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David Wood and A. F. Alhajji
Despite the nuclear standoff and economic sanctions, higher oil prices continued to fuel Iran’s economic growth, which exceeded 6% in recent years, and finance government spending on social programs. Oil revenues exceeded $70 billion in the last Iranian year, which ended on March 19. However, inflation and unemployment remain high. The sanctions have crippled Iran’s ability to develop its huge gas resources. The fear of confrontation have forced the government to take unpopular steps to reduce gasoline imports, including rationing.
Efforts to curb gasoline consumption, gasoline smuggling, and gasoline imports have been moderately successful. The world’s fourth-largest oil producer lacks refining capacity and, therefore, must import large amounts of fuel, which it then sells at heavily subsidized prices. In June 2007, Iran introduced gasoline rationing to curb soaring consumption; this sparked riots and damage to about one-third of its fuel retail outlets across Iran. A change in Energy Minister ensued in August 2007. Iran reported early in 2008 that gasoline imports have fallen more than 50% since the measures were introduced, saving them more than $4 billion. Iran plans to transform itself from a net importer of gasoline to a net exporter by 2012. In the face of strengthening economic and financial sanctions, Iran has decided to continue building its oil and gas sectors on its own, using its own financial and human resources. However, almost all projects are behind schedule.
Several factors have attributed to the gas crunch that Iran suffered from last winter. These factors include unusually cold winter, delays in bringing online Phases 9 and 10 of South Pars that was suppose to start delivering gas at the beginning of last winter. These problems were exacerbated when Turkmenistan halted gas exports to Iran when Iran failed to make payments after a dispute over pricing.
During the past year, Iran’s production has fluctuated between 3.8 and 4.1 million bpd, displaying a declining trend from December 2007 to May 2008. In fact, Iran’s production has not moved out of the 3.7- to 4.2-million-bopd window since May 2003 (International Energy Agency (IEA), Oil Market Report, June 2008). Despite high prices, the world market for heavy sour crude remains constrained and Iran lacks deep-cut refineries that can convert its crude into the more sought after products or, indeed, to supply even its domestic demand for those products.
Conflicting reports in May 2008 said that Iran may have as much as 30 million bbl of its crude stored in ships and at Kharg Island, hopefully awaiting buyers when price differentials recover. Such storage did not prevent global oil prices rising some $20/bbl from May to July, indicating that it is not heavy sour oil that thirsty OECD markets want.
Exploration. Unlike other OPEC countries and, despite economic sanctions, Iran continues to find more oil and gas in relatively large quantities.
In March, the National Iranian Oil Company (NIOC) announced that it discovered a new oil zone in Azadegan oil field that contains 2.2 Bbbl of resource in place, of which 210 million bbl are recoverable. NIOC was developing another layer that contains 1 Bbbl with the same discovery well. Azadegan as a whole contains 33 Bbbl, possibly, 40 Bbbl.
Also in March, Iran announced that an Indian company discovered an offshore gas reservoir in the Gulf estimated to be around 11 Tcf. The location and the name of the company were not disclosed. However, the government stated that there is a low possibility that the field is shared with another neighboring country.
Last April, NIOC reported a new gas discovery near Masjed Suleyman oil field in Khuzestan province. The company estimates recoverable reserves at 739 Bcf. Once completed, the field will produce 150 MMcfd. In May, NIOC announced that Petrobras discovered oil in the Tusan offshore block with the Taften-1 well. Studies are underway to assess the amount of oil in the field.
Last June, Iran announced four oil and gas discoveries. NIOC discovered oil in the Jufeyr (or Jofeir) oil field in southeast Iran near the Iraqi border, with estimated oil-in-place of 750 million bbl (average recovery factor in Iran is only about 28%). Iran signed a deal with Belarus to develop the field last September. The first phase will produce 15,000 bpd. It will increase to 25,000 if it goes into the second phase.
Three other discoveries were made in Bakhtiari and Boyer Ahamad va Kohgiluyeh provinces. The government is negotiating with Russian oil companies to develop these fields.
Drilling/development. Iran’s main challenges in its oil sector are upgrading its own downstream infrastructure- which is more difficult with a US technology embargo-access to cheaper products, as well as gaining access to overseas refining capacity. In October 2007, it announced an agreement with Syria, Venezuela and Malaysia to build a modern 140,000 bopd refinery in Syria, presumably with the latter objective in mind. This was followed in March 2008 with an announcement that Iran, in collaboration with Pertamina and Petrofield (Malaysia), plans to build a 300,000 bopd, $6 billion refinery in Banten Indonesia, due onstream in 2012. Iran will supply half the crude feedstock for that refinery. As part of the Banten refinery deal, Iran granted Pertamina (state-owned company of Indonesia) a partnership in a project to develop the offshore Laleh oil field in conjunction with an Iranian company.
In April 2008, Croatian state-owned company INA signed an agreement for the Moghan-2 Block. Located in the Caspian region close to the Azerbaijan border, (3,230-km2). A $142-million, drilling and seismic acquisition commitment is involved. INA will provide its own land-rigs for the work, a model already used by Iran with Chinese companies, from whom Iran has recently purchased a number of land rigs.
Despite sitting on the world’s second-largest natural gas reserves, Iran has been slow to develop a gas-export sector due to sanctions, politics and engineering limitations. However, most of the major recent developments in Iran’s petroleum industry involve natural gas. Iran exports and imports gas, but on net, it imports more than it exports, which is about 812 MMcfd from Turkmenistan.
