Iran’s oil sector is like an ageing wrestler who could still surprise opponents with a show of strength. With this essential industry currently flat on its back, President Hassan Rouhani’s team has to find a way to get their champion back on its feet. Meanwhile, international oil companies are looking on from [...]]]>
Iran’s oil sector is like an ageing wrestler who could still surprise opponents with a show of strength. With this essential industry currently flat on its back, President Hassan Rouhani’s team has to find a way to get their champion back on its feet. Meanwhile, international oil companies are looking on from the sidelines, and whispering some encouragement.
Iran’s revival would have a significant impact on global oil markets — and, in the longer term, on gas. Oil minister Bijan Zanganeh has predicted exports of 1.4 million barrels per day (bpd) this year, up from 1.15 million bpd in 2013.
Recent reports have indicated that Russia would swap equipment and goods for up to 500,000 barrels per day of Iranian oil, and that Chinese state trader Zhuhai Zhenrong was negotiating for a new contract to purchase condensate (extra-light oil). China currently accounts for about half of Iran’s reduced volume of exports. Although cracks may be appearing in the sanctions edifice, a full and rapid recovery will require the removal of sanctions, not just loopholes.
In such an eventuality, there will have been some permanent loss of capacity because of lack of investment but a re-emergent that Iran might be able to produce around 3.6 million barrels per day, compared to over 4 million bpd in 2010. This would equate to some 1.9 million bpd of exports, almost double current levels. With the US’s Energy Information Administration forecasting the call on OPEC to fall by 0.5 million bpd in 2014, and Iraq likely to grow by 0.3-0.5 million bpd, other OPEC members — notably Saudi Arabia — would have to cut back significantly.
Technically speaking, Iranian oil production might return much quicker than most observers expect. If the fields were shut down in an orderly manner — and the Iranians had plenty of warning — there is no reason why the closure should have permanently damaged them. Quite the opposite: a period of reduced production from some of the old fields may have allowed pressure to recover and more oil to drain into layers from where it can be recovered.
But the process of unpicking the multi-layered sanctions — US, EU and UN — will be lengthy and complicated. Different sanctions cover financial transactions, access by Iran to its overseas funds, trade in precious metals and petrochemicals, investment in the Iranian oil industry, the supply of refined products, the provision of technology, shipping and insurance, imports of Iranian oil by the US or EU, and dealings with numerous designated entities. Some of these sanctions date back well before the current nuclear crisis, and are predicated on support for terrorism or human rights violations.
So even a comprehensive deal over the nuclear program will not remove all sanctions, and certainly not all at once. President Barack Obama may have considerable discretion to waive the application of some sanctions, but it would be disconcerting for long-term buyers to know that a change in the political winds might again cut off Iranian oil at short notice.
To get much beyond 3.6 million bpd of oil output, and to continue the expansion in gas required to meet domestic demand and some ambitious export plans, the industry requires a comprehensive overhaul. Lists released so far seem more of a miscellany of favoured projects, with no clear prioritisation. Given other calls on the government’s budget, in a post-sanctions phase of economic recovery, external financing is likely to be required. Even more than that, international technology and expertise will be key.
With more than a hundred announced projects, the organisational capacity of the National Iranian Oil Company (NIOC) will be tested to the limit, after a long period of brain drain, underinvestment and politicisation. As the experience of Iraq shows — admittedly under less favourable circumstances — effective delivery of multiple megaprojects in collaboration with international oil companies can drag if the state company and ministry lack capability.
Stated priorities include the development of shared fields with Iran’s neighbours – Iraq, Kuwait, Saudi Arabia, Qatar and the UAE – to avoid hydrocarbons being drained across the international border. It has even been suggested that production-sharing contracts might be offered for such fields – which the international industry prefers to the ‘buybacks’ offered by Iran in the late 1990s, and the technical service contracts used in Iraq.
