GENERAL BACKGROUND
Iran's economy, which relies heavily on oil export revenues (around 80% of total export earnings, for instance, and 40%-50% of the government budget), was hit hard by record-low oil prices during 1998 and early 1999, but with the rebound in oil prices since then, has recovered to a large degree. For 2000, Iran's real GDP grew by around 4.5%-5%; for 2001; it is expected to grow at a slightly lower, but still robust, pace (3.5%-4.8%). Iran's currency, the Rial, has been relatively strong as well (with a unification of the two major exchange rates -- official and "floating" -- scheduled for 2002/03), and the country is enjoying large trade surpluses. On the negative side, inflation remains fairly high at around 17%. On February 11, 2001, the Iranian government approved a $56 billion budget for the new Iranian Fiscal Year, beginning March 21.

For 2001, Iran's oil export revenues are expected to reach $22.8 billion, down slightly from $23.6 billion in 2000, but up 121% from lows reached in 1998. Despite higher oil prices, Iran continues to face budgetary pressures, a rapidly growing, young population with limited job prospects and high levels of unemployment; heavy dependence on oil revenues; significant external debt (including a high proportion of short-term debt); high levels of poverty; expensive state subsidies on many basic goods; a large, inefficient public sector and state monopolies (bonyads, which control at least a quarter of the economy and constitutionally are answerable only to supreme leader Ayatollah Ali Khamenei); international isolation and sanctions. To cope with its economic problems, Iran's government has proposed a variety of privatization and other restructuring and diversification measures, although these remain politically contentious. Iran also has set up a "stabilization fund" for above-budget oil revenues, which amounted to billions of dollars in 2000.

In September 1999, President Khatami (elected in a landslide in May 1997 on a reform agenda) announced an ambitious program to privatize several major industries, including communications, post, rail, petrochemicals, and even upstream oil and gas to an extent, as part of the "total restructuring" of the Iranian economy called for in the country's latest five-year economic plan (which began in March 2000). The five-year plan also targets the the creation of 750,000 new jobs per year, average annual real GDP growth of 6% over the period, reduction in subsidies for basic commodities (bread, rice, sugar, vegetable oil, wheat, fuels), plus a wide range of fiscal and structural reforms. Implementation of these plans, however, has been delayed in the past by lack of domestic political consensus (as well as the Iranian constitution). In November 1999, the powerful (and conservative) "Council of Guardians" rejected a bill which would have exempted foreign companies in an offshore free-trade zone from threats of nationalization. More recently, the Council of Guardians vetoed planned reforms to Iran's mining sector.

Iran is attempting to diversify by investing some of its oil revenues in other areas, including petrochemicals. Iran's non-oil exports appear to have increased significantly in recent years. Iran also is hoping to attract billions of dollars worth of foreign investment to the country by creating a more favorable investment climate (i.e., reduced restrictions and duties on imports, creation of free-trade zones).

On February 18, 2000, Iran held its sixth parliamentary elections since the 1979 Islamic revolution, with an overwhelming victory for the reformist coalition. The next national elections are scheduled for June 8, 2001, and on May 4, President Khatami announced -- after much suspense - that he would be a candidate after all.

Sanctions
The U.S. Iran-Libya Sanctions Act (ILSA) of 1996 imposes mandatory and discretionary sanctions on non-U.S. companies investing more than $20 million annually in the Iranian oil and gas sectors. Also, in 1995, President Clinton signed executive orders prohibiting U.S. companies and their foreign subsidiaries from conducting business with Iran, while banning any "contract for the financing of the development of petroleum resources located in Iran." In response, U.S.-based Conoco was forced to abrogate a $550-million contract to develop Iran's offshore Sirri A and E oil and gas fields. Following this, France's Total and Malaysia's Petronas were awarded the contract. On August 19, 1997, Executive Order 13059 reaffirmed that virtually all trade and investment activities by U.S. citizens in Iran are prohibited. In March 2000, U.S. Secretary of State Albright announced that the United States would lift certain sanctions against Iranian luxury goods. Other sanctions remain in effect, however. On April 19, 2001, President Bush said that he did not plan to lift sanctions against Iran (or Libya) "anytime soon," but added that it was "important...to review all sanctions policies to make sure they're effective."

