IRAN's oil and gas sector has in many ways been dominated in the late 1990s by one project: development of the South Pars gas field, offshore in the Gulf. Nearly one-half of recent foreign investment in the industry has gone into the South Pars project, producing some of the most sought- after sub-contracting work.

South Pars is the Iranian sector of the world's biggest gas structure, which, in the Qatari sector, is known as the North Field. The structure was delineated by the National Iranian Oil Company (NIOC) only a decade ago, and planners have been pressing for early development so as to keep pace with Qatar's exploitation of the shared reserves.

Iranian offshore gas plans in the 1980s centred on the nearby North Pars reserves. But when exploratory drilling by NIOC and a consortium led by TPL and Saipem of Italy revealed the size of the Iranian portion of the South Pars/North Field structure, North Pars was put on the back burner. Not only was NIOC concerned about losing reserves to Qatar, but the high condensate content at South Pars meant that it would be easier to obtain foreign financing.

Most of the South Pars/North Field reserves are on the Qatari side, with Iran's share initially put at less than one-quarter of the total. Iranian reserve estimates have since been trebled to about 8 million million cubic metres - giving Iran nearly as much in reserves as Qatar.

South Pars accounts for about one-third of the country's overall gas reserves of 25 million million cubic metres - a figure which strengthens Iran's claim to be sitting on the second biggest gas reserves in the world after Russia.

South Pars gas contains large quantities of condensate - totalling about 3,000 million barrels. There are also significant crude oil reserves at a depth of 1,200-1,400 metres which would allow a daily production of 100,000 barrels. When and if both the oil and gas reserves are fully developed, the liquid output would rise to more than 1 million barrels a day (b/d).

The South Pars reserves are being developed in 25 phases over an equal number of years. Each phase would produce nearly 35 million cubic metres a day of gas and 40,000 b/d of condensate.

On schedule

Somewhat belatedly, NIOC tendered a 25-year strategic study in 1999, receiving technical bids from 12 oil and gas companies in September. Commercial bids will be invited later in the year. The study should not radically affect the schedule for the first eight development phases - although tenders for phases four to eight may be modified.

Work on the first three phases is generally on schedule. Phase one is the responsibility of Petro Pars, a Virgin Island-based subsidiary of NIOC, which took over a $1,000 million contract awarded to another NIOC subsidiary in 1994. The then John Brown Engineers & Constructors of the UK provided basic engineering.

Petro Pars, like its unsuccessful predecessor, was slow off the mark but, having secured a $350 million financing line from Credit Agricole Indosuez, (arranged through another NIOC subsidiary: Jersey-registered Nafte Iran Intertrading Company), it has been moving fast in 1999 to catch up. Petro Pars has completed most of the subcontracting, leaving mainly the undersea pipeline bids still undecided in late 1999 (see box).

The second and third phases of South Pars are being developed in one $2,000 million contract awarded to a consortium led by France's Total in 1997. Work on these phases is on schedule and the drilling of wells started in February 1999. All sub-contracting work has been awarded by the consortium.

Phases four and five have been under negotiation for some time with two leading bidders: a consortium led by Shell and including BG, Gaz de France and Petronas, competing against Russia's state gas monopoly Gazprom.

But negotiations have been problematic because the gas from these phases is for export and the hopeful investors would prefer a formula that would include the gas export portion. A pipeline plan for Pakistan was being studied by Shell and BHP Petroleum of Australia, but political problems and reported gas finds in Pakistan this year have caused the plan to be shelved temporarily.

The alternative of gas exports to Turkey faces a different set of problems - most seriously, US political opposition. The prospects may not be as bleak as feared, given that Iran and Turkey have gone ahead and built sections of a proposed supply pipeline, and that Iran has also started work on a third trunkline. Completion of these pipeline schemes may thus take little time when and if all sides agree to go ahead with the South Pars project. Nevertheless, any foreign investor would probably like greater assurance of direct access to the Turkish market.

BG has separately proposed a liquefied natural gas (LNG) plant, with an annual capacity of 6 million tonnes, on the nearby island of Kish. But it is unclear how this would fit in with the Shell consortium's export requirements; and would, in any case, take a long time to negotiate and set up.

Next phases

The sixth, seventh and eighth phases of South Pars were tendered in mid- 1999, and are intended to provide gas for re-injection into depleted oil fields on the mainland. Many firms, including Petronas and Elf Aquitaine of France, have submitted bids, although enthusiasm is said to be tempered by the absence of an export option. Nevertheless, these phases should also lend themselves to easy financing thanks to the availability of 120,000 b/d of condensate for export. This is the same formula which applies to phases one-three, which have no natural gas export option.

The South Pars hydrocarbons structure is enriched by the presence of significant crude deposits. NIOC subsidiary Oil & Gas Pars Company, which tendered the so-called South Pars Oil project in early 1999, says it expects to select the winning bid before the end of the year. The list of bidders includes Shell, Total and Maersk of Denmark.

The first production from the gas structure should flow, more or less as scheduled, in 2001. Beyond the first three phases of South Pars, however, there may be slippages because of investors' search for higher profit margins and the complexities of Iran's international relations. Also awaited will be the results of the 25-year strategic study, probably in 2000.