Projects stall as sanctions bite Iran

31 October 2012

International sanctions aimed at blocking the flow of capital and technology are making it harder for Tehran to arrest the production decline rate of its oil and gas fields

International sanctions have choked off most of the avenues for delivering Iran’s crude to market, although some Asian customers are continuing to import oil from Tehran. For an economy that is still 90 per cent dependent on hydrocarbons for generating foreign currency earnings, guile and subterfuge have become unofficial instruments of policy.

For example, MEED understands that international crude buyers have been approached in recent weeks with the offer of Iraqi Basra light crude, whose specifications bear remarkable similarities to Iranian grades.

But Iran’s upstream problems go back much further than the latest round of international sanctions. Investment in the oil sector has decreased significantly in the past two to three years, mainly due to the imposition of sanctions targeting dual-use items such as drilling parts. The restrictions on accessing finance have exacerbated the problem.

Oil output falls

Steadily starved of equipment and expertise, National Iranian Oil Company (NIOC) has been forced to make a virtue of necessity. Having put pressure on foreign joint venture partners such as China National Petroleum Corporation (CNPC), it has handed contracts to local firms once it became clear that no amount of arm twisting would elicit the required action. Tehran accuses CNPC of failing to meet agreed increases at the South Pars phase 11 gas project.

“What you are seeing is not so much the lack of money, but the lack of technology and the loss of international partnerships have had a major effect on Iranian output. That goes for both oil and gas,” says a former Iranian government official.

For the moment, the authorities appear to be in denial about the slowdown in the upstream sector. Oil minister Rostam Ghasemi maintains that no fields are shut, despite Paris-based International Energy Agency’s report that Iranian crude exports fell to a new low of 860,000 barrels a day (b/d) in September, compared with 2.2 million b/d at the end of 2011. The official line is that all this production is being used domestically.

According to deputy oil minister Mohsen Khojastehmehr, Tehran is still intent on increasing oil production capacity to 5.6 million b/d over the long term, compared with around 4 million b/d today.

Other officials are talking up plans to boost exploration and production activities, for example, extending exploration into the central region of Iran and the South Khorasan and North Khorasan provinces in the northeast of the country. Drilling operations that started in 2011 in six oil and gas fields, including Khayyam, Farzad A and Delavaran, have continued this year.

The lack of technology and international partnerships has had a major effect on Iranian output

Former government official

About $14bn has reportedly been allocated by the National Development Fund (NDF) for NIOC and its subsidiaries for oil and gas developments. Somewhat optimistically, NIOC had wanted to tap foreign investment to support its fifth development plan, from 2009-14, for development and exploration activities, with a projected total spend of $155bn.

Sanctions hit Iran

Little of that has been forthcoming and the reality is that sanctions are affecting exploration and production efforts.

“In the long term, sanctions will significantly affect Iran’s production performance,” Singapore-based consultancy FG Energy noted in a recent report, leaving a country with the world’s fourth largest oil reserves in a state of terminal decline.

The number of international oil companies that have pulled out of the upstream sector has increased and is no longer confined to the large Western oil majors such as Total, Shell and Statoil. It now includes the Asian players that were considered more bankable partners by Tehran: Malaysia’s Petronas and Amona, Indian Oil Corporation and Oil India, Japan’s Inpex and, most recently, CNPC.

The equipment restrictions are proving as problematic for international partners as concerns about running foul of US sanctions. CNPC, for example, failed to progress on an oil field development at Masjid Soleiman due to a failure to acquire mission-critical well pumps. NIOC is being forced to rely on technology that simply is not up to the job, with pipelines frequently rupturing and refineries repeatedly catching fire.

Even those foreign partners still present in the country are not doing much to advance exploration and production projects. India’s ONGC Videsh submitted a draft masterplan for the Farzad-B gas field in the Gulf to Iranian Offshore Oil Company in 2009, targeting peak production capacity of 1.1 billion cubic feet a day (cf/d). But the Indian company has persistently refused NOC’s overtures to sign a formal field development contract. With significant capital expenditure needed to bring Farzad-B on stream, the Indians are concerned that a deeper engagement in Iran’s upstream sector could leave it exposed to US sanctions and hamper the company’s investment plans outside the Islamic Republic.

“The Chinese and Indian operators have not met their contractual commitments. After signing the deals, they started bargaining with NIOC to improve their rates,” says Houman Dolatshahi, deputy managing director at Tehran-based Atieh Bahar Consulting.

“This means that major oil field developments such as North and South Azadegan as well as Yadaveran have seen no significant progress. Some projects have been delayed, some are still being negotiated with NIOC to speed them up, but so far nothing major is happening in the oil sector.”