Iran’s production plans hinge particularly on a few large projects — the Azadegan and Yadavaran oil fields near the Iraqi border, which could produce 900 000 barrels per day; the completion of Phases 12, 15 and 16 of the giant South Pars field; and the Kish and Salman gas fields in the southern Persian Gulf, with potential output of 2.7 billion cubic feet per day, almost a fifth of Iran’s current production.
Salman is a cross-border field with the UAE, and its gas was intended to go to the Emirate of Sharjah, but the deal fell apart over allegations of corruption, under-pricing and Iranian failure to complete infrastructure. Kish has for some years been targeted for export to Oman, which has played a quiet but critical role in behind-the-scenes nuclear diplomacy. Qatar, with whom Iran shares South Pars (Qatar’s North Field), recently offered technical assistance on the field.
But NIOC also needs to consider how to sustain and revive output from its mature fields, including managing massive gas reinjection projects that will take years to show results. At the same time, it needs to explore for new fields with the modern technology and geological concepts that have been so successful just over the border in Iraqi Kurdistan.
Iran has long been working with Chinese companies on Azadegan, Yadavaran, and the Iran LNG (liquefied natural gas) project, part of South Pars. But it has become frustrated by what it sees as their low technical competence and foot-dragging over full-scale investments. Western companies are back in favour. Firms such as ENI and Shell have already, with surprising alacrity, held some discussions with Mr. Zanganeh. During an initial phase of sanctions removal, international companies may seek short-term technical assistance deals — building goodwill and positioning themselves, without making major commitments until they can judge to which side the political tussles, internal and external, incline.
International companies — mostly Western, but also including firms such as Malaysia’s Petronas — bring skills in megaprojects, managing mature fields, and exploration. But Iran should think not only in terms of attracting industry titans — it has plenty of smaller fields where nimble newcomers and private Iranian companies can perform better.
With such assistance, the champion can still return to the fray at something like its former strength. Increased oil output challenges Iran’s Arab neighbours, while gas exports allow it to build ties with the UAE and Oman, as well as with Iraq, Turkey and Pakistan. That will be essential for President Rouhani’s administration, giving his team the muscle to revive the economy. Recapture of the commanding heights of the oil industry and its finances — plundered and obscured under President Mahmoud Ahmadinejad — is essential in the country’s byzantine factional contests. As usual, this slippery liquid is the way to keep a firm grip on the economy and body politic.
Photo: Iran’s Oil Minister, Bijan Zanganeh
]]>by Robin M. Mills
Iran’s new oil minister, Bijan Zanganeh, cancelled plans to attend September’s United Nations meeting in New York. But the much-heralded thaw in US-Iranian relations has led to a remarkably quick revival in Western oil companies’ interest.
At least one large European firm is already rumoured to be looking [...]]]>
by Robin M. Mills
Iran’s new oil minister, Bijan Zanganeh, cancelled plans to attend September’s United Nations meeting in New York. But the much-heralded thaw in US-Iranian relations has led to a remarkably quick revival in Western oil companies’ interest.
At least one large European firm is already rumoured to be looking at re-opening its Tehran office, and “There is no embargo on talks,” one European oil executive told Reuters.
The oil companies’ memories may be short. In the late 1990s, beset by low oil prices and outmoded technology, Iran sought to sidestep constitutional restrictions on foreign investment to bring in international oil companies (IOCs).
Under Zanganeh’s first tenure as oil minister, from 1997-2005, France’s Total, Anglo-Dutch Shell, Norway’s Statoil, ENI of Italy, Spain’s Repsol, Petronas from Malaysia, Gazprom from Russia and others came in to work on major oil fields, conduct new exploration, and develop South Pars, Iran’s sector of the world’s largest gas field, which it shares with Qatar.
But the biggest prize was lost when US corporation Conoco had to withdraw from a $1 billion deal to develop the Sirri offshore fields after being blocked by president Bill Clinton’s executive order. Total stepped in instead, and a chance of US-Iranian engagement was forfeited.
