Global Energy Review

Iran: An Oil Producer in Trouble

A Report by Dr Paul McDonald Consulting Editor, Oil and Energy Trends

Contents

List of Tables

Introduction

Despite its apparently huge reserves of oil and natural gas, Iran's energy industry is in trouble. Iran is having great difficulty in producing its full OPEC quota and its ambitious plans to export natural gas have also run into problems.

Its oil exports are being squeezed by rising domestic consumption and Iran is already a net importer of gasoline. Plans to substitute natural gas for oil are behind schedule and the government is now considering nuclear power as an additional substitute for oil.

Part of the reason for Iran's troubles is its inability to increase its oil production capacity in line with rises in domestic oil consumption. Its large ‘proven' oil reserves suggest that it should experience little difficulty in raising output. Its productive capacity, however, was badly damaged following an oil workers' strike in 1978 and a subsequent cut in production ordered by the government of Ayatollah Khomeini from 1979. It also appears likely that Iran's ‘proven' reserves have been greatly exaggerated.

The gas industry has suffered from a similar combination of politics and exaggerated claims concerning reserves and production. Iran's ambitious plans to develop its South Pars gasfield in the Persian Gulf are considerably behind schedule.

Iran will not meet its target to double oil production to 8 mn bpd by 2015. Plans to export large volumes of natural gas will also have to be curtailed and Iran may very well need the nuclear power programme that has caused so much controversy elsewhere. The nuclear programme nevertheless is unlikely to provide the solution to Iran's energy problems and may even make them worse. Moreover, unless Tehran can come to some accommodation with the US and its allies over its nuclear plans, the country may well be denied some of the investment and technology it needs to raise its oil production.

Oil

Assessing Iran's Reserves

Iran's ‘proven' reserves of conventional crude oil are put at 132 bn bbl, making them the second-largest in the world, after those of Saudi Arabia, making them sufficient to last for 88 years at current rates of production.

Table 1
Iran: Oil Reserves and Production, 2006
Proven Reserves
Oil & Gas Journal 132.46 bn bbl
BP 137.50 bn bbl
Production
23.9.05-20.3.06 4.1 mn bpd
Reserves:Production
Oil & Gas Journal 88:1
BP 92:1
Source: (Reserves): Oil & Gas Journal, December, 2005
BP Statistical Review of World Energy, 2006
(Production): Central Bank of Iran

Sources disagree on the exact level of Iran's proven reserves ( see Table 1), but using figures supplied by the Iranians – either directly or from declarations made by Iran to OPEC – most estimates are in the region of 130-140 bn bbl. Such estimates appear to be a considerable exaggeration of Iran's proven reserves (i.e. reserves recoverable from known reservoirs under existing economic and technological conditions).

The Iranians have tried to justify these enormous numbers but have failed to provide sufficient levels of detail to allow any meaningful assessment to be made. In 2003, the Ministry of Petroleum came up with the following explanation of its then reserve estimate of 131 bn bbl:

• Existing Developed & Undeveloped fields, end-1999 (bn bbl)
Onshore
Crude Oil
Developed 53.4
Undeveloped 9.1
Condensate
Developed 3.4
Undeveloped 1.4
Offshore
Crude Oil
Developed 7.8
Undeveloped 5.5
Condensate
Developed   15.8
Undeveloped  
Total 96.4
• Reserve Additions & Increased Recovery Rates for Existing Fields
Total 33.5
• Discoveries since end-1999
Net Additions
2000 0.8
2001 (0.6)
2002 0.7
Total 0.9
• Total Recoverable Oil & Condensate Reserves, end-2002 130.8
Source: Ministry of Petroleum

Several observations may be made concerning the above figures:

Iran has not always claimed such enormous reserve levels. Reserve estimates during the early 1980s were at a much more modest level. Moreover, the Iranians were then reporting a steady annual decline in reserve levels.

In 1986, the Iranians reported their proven reserves at 48 bn bbl. This seems a reasonable estimate for the time, and is consistent with the results of a detailed survey carried out in the mid-1970s by the state-owned National Iranian Oil Company (NIOC), which identified proven reserves of 62 bn bbl.