State of limbo

The state of limbo is deeply irritating for Iranian officials and yet their repeated threats of punitive action against offenders lack the authority they would once have had in the pre-sanctions era. Kicking foreign partners out is no real punishment in a country where importing field development equipment is such a challenge.

In this climate, long-term planning – never the strength of Iran’s hydrocarbons industry – has become all but impossible.

The picture on the ground is one of disarray, with little sense of a coherent plan by NIOC to sustain production capacity.

MEED understands that Iranian oil companies and contractors have complained that the cost of spare parts and equipment have tripled within the past three months, leaving companies at breaking point. They have requested the government provide them with hard currency in order to help them to cope with the effects of equipment inflation.

Adding to the problem is sector mismanagement, with mid-level managers under pressure to deliver projects faster than is technically feasible. Few are prepared to take responsibility when things go wrong, as they invariably do. The desperation to keep pumping means that some wells risk being damaged in the long term. Iran’s oil sector is suffering more than the gas sector, despite the delays encountered at several stages of the multi-phase South Pars gas scheme.

The oil situation is more complex than for gas because of ageing fields and high decline rates, estimated at between 8-11 per cent a year. “The decline rate could be about 300,000 barrels a year and they need to drill more wells to maintain existing capacity. The amount of new oil they can bring to the market is much lower than the decline volumes,” says Siamak Adibi, an analyst at FG Energy.

Without a decisive turnaround in Iran’s international isolation, Adibi says the country is likely to see production capacity fall below 3 million b/d by 2015.

The smaller oil field projects under development include Changuleh in the west. The oil structure explored by Norway’s Statoil and Russia’s Lukoil was awarded in February 2012 to the local Dana Oil Company, which is targeting development of 65,000 b/d at a cost of more than $1bn. Changuleh, Azar and two smaller structures were estimated to contain at least 500 million barrels of recoverable crude.

Initial development at Changuleh was carried out by the joint venture partners, but failure to meet stated commitments resulted in them being replaced by Iranian contractors, who are now in the initial stages of drilling appraisal wells. Other smaller oil projects include the Cheshmeh Khosh, Sarvestan and Sadat Abad fields located in the central region, which are in the final stages of development and due to start production by the end of the current Persian calendar year in March 2013. They are being led by Iranian Central Oil Fields Company.

“These are small projects to add about 220,000 b/d of production, but at some of the major strategic fields there is no significant progress to report. Yes, things are moving, but very slowly,” says Dolatshahi.

Yadaveran, developed by China’s Sinopec, is pumping 90,000 barrels b/d, but the full target capacity of 180,000 b/d may be difficult to achieve.

On the gas side, local players are maintaining activities at the giant South Pars development, which accounts for more than 70 per cent of the country’s gas sector. The focus on gas reflects the strategic nature of the sector, since the majority of Iran’s production is used domestically. 

South Pars delays

Of the 24 phases at South Pars, only 10 are in full operation and actual production is much lower than the nameplate capacity of about 10 billion cf/d and 400,000 b/d of condensate. So far, gas production at its maximum is nearer 9 billion cf/d, Iranian officials report.  Some phases at South Pars are experiencing delays of more than four years and still others in excess of seven years.

The biggest delays are at phases 13 and 14, 19, and 20-25. However, other phases dating back several years, such as 12 and 15-18, are in a better position. Progress in these phases is more than 50-70 per cent, says Adibi. Phase 12, overseen by Iran’s Petropars, is aimed at producing 3 billion cf/d of gas and 120,000 b/d of condensate, and is due for completion before the end of the Persian calendar year.

The biggest blow this year was the withdrawal of CNPC from phase 11. The project was due to deliver 2 billion cf/d of gas, but is unlikely to meet its schedule now that it has been handed to local contractors to develop.

In the end, NIOC will doubtless be grateful for any increments of gas that come on stream in these troubled times for the Islamic Republic. Officials though are keenly aware that handing projects relinquished by international oil majors to local players will yield limited returns in terms of meeting Iran’s capacity targets.

Although some Iranian contractors have made adept use of their ties with mainly Asian partners to bring in technology and can carry out projects under the supervision of foreign companies to ensure the job is done properly, this can only represent at best a temporary solution.

Without a change in the political situation, Iran is facing the long-term deterioration of its oil assets and the stunting of the enormous potential of its still largely untapped natural gas reserves. 

Key fact

Iran’s crude exports fell to a new low of 860,000 barrels a day in September

Source: IEA

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