OIL
Iran holds 90 billion barrels of proven oil reserves, or roughly 9% of the world's total. The vast majority of Iran's crude oil reserves are located in giant onshore fields in the Khuzestan region near the Iraqi border and Persian Gulf terminus. Current Iranian production is accounted for by the following fields: Ahwaz-Bangestan (250,000 bbl/d currently, with plans to increase to 600,000 bbl/d over the next 8 years at a cost of $2.5 billion), Marun, Gachsaran, Agha Jari, and Bibi Hakimeh. Most of Iran's crude oil is low in sulfur, with gravities in the 30°-39° API range. In February 2001, Iran produced just over 4 million bbl/d of oil, around 200,000 bbl/d above its average output of 3.8 million bbl/d for all of 2000. Iran's current sustainable production capacity is estimated at around 3.8 million bbl/d, which is around 250,000 bbl/d above Iran's latest (April 1, 2001) OPEC production quota of 3.55 million bbl/d. With consumption of about 1.2 million bbl/d, Iran currently is a net exporter of around 2.6 million bbl/d. Around half of Iran's oil exports go to Asian markets, with the remainder going to Europe and Africa.

It is possible that with sufficient investment, Iran could increase its oil production capacity significantly. Iran produced 6 million bbl/d in 1974, but has not surpassed 3.8 million bbl/d on an annual basis since the 1978/79 Iranian revolution. It is believed that Iran may have maintained production levels at some older fields only by using methods which have permanently damaged the fields. Also, Iran's oilfields are -- according to Oil Minister Zanganeh -- experiencing a depletion rate of 250,000-300,000 bbl/d per year, and are in need of upgrading and modernization. Despite these problems, Iran has ambitious plans to boost national oil production to 4.8 million bbl/d by 2005, 5.6 million bbl/d by 2010, and 7.3 million bbl/d by 2020, and is counting on foreign investment to do so.

In October 1999, Iran announced that it had made its biggest oil discovery in 30 years, a giant onshore field called Azadegan located in the southwestern province of Khuzestan, a few miles east of the border with Iraq. According to Iran's Oil Minister Zanganeh, the Azadegan field could contain 5-6 billion barrels of recoverable oil, with potential production of 300,000-400,000 bbl/d. On November 1, 2000, agreement was reached between Japan and Iran for Japanese firms (Japex and Indonesia Petroleum, both majority-owned by the Japan National Oil Company -- JNOC) to have priority negotiating rights to develop Azadegan. It is possible that contracts could be signed by the end of 2001, with bids expected by June 2001. In January 2001, the Majlis approved development of Azadegan by foreign investors using the so-called "buyback" model (see below). In September 2000, the U.S. Treasury Department announced that it was investigating Conoco to determine whether or not the company had violated U.S. sanctions in helping to analyze seismic information collected on Azadegan by NIOC.

Since 1995, NIOC has made several sizable oil discoveries, including the huge (as high as 5 billion-barrel) Darkhovin field, located offshore Abadan and containing low sulfur, 39° API crude oil. Italy's ENI, along with Spain's CEPSA, is bidding to develop Darkhovin and another field, Cheshme-Kosh. In February 2001, NIOC announced the discovery of a very large offshore oil field, named Dasht-e Abadan, in shallow waters near the port city of Abadan. According to a top NIOC official, Dasht-e Abadan could contain reserves "comparable" in size to Azadegan.