A decline was only to be expected after the mid-1970s. Output increased sharply during the late 1960s, rising by 4 mn bpd, or 190%, between 1996 and 1974 ( see Table 2). At the time, it was thought that this was putting some reservoirs under strain.

Even worse, however, from the point of view of depletion policy, was the collapse in production from late-1978 following, first, a strike of oil workers in support of the exiled Ayatollah Khomeini, then the reduction of oil production as a matter of national policy following the overthrow of the Shah and the installation of the new revolutionary regime. Between 1978 and 1981, output fell by 4 mn bpd to 1.3 mn bpd, remaining at low levels for some time thereafter ( see Table 2), as Iran and Iraq fought a bitter war involving attacks on oil installations and shipping.

This volatility in oil production levels undoubtedly caused long term damage to some reservoirs and may have resulted in permanent damage in many cases. It is noteworthy that Iran has nowhere near re-attained its pre-revolutionary levels of output and appears to be struggling to produce more than 4 mn bpd at present.

Table 2
Iran: Oil Production, 1966-2006
Year Production*
(mn bpd)
1966 2.1
1967 2.6
1968 2.8
1969 3.4
1970 3.8
1971 4.6
1972 5.1
1973 5.9
1974 6.1
1975 5.4
1976 5.9
1977 5.7
1978 5.3
1979 3.2
1980 1.5
1981 1.3
1982 2.4
1983 2.5
1984 2.2
1985 2.2
1986 1.9
1987 2.3
1988 2.3
1989 2.9
1990 3.3
1991 3.5
1992 3.6
1993 3.7
1994 3.7
1995 3.7
1996 3.8
1997 3.8
1998 3.9
1999 3.6
2000 3.8
2001 3.7
2002 3.4
2003 4.0
2004 4.1
2005 4.0
2006 4.1†
* Includes NGL
† First half

Source: (1966-2005) BP Statistical Review of World Energy
(2006) Central Bank of Iran
Hyper-links:

Reserve Increases

The enormous increases in Iranian reserve levels date primarily from 1988. In that year, Iran raised its estimates of proven reserves by 90% to 93 bn bbl. For the following 14 years, reserves continued to be reported at levels close to 90 bn bbl; then Iran announced a further large increase: this time of 40%, to 126 bn bbl ( see Table 3).

On neither occasion when reserves were raised in this dramatic fashion was there any credible evidence of large new discoveries that would have made such increases valid. It is clear that the reserve increases owed more to politics than any other cause.

By raising its reserves in 1988, Iran was in effect copying moves by other OPEC producers. The process was begun by Kuwait in 1985, and appears to have been a ruse by the Kuwaitis to secure a higher production quota within OPEC. In 1988, four other countries – Iran, Iraq, UAE and Venezuela – followed suit, apparently in retaliation for the Kuwaiti move, which had been heavily criticized within OPEC, though no formal action was taken against Kuwait. By 1990, Saudi Arabia had joined in the process ( see Table 4).

Table 3
Iran: Reserve Additions, 1980-2006
Year Proven Reserves Net Annual Addition/ (Decrease)
(bn bbl)
1980 58 —
1981 58 0
1982 57 (1)
1983 55 (2)
1984 51 (4)
1985 49 (2)
1986 48 (1)
1987 49 1
1988 93 44
1989 93 0
1990 93 0
1991 93 0
1992 93 0
1993 93 0
1994 89 (4)
1995 88 (1)
1996 93 5
1997 93 0
1998 90 (3)
1999 90 0
2000 90 0
2001 90 0
2002 90 0
2003 126 36
2004 126 0
2005 126 0
2006 132 6
Source: Oil & Gas Journal
Table 4
OPEC: Reserve Increases, 1984-90
Year
Country
Proven Reserves
(bn bbl)
Iran Iraq Kuwait* Saudi Arabia* UAE† Venezuela
1984 51 43 64 166 31 25
1985 49 45 90 169 32 26
1986 48 44 90 169 31 26
1987 49 47 92 167 32 25
1988 93 100 92 167 96 56
1989 93 100 92 170 96 58
1990 93 100 92 258 96 59
* Excluding Neutral Zone
† Abu Dhabi and Dubai only
Source: Oil & Gas Journal

