#ImplementationDay – I thank God for this blessing & bow to the greatness of the patient nation of Iran. Congrats on this glorious victory!’ Iran’s President Hassan Rouhani tweeted in celebration late on January 16, as soon as word from Vienna was out that the six world powers — the US, Britain, France, Russia, China and Germany – who had imposed crippling economic sanctions on the Islamic Republic over its controversial nuclear programme, had decided to end it. The nation broke into an emotional jubilation soon after.
Iran’s economy, in particular the oil and gas sector – the breadwinner for the nation – has been the subject of serious restrictions for more than three years, under the international sanctions. Even Iran’s allied nations were coerced by the Western powers to either stop or seriously reduce buying oil and natural gas from it. As a result, the Islamic Republic’s energy revenues plummeted by 36%; from $55.4bn in the last fiscal year to $35.3bn this current fiscal year (Iran’s fiscal year starts on March 21), according to the International Monetary Fund.
A surplus of a million doallrs of oil is being produced each day, something that is widely regarded as the prime cause for the free fall of crude oil prices. A day after the sanctions were lifted, Iran set to work to realise its ambitious plan of raising daily output by 500,000 barrels. The country’s Oil Ministry has already activated this plan, issuing an order to its state-owned companies to increase production and placing the National Iranian Oil Terminals Company on standby.
If achieved, this volume would take Iranian output to around 3.4mn bpd and exports to well over 1.5mn bpd; figures that could further wreak further havoc on the already oversupplied oil market.
“I think we are very concerned about Iran,” Chris Faulkner, chief executive officer of Dallas-based Breitling Energy, said from an American perspective. “The timing of the sanctions being removed is critical. We are hoping that Iran comes back into the market slowly. Iran has pledged to add 500,000 bpd, something that will crush the oil market to their own detriment. We hope they realise that and come into the market slowly,” he told Oil & Gas Middle East.
The lifting of sanctions has removed the constraints that have curbed Iran’s crude oil exports at just over 1mn barrels per day (bpd) over the past four years, and give the country access to billions of dollars frozen in foreign banks – a portion of the money that it desperately needs to develop its below par oil and gas facilities.
However, Iran needs far more than that to repair and boost its ageing and crumbling oil and gas fields and its associated infrastructure, with a recent media report saying the country needs an estimated $150bn in total. For instance, the managing director of Iranian Offshore Oil Co. (IOOC), recently pointed out that the current production rate of its oilfields is about 450,000 bpd and that the company required investment of at least $20bn to implement development projects.
It was optimism injected by the authorities that kept the Iran economy running in its sanctions period, and it is that same optimism that officials are now trying to generate to attract foreign money. A senior Iranian official has estimated that the Islamic Republic will attract $11bn of new investments for its central oilfields, rejecting the notion of low oil prices halting finances in the energy industry.
“In order to achieve the target of increased production during the post-sanctions era, implementation of development projects like increasing recovery factor via EOR and IOR have also been put on the agenda,” Salbali Karimi, managing director of Iran’s Central Oil Fields Company (ICOFC), told the official Mehr News Agency.
Ramping up oil and gas production
Iran’s Petroleum Minister Bijan Zanganeh had further said last year that Iran’s oil output could increase by above 1mn bpd within a month after all the sanctions are lifted. “Some of the most effective sanctions with regards to the oil industry were those that targeted aspects such as sales, volumes, shipment, insurance and the transfer of money,” he said. “If those issues are resolved, Iran will regain the market share that it has lost which amounts to above a million barrels per day.”
One of the main reasons why Iran has been able to sustain a healthy oil output level, even during the peak of the sanctions phase, is its low cost of production per barrel. Ali Asghar Mounesan, managing director of the Kish Free Zone Organisation says Iran has been producing oil at a cost of $10 per barrel, neutralising the impact of the oil price decline. “The Iranian oil production cost is in single-digit figures,” Dave Ernsberger, oil expert at Platts, said during a recent media roundtable in Abu Dhabi, adding that with one of the lowest per barrel costs in the world, the country could get an impetus to achieve its half a million bpd target soon.