Foreign Investment
The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or direct equity stake. However, the 1987 Petroleum Law permits the establishment of contracts between the Ministry of Petroleum, state companies and "local and foreign natural persons and legal entities." "Buyback" contracts, for instance, are arrangements in which the contractor funds all investments, receives remuneration from NIOC in the form of an allocated production share, then transfers operation of the field to NIOC after the contract is completed. This system has drawbacks for both sides: by offering a fixed rate of return, NIOC bears all the risk of low oil prices. If prices drop, NIOC has to sell more oil or gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them. U.S. law permits American companies to buy the bid packages ($10,000 each), but not to submit proposals. In late August 2000, Iran's deputy oil minister, Seyyed Mehdi Hoseyni, said that $8 billion worth of buyback contracts on various oil reservoirs would be finalized soon (an estimated $10 billion in buyback deals reportedly had been signed to that point). Projects include the following oilfields: Salman, Darkhovin, Sa'databad-Sarvestan, Cheshme-Kosh, Foruzan-Esfandiar, and Dehloran. Recently, Iran appears to have had some second thoughts about buybacks (including charges of corruption, insufficient benefits to Iran, and also worries that buybacks are attracting too little investment), and reportedly is considering substantial changes (or even abolition) of the system. Also, as of April 2001, no buyback contract had been signed for more than a year.

The first major project under the buyback investment scheme became operational in October 1998, when the offshore Sirri A oil field (operated by Total and Malaysia's Petronas) began production at 7,000 bbl/d (Sirri A currently is producing around 20,000 bbl/d). The neighboring Sirri E field began production in February 1999, with production at the two fields expected to reach 120,000 bbl/d.

In April 1999, Iran awarded Canada's Bow Valley Energy, along with the former Elf Aquitaine (now TotalFinaElf), a buyback contract to develop the offshore Balal field. The field, which contains some 80 million barrels of reserves, will produce up to 40,000 bbl/d, possibly by late 2002. In February 2001, ENI acquired a 38.25% share in Balal from TotalFinaElf, which continues to hold a 46.75% stake in the field. Bow Valley holds a 15% share.

In March 1999, France's Elf Aquitaine and Italy's ENI/Agip were awarded a $1-billion contract for a secondary recovery program at the offshore, 1.5 billion-barrel Doroud oil and gas field near Kharg Island. The program is intended to boost production from current levels of around 130,000 bbl/d to as high as 220,000 bbl/d within four years. As of December 2000, however, it appeared that tenders on the project had been delayed, in part due to changes in specifications for injection facilities.

In November 2000, Norway's Statoil signed a series of agreements with NIOC to explore for oil in the Strait of Hormuz area. The two companies also will cooperate on developing a gas-to-liquid processing plant for four southern onshore fields, and possibly will develop the Salman offshore field at a cost of $850 million, with eventual production of 130,000 bbl/d.

Onshore Developments
NIOC's onshore field development work is concentrated mainly on sustaining output levels from large, aging fields. Consequently, enhanced oil recovery (EOR) programs, including gas injection, are underway at a number of fields, including Marun, Karanj, and the presently inactive Parsi fields. EOR programs will require sizeable amounts of natural gas, infrastructure development, and financing.

Although NIOC has run into difficulties in implementing EOR programs at some of its fields mentioned above (i.e., Agha Jari, Binak, Kupal, and Ramshahr) fields, it has been successful in many other cases. One example is NIOC's development work at Gachsaran, which contains in-place reserves of 53 billion barrels and a large-scale gas injection capacity which should help increase production.

Offshore Developments
As of August 2000, Iran was producing about 620,000 bbl/d of crude oil from its offshore fields. The Doroud 1&2, Salman, Abuzar, Forozan, and Sirri fields comprised the bulk of Iran's offshore output, all of which is exported. Iran plans extensive development of existing offshore fields and hopes to raise its offshore production capacity to 1.1 million bbl/d by 2003. It is estimated that development of new offshore Persian Gulf and Caspian Sea oil fields will require investment of $8-$10 billion.

