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    Middle East
     Aug 24, 2005
The fuel behind Iran's nuclear drive
By David Isenberg

Much of the argument over the intentions of Iran's nuclear program revolves around a single proposition that goes like this. Given that Iran has huge oil and gas reserves, it has no need for nuclear power for domestic energy needs and thus its nuclear program will be used for nuclear weapons.

Like much so-called conventional wisdom, is this is a highly misleading and debatable cliche?

Certainly, the fact that a state is pursuing a nuclear program per se, even if it is a nuclear proliferator, is not always a cause for alarm for the United States. Earlier this year, the US announced an agreement with India (until recently a target of US sanctions, even under the current US president) to strengthen the utilization of nuclear energy in its energy mix.

The Foreign Affairs Select Committee of England's parliament said in March 2004 that based on a study it commissioned, "It is clear ... that the arguments as to whether Iran has a genuine requirement for domestically produced nuclear electricity are not all, or even predominantly, on one side."

Some US arguments against Iran "were not supported by an analysis of the facts", the committee added, noting that much of the natural gas flared off by Iran - which US officials say could be harnessed instead of nuclear power - was not recoverable for energy use.

Consider the following points. First, Iran's energy situation today is quite different from the late 1970s, when the shah's regime also pursued nuclear technology, a pursuit that did not seem so alarming to the West at the time.

David Kay, former head of the Iraq Survey Group, speaking in November 2004 at a forum sponsored by the Center for Strategic and International Studies said:
The first thing - of what we do know, and it's amazing how many Americans seem to skate over this - the first nuclear reactor given to Iran was given by the United States in 1967 - a five-megawatt trigger reactor, research reactor, under the Eisenhower Atoms for Peace Program. Still operated ... The other thing that Americans forget is that in 1974, the shah announced a policy of 23,000 megawatts of nuclear energy in Iraq. The US reaction? [Former US national security adviser and secretary of state] Henry Kissinger beat down the door to be sure that two US constructors, General Electric and Westinghouse, had a preferred position in selling those reactors. We did not say, "it's a stupid idea, why would you want to do that when you are flaring gas and you have immense oil reserves?" We said, "That is very interesting; it's an example of how the Iranian economy is moving and becoming modern." Imagine in Iranian ears how it sounds now when we denigrate that capacity. They remember. We were sellers of nuclear reactors and wanted to be sellers of nuclear reactors to the shah.
Consider that just a year or so prior to the 1979 Iranian revolution, the country was producing more than 6 million barrels a day of oil and its domestic consumption was less than 10% of that output. Its annual natural gas production (almost all in the form of associated gas) was roughly about 12 billion cubic meters of which some 9.5 billion cubic meters was exported to the Soviet Union and only 20% was consumed domestically. Iran's population was about 35 million. Meanwhile, Iran had signed a number of nuclear power construction contracts with France and Germany and was negotiating with others for additional ones. The stated objectives of these undertakings were to generate electricity and desalinate water. But according to the pre-revolution politicians there was also always an attempt to explore the nuclear technology for military purposes. But there was no overt opposition to the shah's nuclear ambitions because of friendly relations between Iran and US.

In fact, president Gerald Ford signed a directive in 1976 offering Tehran the chance to buy and operate a US-built reprocessing facility for extracting plutonium from nuclear reactor fuel. The deal was for a complete "nuclear fuel cycle" - reactors powered by and regenerating fissile materials on a self-sustaining basis.

The construction of nuclear power plants in Iran has been contemplated for more than 30 years. The shah argued that hydrocarbon resources would be too valuable to burn by the beginning of 21st century and most of Iran's electricity generation must be supplied from nuclear power plants by then.

After the Iran-Iraq war at the end of the 1980s, the need for electricity generation for reconstruction of the war-damaged economy was evident and as the maximum export of hydrocarbon resources was to be achieved for foreign exchange requirements, the attention was focused on rebuilding the Bushehr nuclear power plant.

Today, Iran has a population of more than 65 million and most people are choking from air pollution. The country produces some 4 million barrels of oil a day of which about 1.5 million are consumed domestically. Natural gas production has skyrocketed and almost all of it is consumed domestically and the share of natural gas of total energy consumption has more than tripled and a very significant portion of that is used to generate power. Incidentally, utilization of oil or natural gas for power generation, though more benign than coal, is not pollution free.

A recent article in Foreign Policy journal noted:
Iran is the second-largest oil producer in the Organization of Petroleum Exporting Countries [OPEC] and has the world's second-largest natural gas reserves. But its energy needs are rising faster than its ability to meet them. Driven by a young population and high oil revenues, Iran's power consumption is growing by around 7% annually, and its capacity must nearly triple over the next 15 years to meet projected demand. Where will the electricity come from? Not from the oil sector. It is retarded by US sanctions, as well as inefficiency, corruption and Iran's institutionalized distrust of Western investors. Since 1995, when the sector was opened to a handful of foreign companies, Iran has added 600,000 barrels per day to its crude production, enough to offset depletion in aging fields, but not enough to boost output, which has stagnated at around 3.7 million barrels per day since the late 1990s. Almost 40% of Iran's crude oil is consumed locally. If this figure were to rise, oil revenues would fall, spelling the end of the strong economic growth the country has enjoyed since 1999. Plugging the gap with natural gas is not possible - yet. Iran's gigantic gas reserves are only just being tapped, so Iran remains a net importer.
Second, as a sovereign nation Iran is entitled to make its own sovereign decisions as to how provide for its own energy needs. Under Article IV of the nuclear Non-Proliferation Treaty, member states are assured access to the benefits of civilian nuclear energy.

