Tough Western sanctions are forcing Iran to take drastic action and shut off wells at its vast oilfields, reducing production to levels last seen more than two decades ago and costing Tehran billions in lost revenues.

Iran struggled to sell its oil in the run-up to the European Union ban on July 1, yet it managed to sustain oilfield flows at lofty rates above 3 million barrels per day (bpd) by stashing unwanted barrels in tanks on land and on ships in the Gulf.

But oil sales have now slumped to half the rate of last year and storage is running out. As a last resort, Tehran is carrying out "enforced" maintenance at its ageing reservoirs, say Iranian and Western oil sources, dropping output below 3 million bpd.

It's a step that could make Tehran look as if it is caving in to the West and, in any case, leaves it trailing former rival Iraq in the ranks of the world's top oil producers. And if a big volume of oil is closed down, it will be difficult to bring it back online when it's needed, say Western oil experts.

"We're now in a situation where we are being forced to reduce production - so we will prolong the rehabilitation of our oilfields," said an Iranian oil source, who requested anonymity due to the sensitivity of the information.

"But it's a mistake to think this will make us put our hands up. Iran will not surrender."

Nor will Iran say very much, if anything. Oil sales began to slow in March due to the rigorous restraints imposed by the United States and European Union, but Iran only conceded in June that exports had fallen significantly.

As for lower production, an inevitable result of a sustained slowdown in exports, the Islamic Republic has gone further into lock-down mode - making it exceedingly difficult to obtain precise information.

"In operations - upstream or downstream - maintenance is not something unexpected," said an Iranian oil official, who insisted on anonymity. "It is very normal to have some maintenance."

He declined to comment on whether Iran had taken the opportunity to work-over its oilfields with exports now running about 1 million bpd below last year.

Western oil experts reckon tight storage and plunging oil sales may have forced Tehran to turn down the oilfield taps by at least several hundred thousand barrels a day.

"I would guess that (oilfield) shut-ins will be more than 25 percent - if not already, then very soon," said a European oil executive whose company has invested in Iran.

Adding a further layer of complexity, there are changing faces among the top brass at the National Iranian Oil Co. (NIOC). On the job for just a year, Mohsen Qamsari, head of international affairs, has just been replaced by Mohammad Ali Khatibi, Tehran's representative on OPEC's governing board.

"The pressure is definitely on, but it's difficult to know the details," said a senior Western oil executive. "What is clear is that the situation is extremely complicated and delicate and things are not being said in public."

Exports fall

Oil shipments have declined steadily as buyers cut imports to comply with U.S. and European Union sanctions imposed due to concerns the country is attempting to build a nuclear bomb. Iran says its nuclear activities are peaceful.

Last month, Iran acknowledged that exports had fallen sharply - down 20-30 per cent from normal volumes of 2.2 million barrels daily.

A National Iranian Oil Company official, Mohammad Ali Emadi, put the decrease down to oilfield maintenance and not sanctions imposed on Iran's nuclear programme.

When pressed for further details on the oilfield overhauls, three senior Iranian officials declined to comment. There is no end of speculation among Western executives and policy-makers.

"I have heard that some fields are shut in and just by looking at the numbers, I believe that's correct. I don't think they have much more space to put oil," said an industry source who tracks Iranian production and exports.

"But I am sure they don't want to admit it or give away any ideas on which fields."

In April, shipping sources said Iran had been forced to deploy more than half its fleet to store oil at anchorage in the Gulf, equating to 33 million barrels. The country is expected to store at least a further 8.3 million barrels this month.

Those who track the oil shipments of Iran and other members of the Organization of the Petroleum Exporting Countries say there is precious little available storage in tanks onshore.

"It's full up. It got full quite quickly before the floating storage started getting filled up," said the industry source.

Long-term damage?

While oil industry experts say that shutting in production is beneficial to Iran's hard-worn reservoirs, a prolonged closure of high volumes would not be desirable.

"The more production is shut in, the harder and longer it is to bring back production when it is needed," said Peter Wells of geological consultancy Neftex Petroleum.

Iranian engineers have been battling for years to get the best out of Iran's oilfields, for decades deprived of easy access to cutting-edge technology designed to maximize flows due to successive rounds of U.S. sanctions.

Output from Iran's ageing fields has slumped from 3.9 million bpd in 2005, according to OPEC, as recovery rates are relatively low due to Western restrictions on technology transfers needed to counter production declines or tap trickier discoveries offshore.

Iran is meanwhile dipping deep into savings to fund investment in its energy industry, while increasing its refining capacity for the home market, reporting giant new oil or gas finds, and even touting investment in renewable energy as a possible solution to dependence on oil.

On July 3 - two days after the EU embargo on Iranian oil took effect - Oil Minister Rostam Qasemi signed a memorandum of understanding (MoU) for his ministry to tap the National Development Fund, a sovereign wealth fund largely filled with oil revenues accumulated in better days, for $14 billion.

The fund, now valued at around $35 billion, is the successor of a fund set up in 1999, when oil was below $10 per barrel, to save money for a rainy day.

Qasemi said the move "indicates that the country has enough financial resources to fund projects". The ministry will also issue bonds to raise cash.

The government could be in for a long haul.

"There is an increasing desperation," said a Western oil executive. "It seems very unlikely they will get any relief from sanctions any time soon.” – Reuters