Shell, Repsol, and other foreign companies are coming under renewed Iranian pressure to start development work on the giant offshore South Pars reservoir, or face being evicted from their projects in favour of domestic companies—despite the latter’s limited technical capabilities.
IHS Global Insight Middle East Energy analyst Samuel Ciszuk provides an update on upstream developemnts in Iran.
Significance
Shell and Repsol are reported to have received a two-week ultimatum to commit to the development of upstream phases 13-14 and the integrated Persian LNG project sometime last week, although this is far from the first time Iran has tried to force the companies to start investments.
Implications
There is a renewed push in Iran to make foreign companies start work or leave their contracts. Iranian companies are looking increasingly likely to take over many of the foreign-awarded deals, although their lack of technical capabilities will mean lower resulting production capacities and—in the case of gas—the rerouting of the output to the domestic market, since exports will be impossible.
Outlook
Foreign companies have stalled on Iranian upstream and downstream projects for years, but as Iran’s domestic needs rise, many might finally face eviction for their non-performance as the export deals are scrapped, with the Chinese companies likely to remain as they still bring political benefits and at least some limited investment.
Analysis: Two-Week Notice
Oil Minister Massoud Mir-Kazemi told Iran’s Mehr news agency on Saturday (8 May) that foreign companies that had “dragged their feet for years” would be replaced by domestic firms on the giant South Pars gas field development. Another official requesting anonymity told Reuters that Shell and partner Repsol had been given a deadline some time late last month to commit financially to the integrated Persian LNG project within a few weeks. Speaking to Agence France-Presse (AFP), Reza Kasaizadeh, managing director of the National Iranian Gas Export Company (NIGEC) today said that “the oil ministry has issued an ultimatum to Shell and Repsol and they are expected to make a decision about phases 13 and 14 of South Pars in two weeks’ time”, adding that “if they don’t act promptly, we will hand over these two phases to capable Iranian firms”.
Iran has tried previously to force foreign investors—including Shell and Repsol—to pay up and launch development at some of its key projects, to little avail. Unilateral U.S. financial sanctions, possible further UN sanctions, and political pressure from the United States and the European Union (EU) to desist from Iranian deals have been successful in reducing almost all international companies’ appetite for committing to long-term upstream and downstream projects in the Islamic Republic. Shell and Repsol have hitherto managed to dodge all Iranian deadlines so far—unlike their French peer Total—mainly by continuing to conduct engineering studies and surveys and maintaining some semblance of progress on their Iranian projects, all the while being careful to maintain that their investment did not exceed the US$20 million per year above which U.S. Iran sanctions kick in.
The Export Rethink
Still, Iran has gradually become more and more restless, with its domestic gas demand growing relentlessly and eating into the gas volumes previously earmarked for export. This puts Shell and Repsol in an even more tenuous situation, though with no solution in sight to the Iranian nuclear disagreement, and tighter sanctions—or at least deeper political and economic isolation—looming, their inclination to pursue South Pars is also likely to have weakened.
Iran has hitherto refrained from punishing or evicting Shell and Repsol in the hope of reviving the LNG export dream. With domestic demand continuing to spiral, driven by highly subsidised domestic prices and a rapid increase in the use of gas for oilfield reservoir reinjection (due to old and inefficient domestic technologies), exports look less achievable, but Iran needs to continue developing its South Pars reservoir, which straddles the Iranian/Qatari border, in order to balance production on the Qatari side, known as the North Field. While Iran seems unable to develop export ventures, its companies can develop offshore gas for domestic consumption, although they will still struggle to raise the capital and technology in the timeframes planned and the volumes required. While being overall upbeat on what Iranian companies could achieve, Mir-Kazemi told Mehr that “we are currently facing a liquidity shortage for the implementation of various projects”.
The Technology Gap
Shell and Repsol have been holding off on a final investment decision (FID) for the upstream development of Phases 13-14 on the South Pars field and the construction of an integrated 14-million-t/y LNG venture within the Persian LNG scheme. The gas production capacity target was 2.8 bcf/d, significantly more than the 2 bcf/d (1 bcf/d per phase) planned by the Iranians and dependent on Shell and Repsol’s technical prowess. Indeed, several of the early South Pars phases developed by foreign companies were able to achieve production capacities almost 30% higher than planned, something which the Iranian companies have been unable to replicate on the phases developed without foreign technological assistance.
More dramatically, Iran still lacks any supplier of the long-coveted LNG technology for the venture it has been pursuing without foreign assistance, known as Iran LNG. International sanctions mean that no company from the small group of international engineering specialists and supermajors that have the required technological expertise has been able to sell it to Iran, while the few companies that are still signing the occasional contract (or, more often, non-binding memoranda of understanding, MoUs) have not mastered the technology either. This has been most visible in the events surrounding the expulsion of French supermajor Total from its operator position at the Pars LNG integrated project as punishment for not committing investments to the project last year. Its upstream stake was handed to China’s CNPC, though it was formally allowed to remain in the downstream LNG part of the venture. This makes little sense for Total from an economic point of view given already tight Iranian margins, but CNPC has never been involved in the construction of a liquefaction plant and sanctions are as problematic as for any other company in importing the technology from elsewhere. From the Iranians’ perspective, allowing Total to remain in the LNG component at least keeps alive some hope of reviving the project in the future. The Chinese companies have also been careful not to commit to too much, given that they too are international market actors and could face problems on the financial markets, although CNPC in particular seems to be moving ahead with the onshore Yadavaran project for the moment, perhaps to test the overall risk.
Outlook and Implications
Shell and Repsol might come under definitive pressure from Iran to commit to the project over the coming weeks, as the country has less inclination to wait for the LNG projects to begin and has accepted that it will be better to concentrate on developing domestic supply projects. In the past Iran talked about swapping the venture’s current upstream phases for later ones, but by now even the last South Pars phases are being eyed for rapid domestic development. The Iranians know it will take time and output will be lower than initially hoped, so the Oil Ministry is more likely to bite the bullet and leaving possible LNG for later, when other gas fields such as North Pars or Kish are being developed.
Risks Hard to Gauge
To add to foreign company hardships, the fact that Iran is increasingly awarding projects to domestic companies will make it even harder for its remaining project partners—as well as trading partners—to assess with whom they are doing business. As IHS Global Insight has written in the past, individuals and companies tied to the extended Revolutionary Guards network have taken over more and more of the Iranian oil industry service sector and engineering companies, and have extended their influence throughout the sector. Given the already opaque business environment, this renders even more difficult the possibility of identifying whether a foreign company is engaging in economic contacts with an outfit tied in some way to an organisation blacklisted in the United States. This is going to further undermine foreign company investment in Iran, especially as the privatisation programme gets under way and networks close to the ruling elite are cashing in, in the absence of other Iranian and foreign investors.
About the author: Samuel Ciszuk is IHS Global Insight’s Middle East Energy analyst.
