As news of a possible deal between Iran and the P+1 group intensifies, markets and companies will increasingly focus on what a deal will mean for oil. There are already hints that any deal will involve inspections, followed by affirmation of compliance, by the International Atomic Energy Agency (IAEA) which could take up to six months.
Several analysts have released optimistic estimates for Iran’s return to oil markets. Last May, National Iranian Oil Company (NIOC) managing director Rokneddin Javadi told International Oil Daily at a conference in Kuala Lumpur that Iran’s production would be able to pump an additional 1 million b/d within three to six months but that marketing the oil might be more of a challenge than producing it. Javadi said that all of Iran’s fields would be able to be restored to production levels seen prior to the 2012 sanctions regime.
Well connected analyst Sara Vakhshouri of SVB Energy International says that Iranian engineers are suggesting the resting of some of Iran’s older fields shut in because of sanctions has “enabled reservoir pressures to increase and allow production to resume at high rates.” She writes “Gas injection might also boost production in mature fields in 3 to 6 months.” Vakhshouri’s published estimate is that Iran could physically boost crude oil production by 500,000 b/d to 700,000 b/d within three months, and 800,000 b/d within six. Iran is currently said to be producing 2.8 million b/d of crude oil and 679,000 b/d of condensates. http://www.ogj.com/articles/print/volume-113/issue-6/general-interest/iran-faces-hurdles-hiking-oil-production-when-sanctions-lifted.html Estimates are that domestic refining capacity totals about 1.8 million b/d, suggesting exports now range around 1 million b/d. Embedded in official Iranian estimates and other optimistic ones like Vakhshouri’s is belief that Iran will be successful in bringing on new fields along the Iraqi border and achieve at least 200,000 b/d to 300,000 b/d of production from new fields quickly and then be able to accelerate at least another 200,000 b/d or more from enhanced oil recovery at older fields, bringing 2016 production increases to at least 800,000 b/d of liquids, of which 600,000 b/d could be new or restored crude oil output and 200,000 b/d condensates. By 2020, an additional 1.2 million b/d of liquids is projected, allowing Iran to get to total production of 5.5 million b/d including condensates.
Vakhshouri and others have noted that Iran’s industry has made strong progress on its own without international assistance. Iranian officials say that they have reduced production mainly by stopping natural gas reinjection programs at key fields. They suggest that a resumption of injection can quickly restore production while new fields near the Iraqi border are also coming on line this year.
Still boasting of domestic industry competencies bely at least some problems that have made it to the public domain. Chinese upstream Iranian oil field projects have faced massive delays and the massive South Pars project has also had its own engineering difficulties including a very public embarrassment of a major platform sinking into the ocean.
WoodMackensie Consultants, known for their field by field bottom up approach, is touting far more conservative numbers of a growth in crude oil exports of only 120,000 b/d by the end of this year and a boost of an additional 260,000 b/d by end-2016, based on views that Iran’s geologically complex, mature fields face a decline rate of 8 to 11% a year that is hard to reverse quickly. Citibank is projecting that Iran will try to surge its production immediately upon the lifting of sanctions but will have difficulty sustaining more than a 500,000 b/d incremental increase in 2016 and likely closer to 250,000 b/d average.
To date, Iran has focused its oil capacity expansion efforts on its West Karun fields, which include the giant multi-billion barrel North and South Azadegan and Yadavaran fields, which are currently producing about between 50,000 to 80,000 b/d and targeted to increase slightly in the coming months. Both fields were developed under buy back agreements with Chinese NOCs but have experienced substantial setbacks and delays. Iran ended CNPC’s contract for South Azadegan last year. Other fields on the Iraqi border are also targeted such as the Yaran field now producing 40,000 b/d. The Darquain field, which requires water and gas injections and was a project initiated with help from Italy’s ENI is another field on the Iraqi border that Iran is counting on to contribute to higher output as well as Jofier.
Part of the optimism about Iran’s oil potential focuses on the many Western and Eastern oil companies gathering to negotiate for the new deals under the proposed “Iran Petroleum Contract” (IPC), a new service risk integrated exploration, development and production contract that is supposedly going to allow international companies to “book reserves.” The large reserve potential in Iran is an attractive enticement for majors like ENI-Agip and BP who need a quick fix to their future reserve additions and believe that they could potentially return to fields they are familiar with and think have potential to be repaired quickly with Western intervention. The problem is that this kind of “afraid to miss out” reserve management, reserve replacement fantasy deals have lured these companies before to gloss over enormous technical and geological barriers, ending in write downs or worse, in the Caspian, Iraq, Venezuela and Saudi Arabia’s gas initiative.
Past history has shown that oil fields are harder to rehabilitate quickly when they have been shut-in, regardless of the promise of “Western technology and know-how.” Restoration of lost capacity in Libya by European firms was slow going in the 1990s and 2000s. And the concept that shutting Iranian fields is “enhancing” their pressure may be wishful thinking. When Saudi Arabia de-mothballing of its giant, less complex fields in the 1980s, it encountered field pressure problems and lost capacity, not pressure enhancement, for example.