Aside from acting as a transit center for other countries' oil and gas exports from the Caspian, Iran has potentially significant Caspian reserves of its own, including up to 15 billion barrels of oil and 11 trillion cubic feet of natural gas. It is important to note, however, that almost none of this is "proven" to be recoverable (although preliminary seismic surveys conducted by Lasmo and Shell indicated 2.5 billion barrels of oil). Currently, Iran has no oil or gas production in the Caspian region. In February 2001, Iran requested a delay in the planned meeting of presidents from all Caspian littoral states. Iran's position is that the Caspian should be divided equally, as opposed to Russia's position that median lines should be used, as is done in lakes. In March 2001, NIOC signed a $226-million deal with Sweden's GVA Consultants and Iran's Sadra to build an oil rig in the Caspian Sea off Mazandaran province. This marks Iran's first exploration attempt in the Caspian.

The 105-million barrel Balal field, discovered in the 1970s by an ARCO/Murphy consortium, was never developed even though an oil pipeline connecting the field to the Lavan Island export terminal was laid. As mentioned above, Canada's Bow Valley Energy Ltd. is now conducting detailed engineering work, including a 3-D seismic survey, on the Balal field. Balal likely will require extensive water injection and other secondary recovery methods, especially in later years.

On November 14, 1999, Shell announced that it had been chosen for a buyback project to develop the Soroush and Nowruz offshore oil fields, both of which were closed during the 1980-1988 Iran-Iraq war. These fields are located offshore about 50 miles west of Kharg Island and contain estimated recoverable reserves of around 1 billion barrels of mainly heavy oil. Soroush was one of the original 11 projects put out for tender by NIOC in 1995, and the project calls for Shell to increase output at Soroush to 100,000-150,000 bbl/d (from 60,000 bbl/d currently), and at Nowruz to 90,000 bbl/d within the next three years. As of early May 2001, Shell reportedly was attempting to move the Soroush and Nowruz development project ahead quickly, following award of an $800-million contract in November 1999, but apparently the company has run into some technical difficulties (complex geology, shortages of drilling equipment) and this has slowed things down somewhat. Shell reportedly has started drilling the first of 10 planned horizontal wells at Soroush.

NIOC also would like to develop five oil and gas fields in the Hormuz region (Henjam A (HA), HB, HC, HD, and HE), the A field near Lavan Island, the Esfandir field near Kharg Island, and two structures near the South Pars gas field. According to NIOC, the five Henjam fields hold an estimated 400 million barrels of oil and have a production potential of 80,000 bbl/d. Other Iranian oil fields slated for increases include Doroud, Nosrat, Farzam, and Salman (to 130,000 bbl/d by 2004 from 105,000 bbl/d at present).

Refining and Transportation
As of January 2000, Iran had nine operational refineries with a combined capacity of 1.47 million bbl/d. In order to meet burgeoning domestic demand for middle and light distillates, Iran has imported refined products since 1982, and is attempting to boost its refining capacity to 2 million bbl/d. Two planned grassroots refineries include a 225,000-bbl/d plant at Shah Bahar and a 120,000-bbl/d unit on Qeshm Island. The $3-billion Shah Bahar refinery project was approved by the government in late 1994 and would be built by private investors.

Iran exports crude oil via four main terminals -- Kharg Island (by far the largest), Lavan Island, Sirri Island, and Ras Bahregan. Refined products are exported via the Abadan and Bandar Mahshahr terminals. Many Iranian oil export terminals were damaged during the Iran-Iraq War, but all have been rebuilt. Iran operates the largest oil tanker fleet within OPEC, with 25 ships.

Crude Swaps
In order to get around restrictions in dealing with Iran, several firms have proposed oil "swaps" involving the delivery of Caspian (Azeri, Kazakh, Turkmen) oil to refineries in northern Iran, while the same amount of Iranian oil is exported through Persian Gulf terminals. According to Iranian Oil Minister Bijan Namdar-Zangeneh, Iran is planning to retool its oil infrastructure to accommodate such swaps, including construction of a $400-million, 240-mile pipeline from the Caspian area via Iran's Caspian port of Neka to refineries in northern Iran and to Tehran. In February 2000, the National Iranian Oil Company (NIOC) awarded a Chinese consortium (led by Sinopec and CNPC)a $100-million contract for technical aspects of the project, which is expected to transport 175,000 bbl/d of Caspian crude within two years, and possibly up to 370,000 bbl/d (at a cost of $220 million). European oil trading company Vitol is involved in financing the project. Iran also plans to boost capacity at its northern refineries at Arak, Tabriz, and Tehran to about 800,000 bbl/d to process this oil.

