The Reality of Iran’s Oil and Gas System
Even while sanctioned for more than a decade, Iran still manages to make its way to energy geopolitics news every now and then. The country maintains an image of a force capable of disrupting the global energy markets without ever fully returning to them. Its hydrocarbon sector, among many other functions of the country, remains sanctioned, isolated and outdated. Even in 2015 with whatever glimpse of hope after the JCPOA, its contracts regime (IPC) remained uncompetitive or unattractive, and its infrastructure, while vast, operates below potential.
Now, with President Trump’s return to the White House, and the increased pressure on the Islamic Republic to either accept the U.S. negotiation terms, or else, Iran re-emerges as a geopolitical crude supply variable. When global oil prices rise above $70–$80 per barrel, U.S. shale operators in the Permian and other basins rapidly increase output due to their short development cycles and capital flexibility. This responsiveness acts as a natural ceiling on prices as too much upward momentum triggers a North American supply wave that pulls prices back down. In effect, shale producers, not OPEC, now bracket the top of the market. Meanwhile, OPEC+ has struggled to maintain cohesion amid divergent production quotas, compliance issues, and capacity exhaustion. Between this weak floor and fragile ceiling, Iran’s perceived return potential can push the prices even lower than what we have now.
In this post I briefly discuss what most get wrong about Iran’s energy system, in eight short segments, and what truly defines its path forward. If you work in investment, energy security, or international risk, this is the surface of a much deeper discussion.
1. Reservoirs vs. Realities
Iran holds the world's second-largest natural gas reserves and third-largest proven oil reserves. Yet less than a third of this capacity is fully utilized. Most oil output comes from aging onshore fields in Khuzestan, with average recovery rates of less than 25%. In Bangestan Group reservoirs, one of the country’s largest carbonate tight and higher depth oil layers, recovery falls below 15%. These figures are well below international standards. These ratios should be seen in the context of technical limits for ultimate recovery in fractured carbonate reservoirs, which is the dominant geology in Iranian major fields, and can exceed 60% with proper pressure support, fracture modeling, and surfactant/polymer EOR. Iran, however, routinely abandons wells far earlier due to a combination of factors such as technical limitations due to lack access to advanced world-class technology, infrastructure bottlenecks like limited gas re-injection and waterflood capacity, short investment horizons, even before the sanctions with buy-back contracts, and other mismanagement factors.
As a result, many wells are prematurely shut-in or sidetracked, and marginal reservoirs are deprioritized in favor of higher-volume but rapidly declining fields. Without structural changes, Iran is on track to leave over half its oil in the ground, even in fields with proven secondary and tertiary recovery potential.
Number of wells drilled on a monthly basis in the past few years does not exceed a handful new development wells, and most of the activity is focused on workovers. South Pars remains a global gas giant, but Iran’s gas sector flares ridiculous volumes of natural gas every year ranking Iran third in global flaring. Nameplate capacity, and the historical importance of Iranian oil misleads most Western analysts. Aboveground constraints, political, contractual, and technical issues limit the flow of what lies underground.
2. Sanctions
Iran’s energy sector has took a serious hit, but it’s also adapted to the sanctions by constructing a multi-layered, domestically controlled, and internationally evasive operational architecture. Since 2019, over 30 upstream contracts have been signed with domestic firms such as Petropars, MAPNA, and Khatam al-Anbia. These firms have taken over high-profile projects like South Pars Phase 11 following the withdrawal of Total and CNPC. While these developments are framed as signs of domestic resilience, they also reflect isolation from international service firms, financing networks, and reservoir management expertise.
Privatization in the downstream sector has taken the form of equity floatation and legal restructuring, but in practice, control remains concentrated in quasi-state entities. More than 80% of refining and petrochemical capacity is managed by institutions linked to state banks, the IRGC, or pension and sovereign holding structures. Persian Gulf Petrochemical Industries Company (PGPIC) and its network of subsidiaries function as central nodes in Iran’s sanction-resilient industrial base.
International enforcement of the sanctions regime remains uneven. As of early 2025, most of Iran’s 1 to 1.5 million barrels per day of oil exports are routed through China. Transactions are conducted using yuan clearing mechanisms or barter trade, often bypassing the global banking system. A significant portion of shipping is reportedly handled by a complex fleet of shadow vessels, some operating under flags of convenience, managed by shell entities across the UAE, India, and Hong Kong.