The pattern exhibited by most of the countries shown in Table 4 between 1984 and 1987 is the normal pattern for large, well-established oil producers. Net annual additions to reserves are modest and, occasionally, there is a net decrease in proven reserve levels. None of the countries in the table announced any major new discoveries in the 1980s that would plausibly account for the rises illustrated there. In an attempt to justify the enormous increases claimed from 1985 onwards, some countries resorted to explanations based on unrealistically higher recovery factors that they were now applying to their former reserve estimates. Others added reserves that were not in any accepted sense ‘proven' ( see explanation of ‘proven' above). Iraq appears merely to have plumped for a figure that was higher than its neighbours and rivals, Kuwait and Iran.

Iran also appears to have been trying to out-do Kuwait. The large increase of 1987-88 is all the more difficult to justify when it is remembered that Iran was at war with Iraq from 1980-88 during which period upstream activity was perforce somewhat curtailed. Production, for example, was restricted by Iraqi attacks on oil installations and shipping in the Persian Gulf ( see Table 2). It is far more likely that Iran's reserves declined during this period as a result of falling pressure in reservoirs that were not properly maintained.

Iran has nevertheless announced further increases to reserve levels since 1988. Between 2002 and 2006, for example, they went up by 42 bn bbl, to 132 bn bbl. When the volume of oil produced over the same period is taken into account, the net addition to reserves amounts to nearly 47 mn bbl: which is close to the levels Iran was reporting for its entire reserves in the mid-1980s.

Throughout this recent period, Iran has been suffering from a shortage of upstream capital and technology. Since 1996 it has been subject to the provisions of the US government's Iran Libya Sanctions Act (ILSA), which prohibits the provision by US companies of investment or technology and threatens sanctions against non-US firms that assist in oil development in Iran (though these threats have not actually been carried out). Some foreign companies may have been inhibited from investing by the prospect of US disapproval, but the main problem for Iran has been unattractive upstream terms.

The recent increase in Iran's reserve estimates may be part of an attempt by the Ministry of Petroleum to revive interest in the country's troubled oil sector. No technical or geological data are publicly available to support such claimed increases.

How much Oil?

Without such data, it is impossible to say with any certainty how much oil Iran actually has. The last comprehensive survey of reserves to produce anything like a reasonable estimate of proven reserves is the one conducted by NIOC in the mid-1970s, which concluded that there were 62 bn bbl of ‘proven' reserves recoverable under the economic and technological conditions prevailing in 1975, plus a further 20 bn bbl of ‘probable' reserves.

The decline in upstream activity from 1978, beginning with the oil worker's strike and continuing during the Iran-Iraq War, almost certainly led to the permanent loss of some reserves as a result of declining reservoir pressures. Water is reported to have invaded several important oil formations in a process known as ‘coning'. NIOC appears to have acknowledged this by stepping-up the rate of gas injection.

A further problem for Iran is that it is a mature oil-producer. Its four largest fields are well past their peak. Recent finds have been on a much smaller scale. Moreover, the figures produced by NIOC for 2000 to 2002 suggest that Iran is struggling to replace what it produces with new reserves ( see Table 3).

The largest fields are Gachsaran, Marun, Ahwaz and Agha Jari. They were discovered between 1928 and 1958 and all reached their maximum output levels sometime in the 1970s, around 4.5 mn bpd in total. Their collective output is now probably below 1.9 mn bpd.

There have undoubtedly been some discoveries since the large-scale revisions of the late 1980s, but Iran would have had to identify some 22 bn bbl * since then simply to replace the oil it has produced since then. It is unlikely that Iran has discovered much more than this in the years since 1988, which would give it proven reserves now of about 50 bn bbl. The country's ambitious gas programme appears to have identified extensive reserves of condensate in the Persian Gulf, which might boost the figure to between 60 bn and 70 bn bbl: still well below the claimed level of 132 bn bbl.

