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BMI View: One of the world’s largest resource holders of oil and natural gas, Iran is a significant producer of both. However, international sanctions have significantly dented the country’s short to medium-term prospects. So long as the confrontation between Iran and the West continues, we retain a largely bearish view of Iran’s energy sector, as sanctions have hit the country’s LNG and refining projects, and will result in a drop in Iranian oil production as exports decline.

We highlight these trends and developments in Iran’s oil and gas sector:

- BMI sees Iranian oil production declining in 2012-13 owing to the effects of international sanctions on exports, although the ‘end game’ between Iran and the West is unpredictable at this stage. We assume a slow 1% year-on-year (y-o-y) long-term oil production growth rate. Liquids output is seen at 4.18mn b/d in 2011 and 3.89mn b/d in 2021.

- Much of this increase will be driven by growth in natural gas liquids (NGL) production rather than crude output, as NGLs are not governed by OPEC production quotas.

- Subsidy reforms enacted in December 2010 have cut domestic consumption of refined fuels, resulting in a cut in our oil and gas consumption forecasts.

- We do not foresee a significant rise in crude exports or refining capacity, although gas exports are likely to rise with the completion of a planned pipeline to Pakistan.
- Both proven oil and gas reserves are set to decline over the forecast period, by 12% and 5%, respectively.

Iran’s dependence on oil prices leads to high volatility in the country’s export revenues. Our assumptions of a slower growth in China, a faltering recovery in the US and a worsening eurozone debt crisis, clearly pose a threat to global oil demand. We assume OPEC basket oil prices to fall from US$99.38/bbl in 2012 to US$93.23/bbl by 2015, thus creating a downside risk for the Iran’s macroeconomic outlook.