Why Iran’s Blackouts Keep Happening Despite Vast Gas Reserves

(Bloomberg) -- Iran has the world’s second-biggest reserves of natural gas, but that’s still not enough for the country to keep the lights on this winter.

The Persian Gulf nation is facing wide-reaching power outages — including scheduled blackouts across Tehran and other major cities in recent days — as US sanctions restrict investment.

It’s the latest example of Iran’s economic struggles as it tries to balance domestic energy needs while funding a conflict with Israel. The sanctions have hit Iran’s energy sector hard for years, leaving vast gas fields underdeveloped, power lines in dire need of upgrades, and industries battered by interruptions to electricity.

Despite difficulty supporting the economy at home, Iran has maintained spending on developing ballistic missiles and building up proxies around the region. For years the country has supported groups, including Hezbollah in Lebanon and Hamas in Gaza, to create a ring of allies around the Gulf. Both groups are considered terrorist organizations by the US. Now, as its conflict with Israel intensifies, the cash-strapped country has earmarked more funding for defense in its latest budget.

The Situation

Natural gas is critical to fueling Iran’s power stations, heavy industry and chemical facilities. With reserves of the fuel second only to Russia, it supplies households in a country of 90 million whose consumption of gas and electricity has hit successive records for the past decade. That’s driven a 58% increase in gas production in the decade to 2022, according to the US Energy Information Administration.

One example of how the sector has struggled is Iran’s ability to build its own gas compression platforms, without which production levels at gas fields like South Pars drop significantly. According to Iranian state media, the giant South Pars alone needs 20 gas compressor platforms requiring $20 billion of investment. The country doesn’t have the technology or expertise to produce them and can’t import the required components because of sanctions. 

At the same time President Masoud Pezeshkian has urged his officials to “mobilize” all their efforts to help develop clean energy in order to avoid power outages in the long term.

What Happens Next

The re-election of Donald Trump brings greater focus to Iran’s fossil-fuels industry and also the possibility that he revives his so-called maximum pressure strategy on Iran by squeezing the country’s energy sector. That could spell more bad news for the country by continuing to keep out foreign investment and by cutting into oil revenues.  

Since Trump’s last term, Iran’s oil output has surged back to near capacity, bringing billions of dollars more into the economy. While the administration of Joe Biden prioritized maintaining global supply and targeting lower crude prices in the face of sanctions on Russia, Trump could target Chinese purchases of Iranian oil to squeeze the country’s income even further, according to analysts.  

Iran is preparing the “necessary measures” to counter any additional pressure from the US on its energy industry, Oil Minister Mohsen Paknejad said on Tuesday, according to the state-run Shana news agency. 

“Plans have been made to ensure the stability of Iran’s oil production and exports,” he was cited as saying. 

The country is also holding preliminary talks to import gas from Turkmenistan this winter, Paknejad said, according to a report from the semi-official Iranian Students’ News Agency. Iran imports gas to serve some parts of the country with better connections to the gas grids of its neighbors than its own.

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