NATURAL GAS
Iran contains an estimated 812 trillion cubic feet (Tcf) in proven natural gas reserves -- the world's second largest and surpassed only by those found in Russia. The bulk of Iranian gas reserves are located in non-associated fields, and have not been developed, meaning that Iran has huge potential for gas development. Besides domestic consumption, which is growing rapidly, Iran also has the potential to be a large natural gas exporter. In 1999, Iran produced about 1.9 Tcf of natural gas. Currently, natural gas accounts for around 44% of Iran's total energy consumption, but the government plans billions of dollars worth of investment in the gas sector during its current Five-Year Development Plan.

Iran's largest non-associated natural gas field is South Pars, geologically an extension of Qatar's 241-Tcf North Field. South Pars was first identified in 1988 and originally appraised at 128 Tcf in the early 1990s. Current estimates are that South Pars contains around 280 Tcf of gas, of which a large fraction will be recoverable, and over 17 billion barrels of liquids. Development of South Pars is Iran's largest energy project, and already has attracted around $20 billion in investment. Gas from South Pars largely is slated to be shipped north via the planned 56-inch Igat-3 pipeline, and then reinjected to boost oil output at the mature Aghajari field (output peaked at 1 million bbl/d in 1974, but has since fallen to 200,000 bbl/d), and possibly the Ahwaz and Mansouri fields (which make up part of the huge Bangestan reservoir in the southwest Khuzestan region). South Pars gas also could be exported, both by pipeline and possibly by liquefied natural gas (LNG) tanker.

On September 29, 1997, Total (now TotalFinaElf) signed a $2-billion deal (along with Russia's Gazprom and Malaysia's Petronas) to explore South Pars and to help develop the field during Phase 2 and 3 of its development. NIOC estimates that South Pars has a gas production potential of up to 8 billion cubic feet per day (Bcf/d) from four individual reservoirs. Phase 1, which is being handled by Petropars (owned 60% by NIOC), has been delayed several times and now is scheduled for partial completion by the end of 2002, involves production of 900 million cubic feet per day (Mmcf/d) of natural gas and 40,000 bbl/d of condensate. This first phase is being carried out by the Petroleum Development and Engineering Company (PEDEC), an affiliate of NIOC, while TotalFinaElf's consortium is responsible for Phases 2 and 3. In August 1999, Total signed a $110-million contract with Hyundai Heavy Industries for construction of twin undersea pipelines from South Pars to onshore facilities at Assaluyeh. Work also has begun (also by Hyundai) on a major terminal at Assaluyeh to handle South Pars production from phases 2 and 3. As of early 2001, it remains possible that phases 2 and 3 will be completed in late 2001. Phases 4 and 5, estimated to cost $1.9 billion each, are being handled by ENI and Petropars, and involve construction (by Aip and Petropars) of onshore treatment facilities at the port of Bandar Assaluyeh. Phases 6 through 8, which are to produce a combined 3 Bcf/d of gas and 120,000 bbl/d of condensate, are being handled by Petropars and, in part, by the UK's Enterprise Oil (which has a 20% stake), while international bidders have been short-listed for phases 9 through 12 (in early 2001, Chevron reportedly withdrew its bid on these phases). Phases 9 and 10 are expected to supply the domestic market while phases 11 and 12 are slated for LNG export. Companies reportedly interested in all or parts of phases 9-12 (expected to cost $4 billion) include BG, TotalFinaElf, and Shell.