Last December, Turkmenistan interrupted its gas supplies when Iran refused to pay nearly double ($4/Mcf) the previously agreed-to gas price. The supply disruption caused shortages in northern Iran and ultimately interrupted its gas exports to Turkey. Despite an 18-year gas sales agreement signed in 2006, Turkmenistan and Gazprom agreed to $4.30/Mcf ($150/Mcm), which would rise to $6.0/Mcf ($210/Mcm) in 2009. Also, a new gas pipeline from Turkmenistan to China, scheduled for a 2010 startup, is believed to involve a gas sales price close to $5.7/Mcf ($200/Mcm). By April 2008, Iran was forced to accept the higher prices effectively forced upon it by Gazprom’s insistence on a “European market” price for gas exports.
In April 2008, Gazprom and the Iranian government established closer ties with new agreements to develop several sites at Iran’s South Pars gas field in the Persian Gulf and the North Azadegan oil deposit in southern Iran. These expand Gazprom’s existing participation in developing South Pars’ second and third stages (jointly with France’s Total and Malaysia’s Petronas). Iran also announced intentions to form a joint company with Gazprom for implementing international energy projects, including LNG projects in the country. These announcements coincided with ultimatums reportedly given by Iran to Shell and Total over deals to develop South Pars Phases 11 and 13 as large LNG export projects, to commit by June 2008 or lose the opportunities. Neither Shell nor Total has yet made such commitments.
Iran signed a $16 billion deal with Malaysia’s SKS Ventures in December 2007 to develop Golshan and Ferdows Fields in southern Iran. The deal was divided into some $6 billion offshore and $10 billion onshore extending over 25 years. Golshan Field holds some 50 Tcf of gas reserves and is believed capable of producing up to 2.5 Bcfd. The potential NGL revenues from these and other gas development projects are a substantial revenue stream for Iran, with the lighter C5+ components also easing its heavy oil refining challenges.
In February 2008 Iran announced a new 11-Tcf gas discovery, but it is gas export contracts that Iran really needs to become a global player. It seemed to have finally achieved an impressive long-term gas sales contract when, in March 2008, it announced a 25-year, $42 billion gas supply deal was signed with Elektrizitats-Gesselschaft Laufenburg of Switzerland. Switzerland defended this deal in the face of criticism from the European Union on the basis that it would reduce Europe’s dependence on gas from Russia. Even if agreements with all the pipeline transit countries can be established, they would take about a decade to complete.
Another major gas export deal, under discussion for many years, is the $7.5 billion, 2,600-km gas-IPI pipeline to India via Pakistan. Pakistan is keen to finalize an agreement, including the supply of some 1,100 MW electricity, but India has yet to agree with Iran on the price for the gas, or the transit fees it would pay to Pakistan. Regional geopolitics make it unlikely that a pipeline deal will be agreed to in the short term.
The number of oil wells drilled will increase slightly this year from 185 to 190, a 2.7% increase. The 20-year vision sees natural gas production increasing from 130 Bcm in 2007 to 475 Bcm (1,300 MMcmd) by 2020. This will make it the world’s third largest gas producer. Iran’s gas reserves support even higher production numbers in 2020.
Last April, Iran and Oman signed an MOU to jointly invest and develop part of the South Pars complex. The project will be developed in three phases at a cost of $12 billion. NIOC signed drilling contracts with the National Iranian Drilling Company (NIDC) last April to drill 12 development wells in the field. Drilling these wells will take three years. Once finished, another phase will start that involves drilling 15 offshore wells. When finished, the project will deliver 2 Bcfd to Oman.
In June, NIOC approved plans to increase production at Azadegan to 170,000 bopd, from 20,000 bopd. The first phase of the plan has been completed. Recoverable reserves at Azadegan are 5.2 Bbbl.
Last June, Iran awarded Malaysia’s Amora a $1.6 billion contract to redevelop Resalat oil field. The contract includes drilling 30 wells: 18 production wells and 12 injection wells. The work, which will take about 42 months, will increase production from the current 8,000 bopd to 47,000 bopd.
Under pressure from the government and the public to bring more gas online, NIOC decided earlier this year to develop Phase 13 on its own instead of Shell to expedite the process. It has agreed to give Shell another phase. Phase 13 has a higher potential to produce condensates than any other phase, which means that Shell has to modify the design of the other phase that it will take. Gas from the phase will go to the proposed Persian Gulf Project.
Last July, Pars Oil and Gas Company (POGC) awarded NIDC a $1.4 billion drilling contract for South Pars Phases 17 and 18. The work, which is expected to take more than three years to finish, involves the drilling of 25 development wells and two appraisal wells. Phases 17 and 18 are expected to produce 50 MMcmd of gas and 80,000 bpd of condensates, in addition to various amounts of ethane, LPG and sulfur.
Phases 19, 20 and 21 will be developed by various Iranian companies. The three phases will produce 110,000 bpd of condensate in addition to various amounts of LPG and ethane.
Iran announced last May that it will start exporting LNG at the end of 2010. During the first phase, Iran will produce 10.8 million tons per year of LNG. After the completion of the second phase, production will reach 21.6 million tons per year. Iran’s first LNG project is only 9% complete right now. The country plans to produce 80 million tons per year by 2020.
Production. Recent reports indicate that Iran’s oil production has reached a post-revolution record of 4.23 million bpd. NIOC plans to increase production by 50,000 bpd by April 2009. Recent production increases came from Azadegan, Hengam, Khesht, Darquain and South Pars (condensates) Fields. Production from the giant Azadegan oil field started last February with 20,000 bpd, with the expectation that production will double by the time this report goes to press. The first phase of development will produce 150,000 bpd. By the end of the second phase, the field will be producing 260,000 bopd.
Reserves. Iran’s proved oil reserves remained at 133 Bbbl (11% of global proved reserves) for year-end 2007. This figure has been carried forward unchanged from 2006 figures, and international analysts have no way of verifying it. However, there are clearly billions of barrels left to find. Gas reserves are estimated at 974 Tcf. 
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