The most important energy project in Iran

22 September 2015

Special Report Contents

  • South Pars field development is the most important energy project in Iran
  • The offshore field accounts for 40 per cent of Iran’s gas reserves
  • Iran’s South Pars asset contains in-place gas reserves estimated to be 500 trillion cubic feet

The fortunes of both Iran and Qatar were changed when the largest gas field in the world was discovered in the Gulf in 1990, straddling the border between the two countries.

The South Pars field or North Dome field, as it is known in Iran and Qatar respectively, propelled Qatar’s well-documented transformation into a leading liquefied natural gas (LNG) exporter and one of the richest countries in the world.

For Iran, the discovery added to the country’s already world-scale gas reserves, but the Islamic Republic has struggled to develop its side of the field to its full potential. 

The suspension of international sanctions against the Iranian economy set for 2016 will bring the significance of the field into focus, as investment and technology from overseas will provide Tehran with more options to exploit the gas asset.

The South Pars field development is the most important energy project in Iran, both in terms of size and the strategic value to the country.

The offshore field accounts for 40 per cent of Iran’s gas reserves and an estimated 40 per cent of the country’s total gas production.

The field is located about 100 kilometres off the Iranian coast, lying beneath 65 metres of water and located 3,000 metres under the seabed.

The total field covers an area of 9,700 square kilometres, with 3,700 sq km located in Iran and Qatar holding 6,000 sq km in its territorial waters.

Recoverable reserves

Iran’s South Pars asset contains in-place gas reserves estimated to be 500 trillion cubic feet, with recoverable gas reserves of 360 trillion cubic feet, and condensate reserves of 3 billion-4 billion barrels.

Pars Oil & Gas Company (POGC), a subsidiary of state-owned National Iranian Oil Company (NIOC), was set up to manage the development of the South Pars field.

It has embarked on a 24-phase development plan to bring it on stream. The total cost is expected to exceed $100bn, making it the largest ongoing oil and gas project in the Middle East.

The first 10 production phases were originally designed to meet domestic gas demand and requirements for reinjection into oil fields. The gas capacity from the latter phases was to be used for exports through pipelines, LNG shipments or gas-to-liquids (GTL) production.

Gas and condensates are pumped to onshore facilities in Assaluyeh for processing and distribution.

The 24 phases together are planned to have the capacity to produce 29.7 billion cubic feet a day (cf/d) of gas.

This is more than quadruple Iran’s existing gas production capacity when the first phase of the project came on stream in 2002.

To put it into a global perspective, the completed South Pars project will have the capacity to produce more gas than any country in the world apart from the US and Russia.

Project difficulties

But POGC, and its parent group NIOC, has run into problems both in terms of meeting project deadlines to bring capacity on stream and in its ability to use the gas for exports.

POGC brought on stream phases 1-10 of the South Pars development between 2002 and 2009, largely with the assistance of international oil companies.

Phase 1 was supervised by Malaysia’s Petronas; phases 2 and 3 were developed by a consortium of France’s Total, Petronas, and Russian group Gazprom; phases 4-5 were developed by a consortium led by Agip, a subsidiary of Italy’s Eni; phases 6-8 were overseen by a consortium of the local PetroPars and Norway’s Statoil.

Although phases 9 and 10 were awarded to PetroPars, the work was subcontracted to a consortium led by South Korea’s GS Engineering & Construction.

POGC announced in late August that phase 12 is the latest section of the project to be fully commissioned, following 10 years of work.

The main contract for phase 12, the second-largest segment of the 24-phase offshore gas megaproject, was awarded to the local PetroPars in July 2005 under a buyback agreement.

Phase 12 has the capacity to produce 3 billion cf/d of gas, 110,000 barrels a day (b/d) of condensates and 750 tonnes a day (t/d) of sulphur.

Future phases

Meanwhile, Iran’s Petroleum Minister Bijan Zanganeh said on 25 August that phases 15 and 16 are close to starting production, and would be inaugurated by President Hassan Rouhani by October.

Phases 15 and 16 will have the capacity to produce 2 billion cf/d of gas, 80,000 b/d of condensate, 1.05 million tonnes a year (t/y) of liquefied petroleum gas (LPG), 1 million t/y of ethane for petrochemicals feedstock and 400 t/d of sulphur.

The main contract was awarded to a consortium of local groups: National Iranian Offshore Engineering & Construction Company, Iran Shipbuilding & Offshore Industries Complex Company and Saff Offshore Industries Company.

Phases 11-24 were designed to be linked to onshore liquefaction facilities in Assaluyeh, to allow Iran to export LNG. However, no LNG facilities have been completed in the country due to restrictions on technology caused by international sanctions.

Phase 11 has run into considerable difficulties due to the exit of international companies. It was awarded to a consortium named Pars LNG, a joint venture of NIOC (50 per cent), Total (30 per cent) and Petronas (20 per cent).

The consortium signed a framework agreement with POGC in March 2004, and the phase was expected to be completed by 2008.

However, negotiations between NIOC and Total dragged on into 2006 and 2007. The French firm pulled out of the project in 2008, with its then-CEO Christophe de Margerie claiming the political environment was too risky to invest in Iran.

In February 2010, Total and Petronas were replaced by China National Petroleum Corporation (CNPC), but this was soon followed in mid-2011 by statements from NIOC saying CNPC could lose its contract if it did not speed up work on the project.

In September 2013, it emerged that NIOC had signed a deal – reportedly worth $5bn – with PetroPars to complete phase 11, replacing CNPC, which was eventually removed from the project in 2012. PetroPars was already working on phases 12 & 19 of the development and is revamping phase 1.

The completion date for phase 11 is now unknown, as PetroPars is not thought to have the technology to build the liquefaction plant required in the scope.

Delayed phases

With at least nine phases facing significant delays, POGC could look to bring in international oil companies (IOCs) to speed up the completion of the development and build the LNG facilities planned in the original scope.

Iran has large amounts of undeveloped known reserves, which take the priority away from exploration.

Despite this, the country has a high success rate in finding new reserves, with four significant discoveries announced in 2011 alone.

Iran’s other major gas fields include Kish, North Pars, Tabnak, Forouz and Kangan, which also include significant condensate reserves.

Unlike crude production, gas output has increased enormously in the past two decades.

Iran is now estimated to be the fourth-biggest producer of gas in the world after the US, Russia and Qatar, producing 16.7 billion cf/d, or 172.6 billion cubic metres of gas, in 2014.

Despite Iran’s huge reserves and production, the country has failed to emerge as a major gas exporter like other world scale producers Russia and Qatar.

Iran will look to use the opportunities created from the lifting of sanctions to not only develop LNG export capabilities but also push through the various schemes it has undertaken to increase pipeline exports.

A pipeline to Pakistan has long been under development but failed to materialise, while Tehran is in the early stages of a proposed undersea pipeline to Oman. Pipeline exports to Iraq, which has much lower gas reserves, also offer significant potential.

Iran is also using gas products from South Pars to supply domestic industries, including ethane to feed its vast, ambitious petrochemicals expansion plans.

The nuclear agreement reached with the P5+1 world powers in Vienna on 14 July provides a new start for Iran’s gas industry, and could enable the country to finally reach its potential as a world-scale exporter.

Opportunity Iran 2015

Opportunity Iran 2015 is MEED Insight’s latest research report. Buy your copy today at www.meedinsight.com

Stay informed with the latest in the Middle East
Download the MEED app today, available on Apple and Android devices

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.