In addition to South Pars, the 48-Tcf North Pars development may also be part of Iran's long-term gas utilization plans. Development plans call for 3.6 Bcf/d of gas production, of which 1.2 Bcf/d would be re-injected into the onshore Gachsaran, Bibi Hakimeh, and Binak oil fields. The other 2.4 Bcf/d would be sent to the more mature Agha Jari oil field. Negotiations on the field stalled in 1995, but Shell reportedly renewed its interest in 1998. A feasibility study on the field is scheduled to be completed in late 2001, and will determine whether or not North Pars gas is needed for injection into mature southern oil fields.

Besides North and South Pars, Iran aims to develop the 6.4-Tcf, non-associated Khuff (Dalan) reservoir of the Salman oil field. Salman straddles Iran's maritime border with Abu Dhabi, where it is known as the Abu Koosh field. NIOC is seeking to develop the Khuff reservoir, which could lead to the production of 500 Mmcf/d of non-associated gas, along with the 120,000 bbl/d of crude oil that is now being produced from a shallower reservoir. Salman gas could either be exported to Dubai's Jebel Ali or to domestic locations at Qeshm Island and Badar Mogham. The project cost is estimated at slightly under $600 million for a two-platform development.

During 2000, Iran made several significant gas field discoveries. These include: the 800-Bcf Zireh field in Bushehr province; the 4-Tcf Homa field in southern Fars province; the huge, 14-Tcf Tabnak gas field located in southern Iran. Iran's other sizable non-associated gas reserves include the offshore 47-Tcf North Pars gas field (a separate structure from South Pars), the onshore Nar-Kangan fields, the 13-Tcf Aghar and Dalan fields in Fars province, and the Sarkhoun and Mand fields.

The dual Aghar-Dalan field development has been one of National Iranian Gas Company's recent successful gas utilization projects. Since coming online in mid-1995, the Aghar and Dalan fields have produced approximately 600 Mmcf/d and 800 Mmcf/d, respectively. Gas from both fields is processed at a $300-million gas processing facility at the Dalan field, which is also the location of a 40-MW, gas-fired power plant. Most of the treated gas from the Dalan processing plant is carried through a 212-mile pipeline for re-injection in the Marun field and other oil fields in Khuzestan province.

Natural Gas Trade
Although consumption is growing rapidly, Iran continues to promote export markets for its natural gas. Possibilities include Turkey, Armenia, Ukraine (Kiev reportedly is interested in building an Iran-Armenia-Georgia-Crimea-Ukraine line), Europe (possibly via Ukraine), Pakistan, India, Taiwan, South Korea, and coastal China. These exports could be either via pipeline or by LNG tanker, with possible LNG export terminals at Asaluyeh or Kish Island. Although India and Iran in 1993 signed a memorandum of understanding on an overland gas pipeline, regional political and security concerns to date have blocked completion of a feasibility study. Reportedly, Pakistan and Iran at one point had agreed to a gas line from South Pars to Multan, Pakistan, with a possible extension to Hazipur-Bijapur-Jagdishpur in northern India. In early February 2001, there were reports that India and Iran were negotiating over an offshore gas pipeline option, which would run from Iran to Gujarat, India. However, this could be much more costly and technically difficult than an overland line.

In 1996, Iran and Turkey signed a $20-billion agreement that calls for Iran to supply Turkey with natural gas over a period of 22 years. Exports of Iranian gas to Turkey were slated to start in 1999 at an initial rate of 300 Mmcf/d and rise to a level of 1,000 Mmcf/d in 2005. In November 1998, Turkey began construction of a 623-mile pipeline that could transport gas westward from Iran. In January 2000, Iran said that it accepted Turkey's request to delay the purchase of Iranian natural gas until September 2001 (on August 2, 2000, the two countries signed a protocol for pumping to begin on July 30, 2001). Turkey said that it had been unable to complete its portion of the pipeline due to economic problems. As of March 2001, it appeared that the pipeline had been delayed once again, and would not begin operating until 2002.