Increasing Production

Iran's production of crude oil and NGL during 2006 has been in the region of 4.1 mn bpd ( see Table 5). Crude oil makes up just under 4 mn bpd of this total. Iran has an OPEC quota permitting it to produce up to 4.1 mn bpd, but in a strong market it has consistently failed to produce its full quota when several other OPEC countries have been producing in excess of their quotas in order to benefit fully from the high price levels seen in 2006.

OET ARCHIVE

'Does OPEC have enough spare capacity?' Focus May05

Table 5
Iran: Oil Balance, 2006*
(mn bpd)
Production
Crude Oil
Production 3.9
Capacity 4.1
OPEC Quota 4.1
NGL
Production 0.2
Total Production 4.1
Consumption
Total 1.7
Trade
Exports 2.6
Imports 0.2
Net Trade 2.4
* First half
Source: Pearl Oil estimate

Iran's capacity is heavily concentrated in a small number of declining mature fields. A further problem for Iran is that these fields produce much of Iran's light crude. Because of this, Iran's export slate is becoming increasingly heavy. In 2005, around 58% of Iranian crude oil exports were of API gravities of 32° or less ( see Table 6).

Table 6
Iran: Crude Oil Exports* by Gravity, 2005
Source Volume Share Gravity
(th bpd) (%) (°API)
Onshore
Iranian Light 800 30.2 >32
Iranian Heavy 1,050 39.6 26-32
Offshore
Forouzan 350 13.2 26-32
Lavan 100 3.8 >32
Sirri 100 3.8 26-32
Soroosh 50 1.9 <26
Total Light 900 34.0 >32
Total Medium/Heavy 1,550 58.5 <32
Total Condensate 200 7.5 >56
Total 2,650 100.0 —
* Gross exports
Volumes approximate
Source: Pearl Oil estimate

During 2005, Iran experienced considerable difficulty in selling some of its heaviest crude oil blends. The Nowruz and Soroosh fields, which produce crude with a gravity between 18° and 19° API, were particularly badly affected. The Iranians were forced to put considerable volumes of unsold crude in floating storage. Eventually, output at the two fields – amounting to 190,000 bpd – was temporarily halted for what were described as “technical” reasons.

Contract Difficulties

Nowruz and Soroosh were affected by further problems concerning the contract terms under which they were being developed. Like many other Iranian fields, Nowruz and Soroosh are operated under arrangements known as ‘buy-back contracts', under which private companies act as service contractors to the government, receiving payment for their services in oil.

Several international oil companies consider the contract terms insufficiently attractive financially, whilst others are uncomfortable with the high level of political risk involved in doing business with what they see as an ideologically-motivated government.

There have been difficulties with buy-back contracts at other fields. The increasing capital cost of developing many fields has reduced the rate of return of several projects. The result has been delays to several important developments, including the Azadegan and Yadavaran fields which, between them, are scheduled to produce some 560,000 bpd ( see Table 7).

Table 7
Iran: Proposed Additions to Capacity
Field Production to be added Type of crude
(th bpd)
2006-8
Abuzar 30 M
Ahwaz 115 M & H
Cheshmeh Khosh 44 M
Darkhovin; Masjid; Suleiman 110 L
Doroud 90 L
Forouzan 65 M
Rag e Safid 60 M
Salman 50 L
South Pars IV and V 85 Cond
South Pars VI and VIII 120 Cond
Others 44 L
Total 813
After 2008
Ahwaz 50 M
Azadegan North 100 H
Azadegan South 160 H
Kushk Hosseinieh 300 H
Mansouri 50 M
Parsi 50 L
Resalat 42 L
Reshadat 80 L
South Pars IX and X 80 Cond
South Pars XI–XVII 360 Cond & GTL
Yadavaran 300 N/A
Total 1,572
NB: Volumes given are approximate
Dates of commissioning subject to change
L = Light > 32°API; M = Medium 26°-32°API; H = Heavy < 26°API
Cond = Condensate GTL = Gas-to-liquids N/A = Not available

Ambitious Plans

Despite all its upstream problems, Iran has announced a series of ambitious plans to increase its production capacity. Under earlier proposals, it was supposed to have a capacity of 5 mn bpd by 2005, which is some 1 mn bpd more than what was actually achieved. Under the same plan, capacity was supposed to rise to 8.4 mn bpd by 2010.