The international companies did not find the going easy. The Iranian constitution was interpreted as banning foreign ownership of hydrocarbon reserves or even a contractual right to a portion of oil and gas a company extracted — the “production sharing contract” (PSC) used by Qatar and many other major producers.
Instead, Iran devised its own formula, the “buyback”, where the contracting company committed to delivering a set development plan for a fixed price, receiving a defined profit margin, and then handing over the field to the National Iranian Oil Company (NIOC).
A more lose-lose formula could hardly have been devised. According to those terms, the international company assumed all the risks of cost overruns and technical problems without any share of a potential upside from larger reserves or higher prices. The Iranians meanwhile missed out on a transfer of skills and a chance to optimise development or operations as the international operator learnt more about each field’s geology. Each contract took years to negotiate, trying the patience of IOCs who saw more attractive opportunities elsewhere as oil prices recovered.
The buybacks were attacked on nationalist grounds, and Zanganeh and his associates were accused of corruption. Their quasi-privatisation of parts of the oil industry into companies such as PetroPars and PetroIran — in fact controlled by government organs — was problematic. Nevertheless, oil production increased from 3.8 to 4.2 million barrels per day, and gas output more than doubled. Iran developed a substantial, if rather expensive, domestic oil engineering capability.
But under the Ahmadinejad administration — amid an increasingly politicised oil ministry and NIOC, a hostile Majles, and ever-tighter international and US sanctions — progress ground to a halt. In 2010, Shell halted new business development in Iran and finally gave up on its “Persian LNG” (liquefied natural gas) joint venture with Repsol. Some other oil companies, particularly Chinese ones, continued operations at a low level but did not make major new commitments.
If Western oil companies are to return to Iran, the prerequisite will be a relaxation of many of the US and EU sanctions on oil trade, investments in the energy sector and financial transactions. The Europeans, at least, could operate with some continuation of the much milder sanctions of the early 2000s, which mostly affect technology transfers. But to make large investments, these companies would have to be confident that harsh sanctions would be unlikely to return.
Just as importantly, IOCs would have to be confident that contractual terms will be reasonably attractive and balanced. They will want to negotiate contracts within reasonable time frames.
The competitive landscape for Iran is much tougher than during its last opening. Lucrative — albeit high-cost — investment opportunities have sprung up in North American shale oil and gas. Next-door Iraq also offers access to giant, low-cost fields — though on tough terms and with serious political and security risks. The sector of the Zagros Mountains in the Kurdistan region of Iraq shows just how successful modern exploration techniques can be. And the gas market is much more crowded, with the US, East Africa and Australia all seeking to rival Qatar as global LNG giants.
Zanganeh’s deputy, Mehdi Hosseini, is well-known to Western IOCs. But he has praised Iraq’s service contracts, which will not excite them. Production sharing contracts seem still to be off the table, for now — though there was talk earlier this year about using them for an Indian consortium’s offshore field.
More feasible would be a contractual form that mimics the financial returns from a PSC while honouring nationalist sensitivities. IOCs would like to be able to book reserves but can manage without this if profits are sufficient. The key is to give international companies a long-term stake in fields that encourages them to bring their best technology, maximise recovery in Iran’s mature oil-fields and explore new prospects. In gas, Iran can use the commercial skills of IOCs to develop exports to its neighbours, which will re-integrate it into the regional and global economy.
If the political stars align, the return of Western IOCs to Iran can bring them benefits while also benefiting Iran and the global economy. Zanganeh and his team have learnt lessons from their successes and failures in the early 2000s. But domestic realities on both sides may mean it’s a long time before ExxonMobil and Chevron are drilling just over the border from their Iraqi operations.
– Robin M. Mills is Head of Consulting at Manaar Energy and author of The Myth of the Oil Crisis and Capturing Carbon. Email him or follow him on Twitter.
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