More Than Heavy

In terms of hydrocarbons it is hard not to speak in superlatives about Iran. The country ranks among the world’s leading producers and exporters of oil and gas, as it possesses the world’s third largest oil reserves after Saudi Arabia and Canada, and the world’s second largest natural gas reserves behind Russia. Furthermore, Iran ranks as the world’s 4th largest oil exporter and is one of the founding members of the Organization of Petroleum Exporting Countries (OPEC). In 2011, Iran will take on the rotating OPEC presidency after a hiatus of 36 years.

Iran’s net oil export revenues amount up to $75 billion and provide approximately half of Iran’s government revenues. Domestically, some 97% of the country’s energy needs are met by natural gas and oil respectively, while the remaining 3% is sourced from hydro-electric power and coal. The country has embarked on an ambitious program to expand its oil production and refining capabilities, while it hopes to increase gas exports mainly by developing its liquid natural gas (LNG) production, storage, and transport facilities. Finally, the government needs to expand its power-generating infrastructure, as demand for electricity is set to grow by some 7 to 9% annually.

Iran’s energy sector remains a largely state-controlled affair, although it allows for public-private partnerships (PPPs) and joint ventures. The Ministry of Petroleum essentially supervises and runs the sector through four state-owned companies. Founded in 1948, the National Iranian Oil Company (NIOC) is responsible for all oil and gas exploration and production in the country. International oil firms that wish to sign exploration or development contracts need to approach and partner with NIOC.

The National Iranian Gas Company (NIGC) is responsible for the treatment, processing, transmission, distribution, and export of gas and liquefied gas. NIOC, however, remains responsible for rewarding all upstream projects. The National Petrochemical Company (NPC) handles all petrochemical production, distribution and exports, and the National Iranian Oil Refining and Distribution Company (NIORDC) is responsible for oil refining and transportation.

OIL

According to the 2010 BP Statistical Review of World Energy, published in June 2010, the world’s proven oil reserves amount to 1,333.1 billion barrels, some 137.1 billion barrels of which are located in Iran. Most international rating agencies put the country around that mark. On October 11, 2010, however, Iran’s Oil Minister, Masoud Mir-Kazemi, announced that the country’s proven reserves are significantly higher than previously estimated and currently amount to 150.31 billion barrels. The 8.8% increase is mainly due to newly discovered oil fields and an in-depth review of secondary resources.

The majority of Iran’s crude oil reserves are located in giant onshore fields in the southern Khuzestan region near Iraq. Iran currently has some 40 operating fields that produce an estimated 4.2 million barrels of oil per day (bbl/d), mostly crude, which represents some 5% of global oil production. It also makes the country the second largest OPEC producer after Saudi Arabia. According to the latest five-year sector development plan, which was announced in January 2010, Iran aims to increase oil production to 5.1 million bbl/d by 2015. Iran’s oil consumption in 2008 amounted to some 1.7 million bbl/d.

One way to achieve that goal is to increase production from three offshore fields Iran shares with Saudi Arabia, Oman, and the UAE. According to Mahmoud Zirakchianzadch, Managing Director of Iran’s Offshore Oil Company, some ‚¬400 million has been allocated to increase the output of the Esfandiar field (shared with Saudi Arabia) by 20,000 barrels a day, while an increase of 10,000 barrels a day is set for the Salman and Forouzan fields shared with the UAE and Oman.

The Energy Information Administration (EIA) estimated that Iran in 2008 exported some 2.6 million bbl/d of oil per day, making it the world’s 4th largest exporter after Saudi Arabia, Russia, and the UAE. Iranian crude and its derivatives account for nearly 80% of Iran’s total exports and provide for approximately half of the government budget. Iran’s main trading partners are Japan, China, India, and South Korea—in that order—which import more than half of Iran’s total oil exports.

The epicenter of Iran’s oil export is Kharg Island, which has a storage capacity of some 20 million bbl and a loading capacity of some 5 million bbl/d, followed by Lavan Island with a storage capacity of 5 million bbl/d and a loading capacity of 200,000 bbl. Other important terminals are found at Kish Island, Abadan, Bandar Mahshar, and Neka. Most oil is exported by ship. Iran possesses a fleet of 29 oil tankers, the region’s largest. In addition, the country has an extensive network of oil pipelines, which so far mainly serves for domestic use.

NATURAL GAS

Iran, home to the world’s second largest natural gas reserves, is the world’s fourth largest producer, and the world’s third largest consumer of natural gas. According to the 2010 BP Statistical Review of World Energy, the country’s proven natural gas reserves stand at some 1045 trillion cubic feet (tcf) or 29.6 trillion cubic meters (tcm), which represents 15.8% of global gas reserves. Major natural gas fields include the South and North Pars, Kish, and Kangan-Nar.

Gas production and consumption have grown rapidly during the past 20 years. According to BP’s annual energy review, Iran in 2009 produced 131.2 billion cubic meters (bcm), which represents an increase of 13% compared to the previous year. Domestic consumption in 2009 amounted to 131.7 bcm and is expected to grow by some 7% annually over the next decade. In addition, natural gas is used for re-injection into maturing oil fields. To help meet the country’s growing demand, Iran in 2009 signed an agreement with Turkmenistan to increase gas imports up to 1.2 bcf/d.

