Why Iran is grappling with worsening gas and power shortages

Iran's growing gas deficit stems from rising consumption, driven by 8,000 MW of new thermal power plants and increased household use, while gas production growth in the past three years has slowed to a third of the previous decade's rate.

This has resulted in chronic power shortages, blackouts, and significant industrial production losses, compounding the country's struggles under US sanctions. Inflation has remained above 40% for five years, the national currency has halved in value over two years, and at least 30 million citizens now live below the poverty line.

Loss of natural gas production

The South Pars gas field in the Persian Gulf, which accounts for 75% of Iran’s production, has entered the second half of its lifecycle and is experiencing declining output. Due to sanctions, Iran is unable to attract Western companies to install large-scale production platforms equipped with compressors, forcing the country to accept reduced production levels.

Iran holds the world’s second-largest natural gas reserves after Russia and ranks as the third-largest producer, following the United States and Russia. According to BP's statistics, Iran's gas production increased from approximately 157 billion cubic meters in 2010 to 252 billion cubic meters last year, but the growth rate has slowed.

Iran also experiences an annual loss of 28 billion cubic meters of gas during production and distribution stages—a figure not included in the above production figures.

Around 70% of Iran’s energy consumption also depends on natural gas, with no viable alternatives to make up for the shortage. The country is also grappling with deficits in gasoline and diesel supplies, while the highly polluting mazut consumption has tripled in recent years.

The government could potentially compensate a part of energy shortages by halting exports of 6.5 million tons of LPG and 12 billion cubic meters of natural gas annually. However, it heavily relies on revenue from gas and LPG exports.

Impact of gas shortages on industries

This summer, due to electricity shortages, the government halved electricity supplies to industries. According to the World Steel Association, Iran’s steel production fell by 45% in summer compared to spring, dropping to 4.7 million tons (Q3 2024). Since last month, the government has also cut gas supplies to the steel industry by half.

Cement production has also suffered by 7% because of electricity and gas shortages. Plants have not been able to produce the raw material and have used reserves during the summer. However, with an 80% reduction in gas supplies to the cement industry since late September and dwindling raw material stocks, a significant drop in cement output is expected in autumn and winter.

The petrochemical sector, the most gas-dependent industry, operated at only 70% of the capacity last year due to gas shortages. This year, with worsening imbalances, further production declines are anticipated. Iran, which is a small cement exporter, now has to cut back on construction or become an importer.

Last year Iran exported $8 billion worth of crude steel and steel products and $19.5 billion in petrochemical products. Together, the steel and petrochemical sectors accounted for 55% of the country’s total non-oil exports.

Effects on citizens’ lives

Natural gas shortages have forced the government to reduce supplies to power plants, resulting in widespread blackouts. Since early November, rolling blackouts in residential areas of major cities have sparked public anger. The electricity shortage has also disrupted commercial activities, reduced household incomes, and caused industrial production losses, further impacting employment levels.

With the onset of winter, the natural gas-induced power shortages will worsen, affecting citizens more dramatically. While planned gas price increases could boost government revenues, domestic gas prices are so low that even doubling them would barely affect household consumption.

Iran’s daily gas consumption in the fall has reached 820 million cubic meters, with the residential, commercial, and small industrial sectors accounting for 440 mcm/d. During peak winter months, this figure is expected to rise to 650 mcm/d.

Even at current consumption levels, Iran faces a gas deficit of 90 mcm/d. This shortage is projected to reach 300 mcm/d in winter, meaning the government will be unable to meet one-fourth of the country’s gas demand.