“Iran is producing around 2.9mn bpd at present,” Ehsan-Ul-Haq, senior oil market consultant at London-based KBC Energy Economics, told Oil & Gas Middle East. “It is reportedly developing North Azadegan and Yadavaran oilfields at present. CNPC from China is working on the North Azadegan oilfield while Sinopec is helping Iran with the Yadavaran oilfield. At present, both oilfields are producing around 100,000 bpd in total, but output could reach 300,000 bpd by the end of 2016,” he said.
Recoverable crude oil reserves in Iran’s central regions amount to 10bn barrels and an average of 100,000 bpd is currently being produced in the central oilfields. “Moreover, a sum of 7tn cubic metres of recoverable natural gas reserves are deemed to be found in the area,” Karimi said. He pointed to signs of increasing natural gas reserves in the country’s central oilfields, given the discovery of new hydrocarbon fields and formations, adding however that ‘due to the need for management of financial resources and costs, the number of active drilling rigs will decrease from 22 to 12 in the current year’.
There are currently 18 companies with 120 onshore drilling rigs active in different oil and gas regions in Iran. Utilising the 75 onshore and offshore drilling rigs in its possession, the National Iranian Drilling Co. (NIDC) said it has succeeded in drilling 136 oil and gas exploration wells, including a heavy drilling rig that has been placed in the Sohrab oilfield in the operation zone of Arvandan Oil & Gas Production Co.
Speaking of other Iranian oil production facilities, Karimi claimed that phase I of the production and desalting complex in the West Karoun region has got on stream with a capacity of 55,000 bpd. The managing director of Karoun Oil & Gas Production Co. (KOGPC), announced that the oil production capacity of this company is 1.4mn bpd, adding that the output would be raised by 66,000bpd.
The National Iranian South Oil Co. (NISOC), also said that its target to achieve 100.7% of crude oil production had been realised in the first seven months of the current Iranian year. Oil production capacity at Iran’s Masjed Soleyman field is also rising, if state media reports are to be believed.
Among the few offshore fields the Islamic Republic is banking upon is the Doroud oilfield, located on Kharg Island in the northwest of the Arabian Gulf. The operator, IOOC, invited foreign investors for a second time at the Tehran Conference in December, to further boost the oilfield’s output.
Iran, as the world’s 4th biggest producer of natural gas, produced 588mn cubic metres per day last year (mcm/d), estimates suggest. The South Pars gas field, the smaller half of the world’s largest gas reserve, which Iran shares with Qatar (where it is known as the North Dome) contributes to 35% of the country’s gas output.
The South Pars is believed to have 24 phases in total and the country is stepping up efforts to develop it fully by 2017. On January 11, President Rouhani inaugurated phases 15 and 16. Once fully operational, the two will produce daily 56.6mcm of natural gas, 75,000 barrels of condensates, and 1.05mn tonnes of LPG and 1mn tonne of ethane annually, according to the Sana news agency.
Oil minister Zanganeh said other phases were also nearing production. “Development of phases 18 and 17 is near completion. The phases have even started gas production. They are expected to become operational in March or April 2016,” he was cited as saying by Sana.
Completing all phases of the South Pars gas field will bring an annual revenue of $100bn for Iran, Zanganeh stated. By putting all phases of the field into operation, the country’s gas output will reach nearly 700 mcm/d, the minister added. Rokneddin Javadi, the managing director of the National Iranian Oil Company (NIOC), further revealed that the cost of developing phases 15 and 16 could be put at around $5.5bn, but would earn Iran somewhere in the region of $20mn a day.
With regards to the other gas fields, the NIOC has decided to press ahead with the Phase I development of its Kish gas project, as it had already invested $700mn in the project. Iran also claimed that production of LPG at its gas refineries exceeded over 2mn tonnes within the first nine months of current (Iranian) year, a 47% increase compared to the same period last year.
Karimi of ICOFC has also said that Iran is presently producing around 1.1mcm/d of gas from the Gonbadli gas field it shares with Turkmenistan; an output figure it would like to maintain.