Founded in 1965, the NIGC is responsible for the treatment, transmission, and transport of natural gas within Iran. Through a pipeline network of some 30,000 kilometers gas is delivered to over 6,000 villages and 700 cities throughout the country. In addition, pipelines to Turkey, Armenia, and Turkmenistan have been built, while Iran hopes to extend its network to Pakistan, India, and even China.

According to FACTS Global Energy, Iran’s natural gas exports in the short term will remain limited in size mainly due to the rise in domestic demand, even when taking into consideration the ongoing expansion in production from the South Pars field. This massive offshore field (shared with Qatar) has an estimated 450 tcf of natural gas, nearly half the country’s total reserves.

Managed by the Pars Oil & Gas Company, South Pars is subject to a 28 phase development scheme spanning 20 years. Eight phases have been completed so far. The two next phases are due to go on stream by March 2011 when 54% of the work is due for completion. Each phase covers a combination of natural gas with condensate.

In October 2004, Iran and China signed an agreement on the long-term sale of LNG to China that eventually could be worth $100 billion. Iran LNG is charged with building and operating the storage and liquefaction process. By September 2010, two-thirds of the work on the South Pars harbor and jetty had been completed, as well as 62% of the storage tanks. Regarding liquefaction and power generation, the emphasis has so far been put on the latter. Consequently, the first LNG shipment is not likely to take place before 2015.

In the first six months of the Iranian calendar year, which started on March 21, Iran produced 69 million barrels of gas condensates, which represents an increase of 50% when compared to the same period in the previous year. The country also produced 72 billion cubic meters of sour gas, which represented a 5% increase when compared to last year.

REFINING

The National Iranian Oil Refining and Distribution Company (NIORDC) operates nine refineries with a total capacity of some 1.5 million bbl/d. Iran aims to increase its capacity to 3 million bbl/d by 2013 as, currently, supply barely meets demand. According to FACTS Global Energy, diesel consumption in 2008 amounted to 570,000 bbl/d, nearly 90% of which was produced domestically. The refining shortage mainly concerns gasoline, of which Iran in 2009 imported some 130,000 bbl/d.

According to NIORDC’s Managing Director, Ali-Reza Zeighami, Iran’s refineries currently produce 45 million liters a day, while consumption amounts to 64 million liters. The government intends to increase gasoline production to 191 million liters a day by 2015. Zeighami also said that had the government’s rationing scheme not been implemented, national consumption would amount to some 100 to 120 million liters a day. Most gasoline, some 50%, is used in transport, followed by households, shops and small business (19%), industry (15%), and agriculture (6%).

In December 2009, a private motorist’s gasoline quota, at a subsidized price of $0.10 per liter, was reduced from 100 liters per month to 80 liters per month. Taxis, commercial, and government vehicles, however, were given special allowances. During the first half of the Iranian calendar year, the government reportedly paid no less than $18 billion in gasoline subsidies. It should not come as a surprise therefore that the Guardian Council in January 2010 approved measures that aim to gradually eliminate energy subsidies by 2015.

PETROCHEMICALS

Founded in 1964, NPC is responsible for the development and operation of the country’s rapidly expanding petrochemical sector. Having started its activities with a small fertilizer plant near Shiraz, the NPC is today the region’s second largest producer and exporter of petrochemicals. The company aims to increase today’s output of some 44 million tons to up to 100 million tons per year by 2015, which would make Iran the second largest chemical producer in the world.

In addition to fertilizers, NPC aims to become a major player in the global production of methanol, ethylene, polymer and urea. A key role in the expansion scheme is played by the petrochemical hub in the special economic zone of Assaluyeh, which in the 2Q and 3Q 2010 managed to produce 7.2 million tons of petrochemicals worth well over $4 billion.

ELECTRICITY

There are over 400 power plants in Iran with a total capacity of 57,000 MW. However, several plants have reached the end of their life cycle and are in need of repair or replacement. Annual electricity demand is increasing by some 7 to 9%, and the addition of extra capacity has become a top state priority. The Ministry of Energy estimates that to meet the projected growth demand, the country’s capacity must reach at least 60,000 MW by 2015. Iran aims to increase its capacity mainly by expanding its park of combined-cycle and hydroelectric power plants. It also aims to produce 7,000 MW in nuclear-generated electricity by 2020.

Currently, some 75% of Iran’s power plants operate on gas and 18% on fuel oil. The remainder is hydro-powered. Meanwhile, the country is looking at alternative ways of generating electricity. It has opened its first wind parks, while it is looking into the possibility of thermal, solar, and even (tidal) wave power. To meet the growing demand in the short term, however, the country will have to construct traditional power plants.

An important role is set to be played by independent power producers (IPPs), who may have foreign equity stakes. Iran has a number of such projects under construction. However, while the construction of power plants in Iran two decades ago was mostly done by foreign contractors, according to Iran’s Deputy Energy Minister Hamid Chitchian, they are currently mostly designed and built by Iranian engineers and experts. In addition, Iran is exporting its expertise to countries such as Oman, Syria, and Iraq. “In terms of designing, installing and commissioning power plants, Iran rivals top countries such as the US, Britain, Germany, Japan and China,” said Chitchian. Iran also exports electricity to neighbors including Armenia, Pakistan, Turkey, Iraq, and Afghanistan, while receiving imports from Azerbaijan and Armenia.