis that Iran is facing is a sign of a broader malaise, which many analysts point to as bad governance and frequent foreign policy failures.

The nation has been segregated from the outside world and the institutions wielding power are not accountable, so poor decisions affecting millions of people are made with no oversight. The casualties of these decisions are higher in the energy sector, especially because of their environmental side effects.

“As long as the political system remains in power, we expect a worsening situation that does not invite investment but encourages capital flight,” said Mahdi Ghodsi, an economist at the Vienna Institute for International Economic Studies.

“The rundown infrastructure resembles a war-torn country or a least developed economy, which cannot supply the needed services for citizens. According to the new figures on GDP per capita, Iran can no longer be considered as a middle-income country, but as a low-income country,” Ghodsi told TRT World.

In December 2022, the minister of petroleum warned that Iran should attract $240 billion investment in its oil and gas sector so that it doesn’t become an official energy importer in the next eight years.

The current state of Iran’s foreign relations, characterised by tensions with several neighbouring countries and continued hostilities with the West, doesn’t promise that substantial investment is going to happen, at least by reliable international creditors and firms.

“There is a major need for technology, investments and capabilities, all not available. The only way out of this is to change the current political, strategic views of the regime, and open up to the West and Arab world, as both can provide all that is needed,” said Cyril Widdershoven, an energy market expert and founder of the Verocy consultancy in the Netherlands, told TRT World.

“Without this, Iran will survive, and even the regime, but the situation will be hard even if all is being done to confront it.”

‘Lack of economic foresight’

Iran possesses the second-largest proven natural gas reserves in the world after Russia. With 32 trillion cubic meters, it accounts for 16 percent of the world’s share of natural gas. But it is not one of the top 10 exporters, and after years of grinding sanctions, attracting customers in Europe and Asia has been an uphill battle.

Being a significantly resource-rich country, Iran has still been heavily reliant on imports to meet its domestic consumption needs. As part of a 25-year supply contract with Turkmenistan signed in 1997, Iran had been importing 5-7 billion cubic meters per year of Turkmenistan gas by pipeline. In 2016, the state-owned Turkmengaz lessened the imports and brought them to a complete halt in 2017, citing Tehran’s failure to settle its dues. Iran was unable to compensate Turkmenistan owing to the international sanctions that had been in place until January 2016 when the nuclear deal was implemented.

In November 2019, Iran signed a fresh gas swap deal with Turkmenistan and Azerbaijan, but Turkmenistan again pulled the plug on the exports earlier in January over “technical reasons caused by frosts” that also put domestic consumption on steroids.

Iran, unprepared to respond to the contingency, was gripped by a crisis of extensive outage, and in remote villages and smaller cities, people started scouring for propane cylinders and kerosene heaters to warm themselves up.

In a bid to stave off further disruption to gas provision to households, the administration of President Ebrahim Raisi decided to cut off flows to industries and manufacturers. Industry practitioners said the supply of gas to nearly 50 cement plants was terminated, and the daily consumption of steel factories across the country plummeted to 15 million cubic meters from an average of 40 million cubic meters, resulting in a decline of 2 million tons in output.

The authorities also ordered closures of hundreds of schools, banks and government offices to mitigate the crisis, but at least five provinces were reported to be on the brink of total disconnection from the supply chain. Javad Owji, Iran’s minister of petroleum, appealed to the people on January 11 to put on warm clothes when at home.

Iran had been feeling the twinge of gas shortage long before the chilling winter hit. With sanctions blocking investment in the country’s sclerotic refineries, natural gas production was scant and power plants were instructed to burn Mazut, a low-quality heavy fuel oil, as their propelling energy. Experts have long been warning about the dire environmental impacts of widespread Mazut use.

Ali Dadpay, an associate professor of finance at the University of Dallas, warns the consequences of this strategy are multi-pronged and long-lasting. “There are many consequences, from increasing public mistrust of the government to environmental damage. The Islamic Republic is not considered a failed state yet, but it is becoming one that fails to govern and correct its mistakes.”

“I doubt we would know the true extent of environmental damage for some time. However, one thing is sure; generations of Iranians would pay for the regime’s lack of economic foresight and incompetence,” Dadpay told TRT World.

Others say the reverberations of the economic sanctions Iran has been targeted with can be complex and hard to untangle, and unless the Islamic Republic is able to come to an understanding with the international community to have the sanctions removed, its primary industries, including oil and gas, will remain underfunded and inchoate due to a lack of foreign investment.

“Companies won’t invest in Iran, and this is likely to last for years. Yes, years, because even if the US lifts sanctions today, companies don’t trust that the US will not re-impose them again after the companies have invested billions of dollars,” Hossein Askari, professor emeritus of international business and international affairs at George Washington University, told TRT World.

Askari noted that major companies like Bechtel which developed the field Iran shares with Qatar like Pars and North Dome, will not commit to working in Iran because of sanctions. As a result, Iran’s gas development and export levels are not where they were expected to be.

“Sanctions have done a number on Iran. After wars, things resume but not these after these US sanctions,” Askari said.