Iraq’s own oil field expansion program was slow to recover in the first year after sanctions, and, for years after, companies operating in Southern Iraq have been hampered by many factors, including bureaucratic difficulties getting needed equipment procured and into the country, a problem more than likely to plague firms working with Iran’s massive bureaucracy as well. Any return to Iran for upstream work will also have to overcome Iran’s many local content provisions at a time when the lifting of sanctions will be complex and confusing. US secondary sanctions related to terrorism and human rights will still be in effect and the Iranian Revolutionary Guard Corps (IRGC), which has several commercial enterprises in the Iranian oil sector, is deemed a terrorist organization by the U.S. The United States has also been aggressive in its prosecutions of the foreign corrupt practices act (FCPAC) in recent years – as has its European counterparts- and European firms such as Total and Statoil have already run amok of Iranian corruption over the last decade.
In the late 1990s/early 2000s, Iran needed 100 trillion cubic feet of natural gas (tcf) for field rehabilitation and the needs for future expansion will be higher still. Water encroachment and pressure problems plagued major fields such as Marun, Karanj, and Ahwaz, Parsi. Gachsaran and Bibi Hakimeh fields also depend on gas injection EOR. Iran has announced that it intends to increase gas injection to 330-mcm/d by end-2016 and that the gas is available from the Iranian domestic natural gas grid from domestic associated natural gas production. However, in past years, the country faced severe natural gas shortages and was banking on increases in foreign investment in the North and South Pars projects. Natural gas use by consumers has also been rising with the government’s “resiliency” program for replacing gasoline and diesel with compressed natural gas (CNG) for vehicles and higher use in the residential sector.
Pre-Sanctions Iranian Oil field capacity in 1999
Rag-e Safid 150
Agha Jari 150
Bibi Hakimeh 140
Total Onshore 3,260
Sirri A,E 40
Sirri C,D 30
Total Offshore 560
The Obama administration has been hopeful that a nuclear deal would help buttress Iranian “reformers” inside Iran’s political system and thereby contribute to a moderating of the country’s foreign policy over time. This strategy presumes an Iran hurt by sanctions and forced to the table to survive economically. Iran’s negotiators have certainly played to that view, hoping to take advantage of President Obama’s urge to make a historic agreement.
But the Iranian strategy may be completely different. For one thing, hardliners believe that they can gain politically from a deal by exposing the naiveté of reformers about Western intentions. Hardliners may be willing to stand aside and not block the deal because they believe the United States and Europe will be slow to lift sanctions and that Iranians will not see the economic benefits that reformers have promised. As the deal goes sour on implementation, Iran’s hardliners can point to the correctness of their original warnings and gain back popular support.
But perhaps more importantly, Iran has strong benefits it can reap strategically from a relaxing of Western sanctions, if for only a short window of time, even if it does not intend to comply with the terms of the deal in the long run. Those benefits go beyond the billions of dollars sitting frozen in international banks. Iran needs spare parts for its petrochemical industry and to complete gas injection infrastructure that are an essential part of Supreme Leader Ayatollah Ali Khamenei’s “resistance economy” strategy announced in 2010. The Supreme leader has repeated his vision for a grand economic strategy that relies on indigenous economic capacities as a “battlefield” in his 2015 New Year’s speech and rejected the notion, put forward by reformists, that Iran’s economy would benefit from integration with the global economy. Khamenei’s view is that Iran must end the export of raw materials and seek an “economy of resistance” that generates added value on Iranian soil. For the oil industry, this means added sufficient refining capacity to process all of Iran’s oil production and to limit oil trade to refined products that can that can enhance Tehran’s position in regional markets where overland routes and local trade can strengthen the country’s geostrategic position.
In the past, it has been assumed that Iran needed to get sanctions lifted or else it would miss the window to develop lucrative liquefied natural gas (LNG) and natural gas pipeline export schemes. Now Iranian officials say the focus has changed as part of the Supreme leader’s resistance economy plan. Iran has targeted key industries for the utilization of its natural gas including production of petrochemicals, steel, cement and power generation as top priorities, with an eye to add jobs, diversify the economy away from crude oil exports and to enhance its ability to engage in regional trade. Iran also needs equipment to allow it to finish expanding its refining and petrochemical capacity. Iran is hoping that petrochemical sector imports can benefit early from the lifting of sanctions and that it can ask European engineering firms, lured by new contracts, to provide technology transfers and equipment it needs quickly to get its resistance economy on track.
The United States will have to worry that the so-called snap-back, the mechanism to reinstate sanctions if Iranian compliance to the nuclear deal is not sustained, will happen only after Iran has managed to get the technologies and equipment it needs to finalize its “resistance economy” and thereby its ability to go nuclear and still sustain a growing economy based on regional, overland trade in refined products, electricity, petrochemicals and weaponry. Such an economic strategy would fit well with the Iran’s hardliners’ current expansive regional policies and long term patience to wait out the West in its pursuit of their long term interests. It remains unclear, therefore, whether a nuclear deal will really usher in an engaged Iran or just facilitate the maintenance of the Supreme Leader’s vision for the country, as restated in his Iranian New Year 2015 address.
Jareer Elass contributed to this blog