In July 2000, Iran's Oil Minister Zanganeh stated that Iran was open to selling gas to Kuwait. Iran has been involved in a border dispute with Kuwait and Saudi Arabia over demarcation of the border through the northern Gulf continental shelf. This region contains the huge (7-13 Tcf) Dorra gas field, which Iran had begun drilling in early 2000 but stopped after complaints by Kuwait. Saudi Arabia and Kuwait signed a bilateral agreement in July 2000 on dividing up the Dorra gas field equally between the two countries, and now are working on a final deal with Iran. Besides Kuwait, Iran also is reported to have discussed possible gas exports to the United Arab Emirates, although in April 2001, NIOC denied such a plan, as has Crescent Petroleum, the UAE company reportedly involved in the deal.

Besides gas exports, Iran also has discussed importing gas from Azerbaijan, and already imports some gas from Turkmenistan. This gas is for use in Iran's northern areas, far from the country's main gas reserves in the south. Turkmenistan is set to supply Iran with around 210 Bcf of gas in 2001 via the Korpeje-Kurt Kui pipeline, at a price of $40 per 1,000 cubic meters.

ELECTRIC POWER
Iran has installed power generation capacity of about 30 gigawatts (GW), of which around 93% is thermal (natural gas or oil), and the remainder hydroelectric. A number of new power plants have come online recently in recent years in Iran, including the 2,000-MW Shahid Rai thermal power station in Qazvin; a 1,290-MW combined-cycle plant in Rasht; a doubling of the Tabriz power plant's capacity to 1,500 MW; two, 200-MW, steam-powered units at the Martyr Montazeri plant; a 215-MW steam-powered unit at the Ramin Power Plant; and a 107-MW combined cycle generator at Montazer Qa'em Power Plant. With power demand growing rapidly, Iran is adding significant generation capacity -- both thermal and hydroelectric. The largest hydro projects are the 3,000-megawatt (MW) Karun 3 plant, the 2,000-MW Godar-e Landar facility, a 1,000-MW station in Upper Gorvand, and the 400-MW Karkheh dam. New thermal projects include two 1,040-MW combined cycle plants in the South, an 1,100-MW combined cycle plant at Arak, and a 1,000-MW facility in Bandar Abbas.

Iran's power consumption is growing at around 7.5% annually. This will require the addition of an estimated 1,600 MW in generating capacity annually over the next several years, at a cost of several billion dollars. Iran has received offers for investment in the form of loans and build-operate-and-transfer-contracts (BOT). BOT contracts allow the investing company to build and operate the generating facility for a period of 15-20 years, after which time the plant is turned over to the Energy Ministry. Negotiations have taken place with international energy firms on expansion plans for power plants at Bandar Abbas, Shaid Rajai, Alborz, Ramin, and Kerman.

Although the government has considered privatization, at present Iran's power sector is run by the state-controlled Tavanir organization. Eventually, Tavanir may be broken up into smaller companies as part of a privatization package. In addition to power generation, Tavanir also is responsible for transmission. Iran has main power distribution networks: 1) The Interconnected Network, which serves all of Iran except for remote eastern and southern areas, using 440-kV and 230-kV transmission lines; 2) the Khorassan Network, which serves the eastern Khorossan province; and 3) the Sistan and Baluchistan Network, which serves the remote southeastern provinces of Sistan and Baluchistan. The government goal is to join these three networks into one national grid. Currently, around 94% of Iranians are connected to one of Iran's power grids. Iran also has power links to neighboring countries, including a recent line connecting Parsabad-e Moghan, Iran and Imishli, Azerbaijan.

NUCLEAR
Currently, Iran has five small nuclear reactors, one in Tehran and four in Isfahan. Iran claims that its nuclear power is for peaceful purposes and that it will help free up oil and gas resources for export, thus generating additional hard-currency revenues. The U.S. State Department frequently has stated U.S. opposition to Iran's nuclear program. The United States has argued that Iran has sufficient oil and gas reserves for power generation, and that nuclear reactors are expensive, unnecessary, and could be used for military purposes. Iran is a signatory to the Nuclear Non-Proliferation Treaty.