Iran is a resource-rich country and has all the rights to use its resources as it sees fit. Among these resources there are several uranium mines whose energy contents cannot be overlooked. Expecting Iran to disregard this valuable resource is irrational, not to mention that taking away that much energy from the free market is an irresponsible proposition. On the other hand, helping Iran to extract, process and use this resource in a joint operation with the International Atomic Energy Agency could help resolve many political as well as financial problems.

Third, the large oil and gas reserves that Iran possesses do not mean that Iran can use oil and gas at no cost.

It is not well appreciated that Iranian oil production has dropped from a peak of more than 6 million barrels per day in 1974 to about 3.4 barrels per day in 2002. Years of political isolation, recurring war and US sanctions have deprived the oil sector of needed investment. Iran's share of total world oil trade peaked at 17.2% in 1972, then declined to 2.6% in 1980, but has since recouped to roughly 5%. In 2002, earnings from oil and gas made up more than 70% of total government revenues, while taxes made up about 20%. After the 1980-1988 Iran-Iraq war, the National Iranian Oil Company launched a reconstruction program to restore damaged fields. Since 1994, production has averaged 3.6 million barrels per day, although this is still roughly half of Iran's 1974 levels. The government hopes that foreign finance and technology will help raise Iran's output to 5.6 million barrels per day by 2010 and 7.3 million barrels per day by 2020.

In fact, the oil and gas that Iran has are almost as expensive as the oil and gas that other countries don't have. To be able to use oil or gas as a feed for an industry (eg power generation), Iran has to develop the resources. Now, once developed and produced, from an economic point of view, oil can be treated as a commodity, which has a value. The monetization of gas is more difficult, but not if you have ready markets around you and also if you can use that gas to boost your oil production capacity. In fact, considering the reality that the majority of Iran's oil and gas reserves are in the south and the country's population centers are in the north, it makes more sense to export the oil and gas in the south (oil from the terminals and gas through pipelines and gas value-add projects) rather than pump it to the north and translate it into electric power.

One example explains the logic of this argument - no one has so far posed the question why Iran actually buys oil from Caspian sources. The simple answer is that it makes economic sense: Caspian crude is closer to Iran's northern refineries and the utilization of Caspian crude in the north frees up oil in the south for export. The only argument that can be used regarding Iran's oil and gas reserves compared to other countries is the fact that Iran has secure domestic supplies as compared to other countries that are importers of oil and gas. However, if Iran as a country manages also to secure its own indigenous supply of nuclear fuel, then the equation changes and it becomes more of an economic evaluation.

With regard to its gas reserves, it bears noting that there are needs for gas in Iran that are much higher priorities than the construction of gas power plants. As academics William Beeman and Thomas Stauffer noted:
First, gas is vitally needed for reinjection into existing oil reservoirs [repressurizing]. This is indispensable for maintaining oil output levels, as well as for increasing overall, long-term recovery of oil. Second, natural gas is needed for growing domestic use, such as in cooking fuel and domestic heating (Iranians typically use kerosene for both), where it can free up oil for more profitable export. New uses such as powering bus and taxi fleets in Iran's smoggy urban areas are also essential for development. Third, natural gas exports - via pipelines to Turkey or in liquefied form to the sub-continent - set an attractive minimum value for any available natural gas. With adequate nuclear power generation, Iran can profit more from selling its gas than using it to generate power. Fourth, the economics of gas production in Iran are almost backwards, certainly counter-intuitive. Much of Iran's gas is "rich" - it contains byproducts, such as liquid-petroleum gas [LPG, better known as propane], which are more valuable than the natural gas from which they are derived. Iran can profit by selling these derivatives, but not if it burns the natural gas to generate power. Furthermore, Iran adheres to OPEC production quotas, which combine oil and natural gas production. Therefore Iran cannot simply increase natural gas for export to make up for what it burns at home.
Finally, there is another important strategic element to consider. Iran derives strategic significance from its status as an oil and gas exporter. This is a status that Iran would like to maintain, and as such any initiative that would maximize Iran's potential for hydrocarbon exports has a strategic value for Iran.

David Isenberg, a senior analyst with the Washington-based British American Security Information Council (BASIC), has a wide background in arms control and national security issues. The views expressed are his own.

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The myth of the EU olive branch (Aug 13, '05)

Iran buys some time (Aug 13, '05)

US media and Iran's nuclear threat (May 11, '05)


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