The plan now is to have the 5 mn bpd capacity in place by 2010. There have been further proposals for 8 mn bpd by 2015. This latter figure is hopelessly unrealistic, and Iran may struggle even to reach the 5 mn bpd target.

Before it can begin to contemplate raising capacity, Iran must replace the capacity it is losing each year. Iran loses an estimated 350,000 bpd of production capacity each year as a result of reservoir depletion. By 2010, these annual losses are forecast to be in the region of 500,000 bpd of capacity. In an attempt to slow down the rate of decline in old reservoirs, Iran is trying to increase the rate of gas reinjection. The problem for the Iranians is that the country's gas development plans are behind schedule. This is giving rise to fears that there will not be sufficient gas available to meet the expected demand for reinjection, oil-substitution in the domestic market and exports. Gas exports may have to be curtailed as a result which may, in turn, put off foreign investors from developing new gas projects.

Given the difficulties outlined above, it is unlikely that Iran will be able to increase its production much beyond 5 mn bpd over the next ten years. Output capacity may even go down temporarily sometime in the next few years. Much will depend on what happens in the gas industry: not only in the provision of gas for reinjection into oil reservoirs, but also the recovery of gas liquids that can be added to the crude oil stream. An increasing amount of Iran's output of liquids will have to come from condensate recovered from the South Pars gasfield ( see below).

Natural Gas

An Industry in Trouble

Just as with oil, Iran has ambitious plans to increase its production of natural gas. Part of the aim is to substitute gas for oil in the domestic market in order to allow more oil to be exported; but Iran also wants to export some of the gas. It is proving difficult, however, to realise these plans.

In some cases, the Iranians have failed to determine clearly how the gas developments should proceed; in others, there have been disputes with foreign oil and gas companies over gas pricing and other contract terms. There have been further problems in signing up export customers. Without the gas developments, Iran's oil exports may well decline, but there still seems no clear way forward for the gas industry.

How much Gas?

Iran is the sixth-largest gas producer in the world, with an output in excess of 8.4 bn cfd. Its proven reserves of 971 trillion cf, however, are second only to those of Russia. Iran's aim, according to the state-owned National Iranian Gas Company (NIGC), which is responsible for the domestic distribution of gas, is more or less to double gas production by 2010.

The extra gas is to come mainly from the South Pars field in the Persian Gulf, which forms the northern extension of the world's largest gas field, comprising South Pars and Qatar's North Field. South Pars' proven reserves are estimated at 375 trillion cf, but the entire South Pars formation is thought to contain more than 600 trillion cf: equivalent to 10% of the world's proven gas reserves.

TThe South Pars field is due to be developed in up to 30 phases, of which firm plans exist for about half. So far, however, only five phases are in production, making NIGC's forecast of a doubling of national output in under four-and-a-half years somewhat optimistic.

Table 8
Iran: Reserves, Production, Consumption & Trade, 2005
Reserves: 971 trillion cf
Reserves Remaining: 307 years
(bn cfd)
Production 8.4
Consumption 8.5
     Imports 0.5
     Exports 0.4
     Net Trade (0.1)
Source: BP Statistical Review of World Energy, 2006; GER .

Iran's officially stated reserves are undoubtedly huge ( see Table 8), but they cover all categories, including gas produced in association with oil, non-associated gas and undissolved gas found above oil reservoirs, known as gas caps. Associated gas production depends on the level of oil production, and Iran's oil production is more or less stagnant at present with little prospect of a large increase. The exploration of the gas caps also depends on what happens in oil production.

This still leaves substantial volumes of non-associated gas, though it is impossible to determine accurately Iran's proven reserves since there is no independent audit of the figures declared by Iran as its proven reserves, as is also the case with Iran's crude oil reserves.