In March 2001, President Khatami met with Russian President Putin and agreed to expand bilateral cooperation on nuclear power. Russia's atomic ministry has been assisting Iran on the Bushehr nuclear power facility. Work on this plant began in 1974 by West Germany, but was halted (80% complete) following the 1979 Islamic Revolution. Progress on Bushehr resumed when Russia signed a $780-million contract in 1995, as well as an agreement in September 1998 to complete the facility within 52 months. The 1995 contract with Russia calls for completion of the two, 1,300-MW, pressurized-light water units as well as the supply of two modern VVER-440 units. The United States strongly opposes the project and has in the past provided Russia with information pointing to the existence of an Iranian nuclear weapons program. Despite this, the Russians have proceeded, although slowly (in part due to incompatibilities between Russian and German technologies, with work on Bushehr. Under the latest contract details with Russia, construction on Bushehr must be completed by March 19, 2004. Iran reportedly plans to purchase a second Russian-built reactor for Bushehr once the first reactor is finished.

ENVIRONMENT
In the context of its oil-based economy, environmental issues in Iran only recently have become important. Ongoing air pollution in urban areas, which reached a crisis level in Tehran in December 1999, have highlighted the need to improve Iran's environmental record. The rush to develop oil and gas resources in the Caspian Sea makes oil pollution in the Caspian a real environmental threat.

Huge increases in energy consumption over the past 20 years have contributed greatly to pollution levels as Iran's carbon emissions have nearly tripled over the same time span. Large numbers of old, inefficient cars on the road lacking catalytic converters account for much of the country's air pollution. Together with the widespread use of low-quality, leaded gasoline, this combination has led to noxious, black smoke spewing from cars creating a cloud of smog above many cities, especially Tehran.

In addition, Iran's abundance of fossil fuel resources has tended to discourage the country's incentive to shift to cleaner alternative energy sources for its energy needs. As Iran continues to struggle with air pollution in the 21st century, however, the country likely will need to take a variety of tough measures in order to avert an environmental crisis.

Sources for this report include: Agence France Presse; AP Worldstream; BBC Summary of World Broadcasts; Calgary Herald; CIA World Factbook 2000; Deutsche Presse-Agentur; Dow Jones; Economist Intelligence Unit Viewswire; Financial Times; Foreign Broadcast Information Service; Gulf News; Hart's Africa Oil and Gas; Hart's Asian Petroleum News; Hart's Middle East Oil and Gas; Interfax; International Herald Tribune; Iran Brief; Middle East Business Intelligence; Middle East Economic Digest; National Post; New York Times; Oil and Gas Journal; Oil and Gas Investor; Petroleum Economist; Petroleum Intelligence Weekly; Pipeline and Gas Journal; Reuters; Turkish Daily News; U.S. Energy Information Administration, World Markets Online

Links to other U.S. government web sites:
2000 CIA World Factbook - Iran
U.S. Treasury Department's Office of Foreign Assets Control
U.S. Iran-Libya Sanctions Act
U.S. State Department's Consular Information Sheet - Iran
Library of Congress Country Study on Iran
U.S Policy Towards Iran

The following links are provided solely as a service to our customers, and therefore should not be construed as advocating or reflecting any position of the Energy Information Administration (EIA) or the United States Government. In addition, EIA does not guarantee the content or accuracy of any information presented in linked sites.

The Center for Middle Eastern Studies (University of Texas at Austin) - Iran
Iran Online
Interests Section of the Islamic Republic of Iran in Washington, DC (in the Pakistani Embassy)
Permanent Mission of the Islamic Republic of Iran to the United Nations
Gulf Wire
Iranian Trade
National Petrochemical Company of Iran
MENA Petroleum Bulletin
Salam Iran Home Page
Iran Daily, Morning English Newspaper
Iran Weekly Press Digest
Iran Press Service

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