Energy & Mining
The Persian connection
Iranian oil and gas fields
The third-largest oil producer in OPEC and holding what many believe are the world’s largest gas reserves with 1,183 trillion cubic feet, Iran can afford to weather a crisis or two, be it intentionally man-made or not. Yet, with regional calamities more common than Cromwell these days, a certain stoicism and patience are still in order. Though the broader macro-trends for Iran have been positive—the lifting of nuclear-related sanctions in January 2016 and the re-election of reformist President Hassan Rouhani in May 2017—the economic thaw expected from the former has taken somewhat longer to arrive than many expected, which is precisely why the arrival of a historic deal with French energy giant Total SA in July 2017 came as very welcome news to the energy sector and country alike.
The first major deal to be struck with an international energy company since the lifting of nuclear-related sanctions, the 20-year, USD4.8- billion deal to develop Phase 11 of the South Pars offshore gas field—thought to have the biggest reserves in the world—will be carried out in conjunction with the National Iranian Oil Co. (NIOC) and China National Petroleum Corp (CNPC). But the “first of many” more projects to come, in the words of Total CEO Patrick Pouyanné, the project is seen as a milestone and major bellwether for other leading global firms to later enter the Iranian market.
With Total operating the project and estimating initial costs to run upward of USD2 billion, Iran’s Oil Minister Bijan Namdar Zanganeh estimates the project’s total worth will run USD5 billion. Total will have a 50.1% stake in the project, CPEC 30%, and NIOC 19.9%. Total was developing the field up until 2009 when nuclear-related sanctions forced it to halt operations. Once production is resumed, it is expected to put out 2 billion cubic feet of gas per day, the equivalent of some 400,000 barrels of oil. Over the course of its 20-year contract, the Iranian Deputy Minister of Oil Ali Kardor said that Phase 11 would produce 335 billion cubic meters of gas and 290 million barrels of gas condensate.
The deal could not have come at a more sensitive time for the region. Barely a month before, a flurry of nations led by the GCC and Egypt cut off ties with Qatar for its alleged sponsorship of terrorism and cozying up to Iran. Less implicit in their condemnation of Doha’s relations with Tehran were both countries’ ongoing ambitions to develop the South Pars gas field, which Iran shares with Qatar and to which the latter refers as the North Dome field. By far and away the world’s largest natural gas deposit, Qatar also announced its plans in April 2017 to boost production in its quadrant of the field—a move that is more likely to bolster Qatari-Iranian cooperation in coming decades than not.
The Total deal also comes at a critical junction in the US sanctions regime, a new series that were extended barely two weeks after the South Pars deal in retaliation for the US-alleged “malign influence” it exercises over the Middle East. Two things should give pause to pessimists, however; first, the renewed sanctions came barely 16 hours after the White House declared Iran to be in compliance with the 2015 nuclear accord, a process the US must go through every 90 days in order to renew the waiver of nuclear-related sanctions. Second, and only somewhat separately, the Total deal gives France and China much larger incentives to resist future mutations to any sanctions regime targeting the energy sector in Iran.
That being said, US sanctions are continuing to be felt. Though the July extensions only apply to military-related purchases, they are a reminder that without the US on board, the country will have a difficult time exploiting its energy assets to the full. Though the Total deal is valued at USD4.8 billion, the Iranian industry is believed to require a total of USD200 billion in capital and technology to develop its vast and underdeveloped reserves. The reason many are still so slow to act is that firms with even unbeknown financial ties to the Islamic Revolutionary Guard Corps (IRGC) can be cut off from the US banking system or fined debilitating sums of money by Washington. Just ask BNP Paribas, which shelled out USD9 billion to the US Justice Department in 2015 for breaking sanctions on Iran—the first time in history a foreign bank has pleaded guilty to violating US economic sanctions.
Though Trump has so far failed to dismantle the “most disastrous deal in history,” at the June G20 summit in Hamburg he urged other leaders to strongly discourage companies from doing business with the Islamic Republic. As Iranian Foreign Minister Muhammad Javad Sarif put it, this went strongly against the spirit, if not the letter, of the agreement. On a broader level, it also risks isolating the newly reelected reformist government of Rouhani and strengthening the hand of the anti-nuclear deal hardliners, who will undoubtedly benefit should the Total project prove an isolated one-off.
This is precisely why the government of Rouhani must move ahead with the other 14 tenders it is currently proffering as quickly and efficiently as possible. In addition to South Pars, it is also keen on developing South Azadegan, Yadavaran, West Karoon, Mansouri, and Abe-Timur fields in particular, all of which are in the southwestern Khuzestan region near the Iraqi border and Persian Gulf. Hoping to attract the likes of BP and Gazprom, National Iranian Oil has already begun talks with Lukoil, Russia’s second-largest energy firm, to develop the Mansouri and Abe Timur fields. As Gati Al-Jebouri, Lukoil’s Middle East head of upstream operations, told reporters in Dubai in January, “Iran is our target area at the moment.”
Altogether Iran plans on tendering 14 oil and gas blocks for exploration over the course of summer 2017, NIOC deputy director of exploration Rahim Nematollahi said at an energy conference in Istanbul. In addition to Gazprom, Lukoil, and BP, it is soliciting the likes of Denmark’s Maersk and has already received declared interest from Austria’s OMV, Italy’s Edison, and Malaysia’s Petronas. These are but a fraction of the 70 or so total fields that have become open to foreign investment since the easing of sanctions in January 2016 and the 29 firms the NIOC has highlighted it would be willing to work with to develop them.
As if waiting for the western Godot to appear, Turkey’s Unit International and Russia’s state-owned Zarubezhneft signed a USD7 billion deal with Iran’s Ghadir Investment Holding on August 15 to drill in three oil fields and one gas field. The former are expected to contain total reserves of 10 billion barrels and a future production capacity of 100,000bpd, while the latter is thought to possess a production capacity of 75 billion cubic meters of natural gas per year.
That the latter figure alone is some 150% of the natural gas Turkey imports each year (50 million cubic meters), Unit emphasized how this deal alone would secure Turkey’s natural gas needs for the next century and a half. Whether or not this figure holds up, it sets a huge precedent for strengthening Turkish-Iranian-Russian relations, particularly since this was the first trilateral deal involving an Iranian with foreign partners. And if Iran can continue to boost its ties to regional powers with rising energy demands—Turkey, Russia, and China for starters—it may prove far less vulnerable to cantankerous American cajoling than is currently assumed.
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