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Iran returns to the global oil and gas race

Iran returns to the global oil and gas race

Aug 14, 2017
8 min read
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Iran has laid the groundwork to attract foreign oil companies and is fast signing contractors to speed up the development and revitalise the upstream and downstream sectors of its oil and gas industry. Thanks to a nuclear deal that lifted international sanctions against the Persian nation early 2016, Iran has been able to sign agreements with foreign companies that were not allowed to for nearly a decade. It has also boosted exports to markets and foreign funds it was barred access to.

Last month, National Iranian Oil Company and French group Total signed a draft agreement to develop phase 11 of South Pars field, the world’s largest gas field, marking the first Western oil major returning to Iran and signalling more of the same to come.

The country, with proven gas reserves at 34 trillion cubic meters, (the largest known source in the world) and one of the largest proven oil reserves estimated at 158 billion recoverable barrels, is currently in discussions with other oil companies such as U.K.’s BP, Russia’s Lukoil and Gazprom and Malaysia’s Petronas for developing its fields.

It has also signed preliminary deals with Eni and Shell for exploration and production. To satisfy domestic energy requirement and boost government revenues (as well as rebalance its books) through exports, Iran has set an oil production target of 6 million barrels per day (bpd) by 2021 from current 3.8 million bpd and gas production target of 365 billion cubic metres (cm) by 2021 from current 800 million cm.

The state energy firm identified 52 oil and gas projects (29 oil fields, 23 gas fields) for development to increase production capacity. Tehran hopes that 65-70 per cent of almost US $200 billion investment required to develop these fields will come from international companies.

While some of these projects are already developed but are in desperate need of infrastructure overhaul there are also sites of oil and gas finds which have yet to be developed. These two categories make up the bulk of projects being tendered.

Iran is meanwhile preparing to announce over the next three month its first round of oil and gas exploration tenders since the easing of economic sanctions but analysts expect this to be delayed with the NOIC occupied with the 50+ development projects. Iran has identified 18 explorations blocks so far.

There are three potential hurdles for Iran achieving its energy target in the given time frame; foreign funding contingent upon contract terms, boosting the country’s average daily rate of production and efficient use of gas.

IPC

Prior to sanctions, international companies operated in Iran through a buy-back scheme. These were short term contracts of 6-12 years in length, did not give any ownership interest to non-Iranian firms, and had fixed remuneration fee with disregard to changes in expenses or market oil price. With the aim to attract international firms and their funding, Iran set up a new model called Iran Petroleum Contract (IPC), which the cabinet approved in August last year but has yet finalise.

This is similar to a production sharing contract, where by it enables the foreign company to set up a joint venture with NIOC or its unit, was a duration of 20-30 years and with flexible remuneration and the rates of return are negotiable on a sliding scale and proportionate to risks surrounding development.

Firms including ENI, Total and Shell have all indicated their unwillingness to return to Iran unless the buy-back formula is altered. On the whole, contract terms will be a central criteria to attract the much needed foreign investment through IOCs, analysts say.

“The improvement of the new IPC compared with the unpopular ‘buy-back’ will do little to attract IOCs if they are not competitive with what is available globally. In order to reel in investments, it will fail to do so without assuring IOCs of the terms and without easing the negotiation process,” APICORP said in its energy research report on Iran.

Oil

Over the past five to six years, Iran’s average daily oil production volume has been around 3 million bpd, and export volumes have been around 1 million bpd.

More than 50 per cent of its 2016 production was from its four largest fields; Ahvaz, Gachsaran, Marun and Aghajari.

The aggressive production of the 1970s and the neglect in the 1980s have caused reservoir-pressure problems and water encroachment in a number of oil fields, according to a report by Arthur D Little (ADL) titled ‘A perspective on the Iranian upstream oil and gas industry’.

“It (is) a top priority for the country to develop a clear reservoir management strategy and introduce technologies that can quickly improve reservoir performance,” it said.

Iran’s average rate of recovery is currently at around 25 per cent, compared with a global average of 40 and best-in-class performers, such as the U.K., at 46.

Iran’s oil production and exports took a hit when the US and the European Union tightened economic sanctions against Tehran to curb its nuclear program. But Tehran surprised global markets by boosting production at faster a pace than most analysts had forecast after sanctions were lifted last year.

Following the deal that lifted sanctions, these volumes jumped to as high as 3.9 million bpd, through the second half of 2016.

“This increase was exclusively due to existing production capacity, opening wells that had been shut in, and exporting volumes that had been held in terminals and tankers. So with that in mind, and looking more closely at the target, achieving 6 million bpd by 2020 does appear ambitious,” ADL said in its report.

While Iran’s sustainable growth in production could lift it to 5 million bpd, a gap of 1 million bpd remains, the report said.

Gas

While Iran’s oil production and exports were hindered by political sanctions, its gas production has continued to rise consistently since the early 1980s at 10 per cent a year, driven by domestic demand and supported by government subsidies.

Iran has a gas production target of 385 billion cm per year by 2021, up from 2016 production volume of around 800 billion cm. Analysts expect this to be quite possible because major projects of South Pars and Kish are already in production.

The main concern is whether Iran will be able to meet export target. Only up to 10 per cent of 2016 gas production was exported, 80 per cent used for domestic needs, while the rest was flared, lost or re-injected.

“A possible way the export target and the growing domestic demand could both be met is through increasing production efficiency and reducing losses in the current system, as well as reducing flaring of associated gas volumes,” the Arthur D Little report said.

Meanwhile, the International Energy Agency said in its Gas 2017-2022 report that it expects Iran to account for the largest increase in Middle East production during the next five years, retaining its position as the biggest gas producer in the region even though its exports remain negligible due to a massive domestic consumption.

The region is expected to grow gas production by 1.8 per cent on average, up from around 580 billion cm in 2016 to 650 billion cm at the end of the outlook period of 2022.

Iran is expected to see an average growth of 2.9 per cent per year in gas production, leading to production of almost 225 billion cm by 2022, an increase of 36 billion cm.

Iran has in total an estimate of 4.5 trillion cubic metres of undeveloped gas discoveries, including the undeveloped phases of South Pars, the North Pars and a number of other fields, IEA said.

Volumes of gas for reinjection are expected to rise in the future, the report said, as Iran prioritises increasing oil production in order to maximise revenues as it recovers from the restrictive sanctions and to prevent further declines from its older oilfields.

While exact volumes of reinjected gas are not available, Iran is estimated to have injected 28 billion cm annually for the purpose of secondary oil recovery since 2010.

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