Exports growing steadily
Iran’s oil revenue formed 36.8% of its budget for this fiscal year, and this share will decline to 25% next year, reports suggest, prompting the nation to work towards winning back its export markets to earn crucial income energy income. “Iran would like to boost its market share but it is not going to be an easy task. However, it can offer better terms to win its old customer base back. Iran is likely to face fierce competition not only from Saudi Arabia but also Iraq, with the latter intent on boosting its production significantly,” Haq said.
Iran has found in India a great ally, which supported the former during the sanctions period by continuing to buy oil, albeit in lower amounts. The Islamic Republic supplied 6.5mn tonnes of crude oil to India in H1 2015, numbers which the Asian giant has promised to raise this year. “Iran offers 90-day credit and free shipping, which makes Iranian crude attractive for Indian refiners,” Hellenic Shipping News quoted an official at the India-Iran Joint Commission as saying.
Iran says it has exported 1.25bn litres of gasoline in the first nine months of the Iranian year to its neighbouring nations like Afghanistan, Armenia, Iraq and Pakistan, while the rest was shipped to Southeast Asian markets. Iran’s gasoline export to Afghanistan hit 133mn litres. Afghanistan has also expressed willingness to import 1mn metric tonnes per annum of gasoline from Iran, Zanganeh said. Iran is currently exporting 200,000 metric tonnes of gasoline to Afghanistan, which is also seeking 200,000 metric tonnes of LPG for which the price has to be settled, he has said.
Looking for partners
Iran is hoping that fresh investments and technology can reinvigorate its oil and gas sector that has struggled thus far during the sanctions years, as IOCs pulled out of key development projects. The Islamic Republic is welcoming every nation with which it shares diplomatic ties, from Asian giants like China, India and Japan to European states, as well as traditional ally Russia.
Iran may hold a new tender for the development of its Farzad-B gas field, having recoverable reserves of 12.8tn cubic feet of gas, if it fails to finalise a previously signed deal with India, according to the NIOC’s Javadi. India has however initiated a diplomatic push to ensure its hold in Farzad-B to avoid retendering for its Gulf asset.
“Although Iran has sought Chinese and Russian help to boost it oil and gas production, it needs western know-how. Therefore, it has to attract investment from France, Italy, the UK and other key western countries to boost its oil production,” Haq said.
The European Union members, too, have shown keen interest to enter Iran. Representatives of IOCs and EPC contractors, and trade delegations from Germany, Italy, Denmark, Slovenia, and the UK have visited Tehran in recent months, including participating in local trade fairs. Iran’s Oil Ministry said its investor event in Tehran in November attracted 137 foreign companies from large European and Asian IOCs to engineering contractors.
“I expect the French, Italian, Chinese, Japanese companies to be the early birds,” Ernsberger told Oil & Gas Middle East at the Platts roundtable in Abu Dhabi. “I think Total can be one of the first ones to enter Iran. They have a long history of working there before the sanctions,” he said, although Total CEO Patrick Pouyanne has so far appeared to be pessimistic about the idea. Experts at the Platts roundtable, including Ernsberger however said that at the last investor conference in Tehran, things didn’t too well for interested Western companies, as they were given contracts with no figures and clarity. Iran is now looking up to the London conference late in February to make another attempt to attract other major investments, they said.
“I think US companies will be the very last to get into Iran,” Ernsberger further said.
Faulkner agreed saying, “I have noticed that Iran hasn’t been welcoming American companies to come and invest in its post-sanctions era. However they cannot do without companies like Oxy and Chevron, can they? I don’t really think they can do without us (US technologies and companies).”
“I think there can be some back-door discussions between them and US firms,” he believes.
Common sentiment from energy analysts is that the ongoing sectarian and diplomatic tension between OPEC partners Saudi Arabia and Iran is waning and thus will have no significant impact on oil prices, although the fierce competition between the two oil producers to produce more crude than the other and capture and control markets will continue in the foreseeable future.
“I don’t think further escalation of the Saudi-Iran tension is possible. But I think it goes further to the fact that there is absolutely no chance that Saudi Arabia will assess a reduction in its output, as that will essentially mean helping Iran,” Faulkner said. “Half a million barrels coming into the market (from Iran) is not really such a good thing, especially in a market that is already oversupplied by a million barrels each day.”