Recent U.S. enforcement actions have sanctioned Indian-based firms like Flux Maritime LLP, Cosmos Lines Inc, BSM Marine LLP, and Austinship Management for managing Gabon and Eswatini flagged tankers used in Iranian oil logistics. These companies were all registered between 2020 and 2024, illustrating how Iran’s shipping ecosystem regenerates under pressure using front companies and rapidly incorporated logistics intermediaries.
The structure that helps Iran’s continued oil trade relies on fragmented jurisdictions, limited transparency, and buyers willing to prioritize energy security over sanctions compliance. Weak enforcement during the Biden administration enabled export continuity, but the return of a more aggressive U.S. stance under President Trump including renewed calls for “zero export” targets has reactivated enforcement networks and revived secondary sanctions threats.
Iran’s institutional response has been to double down on internal integration. Sanctions have elevated the role of informal networks, blurred the distinction between public and private actors, and entrenched sanctioned entities deeper into the economic core. Rather than deterring oil trade, the measures have incentivized circumvention expertise across engineering, shipping, insurance, and financial transfer domains.
3. Petrochemicals
Iran is recalibrating its hydrocarbon export model by prioritizing petrochemical production over crude exports. This transition, initially driven by sanctions, has now evolved into a central pillar of Iran’s long-term energy strategy. The sector is expected to generate over $50 billion in annual revenue by 2027, supported by more than 70 production complexes concentrated in Mahshahr, Asaluyeh, and the South Pars corridor.
Key export products include methanol, polyethylene, and urea—most of which are sold into China, India, Southeast Asia, and parts of Africa. Approximately 70% of total production is geared toward export markets. Despite logistical and financial constraints, Iran has continued to develop new petrochemical capacity, often through IRGC-linked engineering, procurement, and construction (EPC) entities. Over 40% of the sector’s operational capacity is now held by firms affiliated with the IRGC or other quasi-state financial institutions.
The nominal capacity target set by the National Petrochemical Company (NPC) stands at 200 million tons per year by 2033. However, actual utilization remains significantly lower due to project delays, feedstock shortages, and periodic shutdowns from gas curtailments. In 2023, Iran added over 12 new plants, including Gachsaran and Arian Methanol, but several operated at below 60% of design capacity.
International pricing also poses structural challenges. Many Iranian products sell at a 50–70% discount to global benchmarks due to limited branding, sanctions-linked risk premiums, and buyer concentration in jurisdictions with weaker compliance regimes. This compresses margins and restricts reinvestment into higher value-added derivatives.
The feedstock model is heavily gas-dependent. Most plants run on ethane, methane, or NGL-derived components, making the sector vulnerable to winter gas supply fluctuations. Gas allocation for petrochemicals is often deprioritized during peak demand periods, undermining operational consistency.
Investment in downstream integration remains limited. While authorities have promoted the idea of value chain extension from basic petrochemicals to specialty and engineered polymers, actual capital deployment remains concentrated in commodity-grade outputs.
The shift toward petrochemicals is a blend of necessity and structural shifts. The sector provides export continuity under sanctions, requires fewer shipping constraints than crude, and enables barter-based trade mechanisms with buyers like China. But long-term competitiveness depends on improving feedstock reliability, plant utilization, environmental compliance, and value chain depth.
4.Export Readiness Assumptions
Iran continues to expand its spare production capacity, with NIOC targeting 1 to 2 million barrels per day of incremental output. This capacity is not currently utilized but serves to enhance flexibility in case of partial sanctions relief or political shifts. Iranian local engineering talent has continually improved in an environment that reliance on Western technology is not a possibility anymore. The country has also invested in infrastructure that reduces its geographic vulnerabilities. The Goreh–Jask pipeline and the Jask export terminal, which allow crude to bypass the Strait of Hormuz entirely. These developments offer Tehran more control over its export routes and greater room for maneuvering in its oil diplomacy.
Iran also reportedly maintains a fleet of over 200 tankers, many operating under flags of convenience and with limited AIS tracking (this caused the Sanchi Tanker disaster killing 32 crew). This fleet supports under-the-radar exports to key buyers such as China and enables rapid redeployment of crude if enforcement patterns change. While actual production remains capped by external constraints, Iran’s ability to resume or reallocate exports on short notice introduces volatility into oil pricing models and risk assessments.
