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Why gas-rich Iran fails to provide heating to its households

January 24, 2023

Gas heating supply cuts have become a recurring theme in Iran for the past several winters, with the government regularly recommending that households turn off their heaters for 6 or more hours per day. For many, this is an inexplicable situation in a country with the second-highest gas reserves in the world. To put it into perspective, Iran’s gas reserves are more than 17% of the world's total gas reserves and 10 times higher than the entire gas reserves of Europe (see Chart 1 below.) 

Still, Iranians are unlikely to see an end to the supply disruptions in the near future, for the following reasons:

Lack of development
Although Iran’s reserves are immense, its gas resources are not developed enough to meet both domestic demands and export commitments.

Iran’s largest gasfield, South Pars, has been losing pressure and many of the wells in this offshore field have started producing water. The South Pars gas field is the Iranian portion of Qatar’s North Dome, the largest gas field in the world. Qatar invested in gas compression technology in the past few years to maintain production rates and to increase the ultimate gas recovery rates. According to industry reports, Iran needs $28 Billion to maintain the reservoir pressure (and hence the gas production rates) at the South Pars gasfield. The government budget for 1402 focuses on security issues rather than investments in infrastructure projects. Given the lack of foreign direct investment in the Iranian energy sector due to the sanctions, such a large investment is highly unlikely in the foreseeable future.

High consumption
According to World Bank data, Iran is the third biggest gas flaring nation in the world, as Iran Open Data previously reported. As shown in Chart 2, in 2020 Iran flared 13.26 Billion M3 per year (BCM). Comparing Iran with some of the more advanced local producers such as Qatar, Saudi Arabia and the UAE, we can see that Iran’s gas flaring is almost 14 times higher than the UAE, whereas the oil production rates of both countries are quite similar. This amount of flared gas could provide electricity for 25 million people in Iran.

Unpaid bills
Iran relied heavily on gas imports from Turkmenistan for years, especially to meet the gas demand of its northeastern Khorasan and Golestan provinces. However, Iran failed to pay its bills on time, leading Turkmenistan to file a legal case against Iran. In recent weeks, Turkmenistan again halted its gas supplies to Iran.

Export obligations 
Iran relies heavily on gas exports to Turkey, because it provides a good source of hard currency and also solidifies Iran's strategic relationship with its neighbour. However, because of gas supply issues, Iran reduced its gas flow to Turkey by 70% in January 2023, forcing Turkey to slow down its industrial activities on its border region with Iran. This stops Iran earning hard currency payments at a difficult time and damages its reputation as a supplier.

The Takeaway:
Iran’s gas shortage is a complex structural problem. Disruptions have occurred during every winter in recent memory, and are not likely to be resolved in the foreseeable future.