Further sanctions and continued cutbacks by key Iranian customers reinforce the negative outlook for Iran's oil sector. With limited prospects for a positive resolution of sanctions in the near term, we highlight both the short- and possible long-term downside risks confronting the Iranian oil sector as international isolation continues. Indeed, gas export schemes and refinery expansion projects will make little progress as international oil company (IOC) partners heed the investment embargo. Meanwhile, Iran is claiming a succession of major oil and gas discoveries that, if proven, demonstrate considerable upside potential to its existing resource base.

We highlight the following trends and developments in Iran's oil and gas sector:

• BMI sees Iranian oil production continuing to decline in 2013. Indeed, January 2013 production fell to levels not seen in 30 years as a result of international sanctions focused on preventing the Islamic Republic from selling its oil exports abroad. We forecast a fall of more than 30% in oil production from 2011 to 2013. Production will remain depressed over the course of 2013, and then only pick up modestly over our forecast period. Production in 2017 is expected to be 3.10mn barrels per day (b/d), which is still well below the 4.23mn b/d produced in 2011.
• US economic sanctions against Iran have slashed the volume of crude exported and oil revenues, with the US Treasury vowing to keep up the pressure on Tehran to prevent the Iranian government from enriching uranium to make nuclear weapons. US efforts have paid off with Iranian crude exports falling substantially, including to the country's largest importers in Asia, namely China, India, Japan and South Korea. At the time of writing, there had been reports of imports of Iranian crude increasing, particularly from China and Japan, although they remain at depressed levels.
• Similarly, the outlook for sustained growth in gas exports has changed dramatically due to the impact of sanctions on foreign investment levels. For the foreseeable future, we see no progress in the development of liquefied natural gas (LNG) schemes, nor the gas field projects designed to supply the fuel. Gas production will continue to rise steadily, albeit modestly over the forecast period, at an average rate of 2% through to 2022.
• While fuel subsidy reforms have undermined the domestic oil consumption trend, we still expect the Iranian market to expand steadily, driving net crude oil exports down from 2.41mn b/d in 2011 to a low of 719,000b/d in 2013. A dramatically weakening rial on the back of sustained sanctions is putting significant pressure on the consumption of some refined products, however. For example, local Iranian airlines have increased fares significantly on the back of kerosene prices, which have risen by more than 80% in recent quarters.
• On May 10 2012, Iran's state news agency announced the discovery of 8-10bn barrels (bbl) of oil in an unnamed oilfield located within the Iranian sector of the Caspian Sea. After the 'huge light crude oil' discovery reported by the Mehr news agency in April, this was the second reportedly substantial find to have been made in 2012. The Caspian oil discovery suggests that the total volume of resources found since 2009 - according to Iranian news sources - could easily exceed 53.06bn bbl of liquids and 3,500bn cubic metres (bcm) of gas.
• Turkmenistan reduced its natural gas exports to Iran by 52% in 2012 as compared to 2011 levels, providing now only between four and five thousand cubic metres per day (mcm/d). This is despite the country's obligations to provide Iran with 14bcm per annum (approximately 40mcm/d). In response, the Iranian government and the National Iranian Gas Company have announced plans to reduce the country's dependency on Turkmen gas, although details were scant. Iranian gas dynamics are such that the country has an obligation to provide 10bcm of gas per annum to Turkey, and is continuing to do so despite sanctions. Amid rising natural gas consumption, it is therefore dependent upon the imports from Turkmenistan to meet its obligations.

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