Doubts about Iran's reserve levels are compounded by the fact that it appears to be having difficulties exploiting its main gas deposits in South Pars. The majority of the difficulties, however, may be political rather than geophysical.

Hyper-links:

OET ARCHIVE

'Iran turns to natural gas' Gas and Power, Jan03

Table 9
South Pars Development Phases
Phase Contractors Details
1 Petropars Began production in 2004
Petronas
2-3 Total Began production in 2002
Petronas
Gazprom
4-5 ENI Began production in 2004
Petropars
NaftIran
6-8 Petropars Production expected 2007
Statoil
9-10 Petropars Contract awarded 2002
Goldstar
IOEC
OIEC
11 Total Agreement signed 2004
Petronas(?) Pars LNG
12 Petropars(?) NIOC LNG
IOC(?)
13 Shell Persian LNG
RepsolYPF
14 TBD LNG or GTL
15-16 Khatam al-Anbia Contract awarded 2006
17-18 Petropars Contract awarded 2005
IOEC Gas & NGL
OIEC Domestic market
19-22 TBD Prequalification tender 2006
Gas & NGL
TBD = to be decided
Source: Oil Press

Developing South Pars

South Pars forms the northern part of the world's largest gas field. The southern part is Qatar's North Field. Proven reserves of the entire formation are estimated at 1,255 trillion cf, of which South Pars is said to contain 375 trillion cf, or 30% and the North Field 880 trillion cf, or 70%.

South Pars is to be developed in several phases, or which 28 have so far been identified. NIGC estimates that there will be 30 phases in-all. Some 22 are in some form of development ( see Table 9) but firm plans have still not been made in a number of cases, nor is the ownership of projects necessarily settled, either.

The various phases of South Pars are being developed in conjunction with the state oil company, the National Iranian Oil Company (NIOC). In many cases, the other shareholdings have still to be settled. The government has tried to involve as many Iranian companies as possible. In the case of Phases 15 and 16, the contract has been awarded to Khatam al-Anbia, which is the business arm of the revolutionary guards, or Pasdaran.

Each phase is supposed to produce about 1 bn cfd of gas plus a further 40,000 bpd of gas liquids. South Pars is estimated to contain 18 bn bbl of condensate. Phases 1-10 were supposed to be on-stream by 2007, producing 10 bn cfd of gas and 450,000 bpd of condensate. The project is behind schedule, however, after a bad start. Phase 1 started more than two years behind schedule and was dogged by cost overruns and allegations of irregular contract dealings.

With only four other Phases in operation and Phases 6-8 behind schedule, South Pars is a long way short of its 10 bn cfd target for late 2007. Phases 6-8 have also lost one potential partner, Shell, which failed to exercise an option to acquire 20% of the project what it inherited from its takeover of Enterprise Oil. When these next three Phases finally come into operation – probably in late 2007 – they will supply gas to the Aghajari oilfield for reinjection into the oil reservoir.

Later Phases

Phases 9-10 are supposed to supply gas for the domestic market from about 2007 onwards. In fact, all the Phases from 1 to 10 are for domestic use. The first one designed to provide gas for export is Phase 11, and this has run into a series of delays, some of them caused by strong political opposition inside Iran to the export of any of the gas from South Pars.

Phase 11 is supposed to provide 1.3 bn cfd of gas for export as LNG. A memorandum of understanding has already been signed for the export of 400 mn cfd to PTT of Thailand, beginning in 2011. Doubts have nevertheless been expressed about several aspects of this Phase. One of the foreign partners, Malaysia's Petronas, was reported in 2005 to be unhappy with the contract terms being offered by NIOC, and was further reported to be considering withdrawing from the project. Further reservations have been made concerning the volumes likely to be available from Phase 11. Some Iranian sources have suggested that there is insufficient gas to supply an LNG terminal of the size that is planned.

Two more LNG schemes are planned for Phases 12-14, along with a gas-to-liquids (GTL) project, but these are not as far advanced as the Pars LNG project based on Phase 11. Phases 15-18 have been awarded to Iranian companies including, controversially, Khatam al-Anbia, the commercial arm of the Guardians of the Revolution ( see above).

