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LONDON—Iran's beleaguered oil industry could be on its way to passing an ignominious milestone: being replaced by its onetime nemesis, Iraq, as the Middle East's second-biggest oil producer.

That possible drop in standing, largely a result of economic sanctions and Iranian mismanagement, raises the prospect of less revenue for Tehran at a time when new sanctions are piling up against the regime.

The Paris-based International Energy Agency this week forecast Iran's oil-pumping capacity to drop about 18%, or roughly 700,000 barrels a day from current levels, to 3.30 million barrels a day by 2015.

The IEA is an energy adviser to the U.S. and other industrialized nations that have concerns over the nature of Iran's nuclear program. But the agency's forecasts are generally regarded among oil analysts as industry benchmarks, and its assessment of Iran's production decline has been echoed by other industry analysts recently.

Iraq has become the most important investment spot for major oil companies because of its huge, undeveloped reserves, the fourth biggest after Saudi Arabia—the Mideast's top oil producer—Canada and Iran.