Surprise: Oil Woes In Iran

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Outsiders are offered contracts only to drill wells--rather than operate fields--and get just a small share of profits from output. For instance, Italian oil giant ENI (ENI), a fixture in Iran since 1957, produces about 35,000 barrels per day but doesn't expect to get any bigger. "Unless international sanctions are imposed on Iran and the Italian government directs ENI to abide by them, we are committed to staying," says ENI Chief Executive Paolo Scaroni. "However, in order to increase our presence there, contractual terms for oil companies need to change."

Endless haggling and delays have set back some of Iran's biggest oil initiatives. One top priority had been the Azagedan field in southern Iran, which is expected eventually to produce 260,000 barrels a day. But in October, Tehran scrapped a $2 billion contract, agreed to in 2004, with Japan's Inpex to develop the project. And Shell's $800 million Soroush/Nowrooz project in the Persian Gulf has been plagued by cost overruns and technical glitches. In January, meanwhile, Statoil wrote down the entire $329 million book value of its South Pars project because of "productivity and quality problems" with a local contractor.

GLACIAL PACE

It's not just oil that Iran is failing to exploit. The glacial pace of negotiations is also making it fall behind neighboring Qatar in exploiting the huge offshore gas field that the two countries share. While Qatar has signed up the likes of ExxonMobil (XOM) and Shell to develop the site, Iran's talks with Total and Shell have progressed far more slowly. Iran is now a net importer of gas, a situation not expected to reverse before 2010.

Foreign energy companies are lobbying the Iranians to change. Executives say they would like longer contracts, which would give them more control and might boost returns. But progress is slow as many Iranian officials are reluctant to give foreigners terms that might be judged too favorable. "There are indications of movement, but how far and how deep it goes is anyone's guess," an oil executive says.

Can Iran fix its energy conundrum? Some experts are betting Tehran will get its act together sooner rather than later. Iran was able to boost production from 1.2 million barrels a day during the 1980-88 war with Iraq to nearly 4 million barrels with almost no foreign help, notes Bijan Khajepour, chairman of Tehran's Atieh Bahar Consulting, which advises oil companies. He thinks Iran should be able to sustain current production for the next decade. Even so, if Tehran doesn't face up to the woes of its oil industry, Iran may find itself in the unusual position of sharing the West's angst over growing dependence on imported oil.

with Babak Pirouz in Tehran

Reed is London bureau chief for BusinessWeek .