5. What Washington Still Misreads
U.S. policy continues to frame Iran through a pre-2015 lens, assuming that sanctions relief would lead to conventional reintegration, foreign investment, and ramped-up oil exports. But the structural realities of Iran’s energy sector is not fully understood. The Iranian Petroleum Contract (IPC), designed to replace the rigid buy-back model, remains legally unstable and politically constrained. Reserve booking is prohibited, risk sharing is uneven, and the operational environment is dominated by firms with ties to the IRGC.
Attempts to improve the upstream investment framework, including the more flexible New Concession Contracts (NCCs), face constitutional barriers under Articles 44 and 81. These legal limitations restrict foreign equity participation and long-term operational control. Without regulatory clarity, institutional reform, and insulation from political interference, no contract model will meaningfully unlock capital or technology transfer.
International observers often overestimate the sector’s openness and underestimate the degree of fragmentation within NIOC and its subsidiaries. Legal ambiguity, lack of transparency, and enforcement risk remain the primary barriers to investor participation despite favorable geology and project economics
6. Domestic Dysfunction
Iran’s internal energy system is defined by high inefficiency, distorted incentives, and aging infrastructure. Natural gas accounts for more than 70% of domestic primary energy use. Power plants reliant on gas operate at low thermal efficiency, often below 35%. In winter months, demand from the residential sector rises sharply, forcing authorities to limit supply to industrial users and even electricity producers. Power outages have become a recurring problem, especially in provinces with weak grid resilience.
The country’s energy intensity is among the highest globally, nearly three times the world average. Heavily subsidized fuel and electricity prices encourage wasteful consumption and reduce the incentives for efficiency investments. Reforms have been discussed, but implementation has been partial and politically constrained.
Iran’s refining sector suffers from outdated configuration and underinvestment. While nominal refining capacity has grown, product quality has lagged. Euro-4 and Euro-5 standards are not met consistently, contributing to urban pollution and limiting the exportability of refined products. Gasoline shortages periodically resurface, driven by high domestic demand, smuggling, and unreliable supply from aging facilities.
The power transmission network has deteriorated under decades of deferred maintenance. Technical losses exceed 17%, and system flexibility remains low. The national vehicle fleet is inefficient, old, and heavily reliant on substandard fuels. Plans to modernize transportation fuel standards have stalled.
Water shortages are increasingly affecting the energy sector. Thermoelectric plants rely on cooling water drawn from already stressed basins, creating a feedback loop between water scarcity and electricity availability. Planning for power and water remains institutionally siloed, which limits coordinated resilience strategies.
7. Renewables
It is very likely that Iran becomes a net importer of both oil and gas, within the next decade, if the current circumstances continue without any major political shifts. From a domestic energy security vantage point, Iran has significant renewable energy potential. High solar irradiance in central and southeastern provinces and steady wind corridors in the north and northwest offer opportunities to diversify the energy mix. The Sixth Development Plan aimed to reach 5% renewable power generation by 2021, but actual deployment has remained below 1%.
Total installed capacity for wind and solar remains around 1.5 GW. Delays in permitting, unstable currency conditions, and limited domestic equipment manufacturing have slowed growth. The grid is not equipped to absorb variable renewable output, and investment in storage remains negligible.
Lifecycle assessment studies show that a shift to renewable electricity could cut environmental impacts by up to 50% by 2050, depending on the deployment scenario. However, these benefits remain theoretical under current policy and regulatory conditions.
While the government has announced support for distributed generation and rooftop solar, actual progress has been modest. Without pricing reform, long-term power purchase agreements, and grid modernization, the role of renewables in Iran’s energy transition will remain limited.
8. What’s Next?
I don’t offer a complete roadmap or prediction of what Iran’s energy future looks like in this post. I tried to outline some of the critical structures, constraints, and leverage points that will shape Iran’s energy future regardless of near term events.
I mapped the field-level mismatches that define Iran’s oil and gas strategy. These operational realities are not fully visible in public market narratives and they’re not fully detailed in this post either.
For energy firms, investors, or policymakers evaluating reentry timing, export risk, or downstream opportunity, tailored diagnostics and briefings are needed. The visible mainstream coverage of Iran’s oil & gas potential is only part of the equation. Long-term decision-making for risk assessment, investment, or infrastructure planning in Iran relies on the elements that are less easily tracked. Maybe I’d post something more detailed soon if things start to unfold faster than expected …