Iran: Controlled access

06 December 2004
Domestic and international political issues are hindering progress in Iran's oil and gas sector, despite some recent developments on specific projects and a successful energy courtship with India and China. The projects that most need to overcome these obstacles lie in the gas sector - the development of South Pars 15-16 and the ongoing negotiations for three liquefied natural gas (LNG) projects.

The political concerns can be divided into two: the difficulty of awarding big contracts in the run-up to a presidential election; and the fears of international oil companies (IOCs) that new sanctions will be imposed on Iran because of its nuclear programme.

'South Pars 15-16 is an enormous project and the second placed bidder is supposed to enter negotiations on the next phases [17-18] soon,' says a contractor. 'The Oil Ministry might not want to award work worth billions of dollars until it knows who will be in charge next year.'

In any case, Pars Oil & Gas Company (POGC), the client for the project, must steer a difficult course of comparing technical qualifications against prices - a process that bidders have said could take months. National Iranian Oil Company (NIOC) bidding regulations allow some scope for favouring high technical merit where bids are comparable.

Further complicating matters, the hard line taken by the Majlis (parliament) on major contracts recently awarded to two Turkish companies in the aviation and GSM sectors has raised concerns that political issues will block major projects in other sectors. In both cases, some critics alleged that the Islamic Revolutionary Guards Corps (IRGC) wanted to carry out the projects itself. Ghorb Khatem, a subsidiary of the crack military unit, is also bidding on South Pars 15-16.

But the LNG projects are at greater risk from fears of fresh sanctions. Three projects are still being pursued by Western companies, which are reluctant to sign up to agreements worth more than $1,000 million while the possibility of a trade embargo still hangs over Iran. As with the domestic political concerns, the nuclear situation should be much clearer by the middle of 2005, by which time it should be evident whether or not Iran will agree to a permanent end to its uranium enrichment programme.

Tehran is trying to introduce wildcards into the LNG game with the deals it has made with Chinese and Indian firms. Both sets of agreements are big on promises but leave important questions unanswered. The premise of the memoranda of understanding (MoUs) is that Indian Oil Corporation and China's Sinopec will each carry out a major LNG project in return for an upstream stake in the massive Yadavaran oil field.

Both countries represent huge potential LNG export markets for Iran, and with growing hydrocarbon-dependent economies represent the country's two best emerging energy partners. Iran's ambitions to increase oil production capacity to 5 million barrels a day (b/d) in the medium term will also necessitate the upstream involvement of IOCs.

So far so good. But there are problems. Few engineering, procurement and construction (EPC) contractors are capable of carrying out world-class LNG projects. The field is narrowed further by the lack of sanction-bound US companies on the local scene. Those that remain have expressed concern about working on a project in which both the client - National Iranian Gas Export Company (NIGEC) - and the developer or offtaker are new to the field.

Their worries have been partly alleviated by NIGEC's apparent in-principle agreement that they should be paid a bidding fee - perhaps up to $2 million - to cover the huge costs involved in preparing a proposal. But even if this difficulty is overcome, the basic problem will remain that experience is deemed vital on at least one side of an LNG project.

Most analyses have linked the Chinese and In

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