Gas from Phases 15-18 is slated for the home market, as is that from Phases 19-22, which will also provide ethane for the domestic petrochemical industry. There will, however, be some 160,000 bpd of condensate for export together with about 65,000 bpd of LPG.

OET ARCHIVE

'Middle East set to benefit as petrochemical demand grows' Focus, Aug05

To Export or not

Exports of gas are nevertheless by no means assured. There are powerful political voices ranged against the idea of exports. Moreover, Iran is also finding it difficult to sign-up foreign customers for any potential exports.

Iran already exports gas by pipeline to Turkey. It is contracted to supply about 420 mn cfd, but deliveries vary and are known to have been cut back at times of high domestic demand, such as in winter. In theory, Iran should receive more than this amount from Turkmenistan – about 560 mn cfd – but Turkmen gas deliveries are also prone to vary. The government has discussed gas export deals with several other countries: some of them involving LNG from South Pars and others requiring the construction of pipelines.

NIGC says that Iran could be exporting nearly 24 bn cfd of gas by 2015. Among the countries that have held talks with Iran for pipeline gas are Kuwait, Oman, UAE, India and Pakistan.

A framework agreement was signed in 2005 for the delivery of 300 mn cfd to Kuwait, beginning in 2007. This would involve the building of a 360-mile pipeline, of which half would be under the Persian Gulf. Under a memorandum of understanding, also signed in 2005, Iran is supposed to deliver 1.06 bn cfd to Oman from 2008 and 2.47 bn cfd by 2012. This would also require the construction of an undersea pipeline.

An even earlier agreement exists to supply gas from the Salman field to the UAE. The contract dates from 2001 and covers the supply of 600 mn cfd to the UAE's Crescent Petroleum. It was due to start in 2005, but has not yet gone ahead. The deal has been attacked by Iranian politicians on account of the low base-price agreed between Iran and Crescent. The price is reported to be in the region of 48¢ per mn BTU: well below prices normally paid in the Middle East. The UAE, for example, is said to be paying $1.80 per mn BTU for gas from Qatar's Dolphin project. Early in 2006, the Iranians began talks with Crescent, aimed at renegotiating the price.

Selling to the Sub-Continent

The latest controversy concerns the export of gas to India and Pakistan, with pricing again one of the areas of contention. Iran is said to want a base-price of $8-9 per mn BTU, which is higher than either India or Pakistan wishes to pay. The two countries are reported to be offering around $4.25 per mn BTU. A further problem is that the estimated cost of a 1,625-mile pipeline from Iran to India across Pakistan has risen sharply. Initial estimates of $4.0-4.5 bn have been revised upwards to $7.0-7.5 bn.

The cost of the pipeline may well sink the project, though Iran might still try and sell LNG to India instead. This would probably be linked with the purchase of a share by the Indian Oil Corporation (IOC). The most likely one appears to be NIOC LNG in Phase 12 ( see Table 9). IOC would probably share its holdings with Iran's Petropars.

If all the pipeline schemes were to go ahead as currently proposed, Iran could be exporting up to 8.7 bn cfd by 2015 ( see Table 10) along with unspecified volumes for LNG. It is doubtful that Iran would have so much gas available for export by then.

Table 10
Iran: Proposed Pipeline Exports
Country Volume Start Date*
(mn cfd)
Kuwait 300 2007
Oman 1,060 2008
2,470 2012
UAE 600 2005†
India 2,120 2010
3,175 2013
Pakistan 355 2010
2,120 2015
* Dates provisional
† Not in operation
Source: Oil Press

Several powerful voices have been raised in Iran against the idea of any exports. Their argument is based on the fact that Iran needs large volumes of gas to maintain the pressure inside its ageing oil reservoirs. In addition to that, Iran needs to slow down the rise in domestic oil consumption, which is squeezing its exports of crude oil. Gas is seen as the prime means of substituting for oil consumption.

Iran's gas consumption has more than doubled over the past ten years. If it were to go on rising at the same rate, it would require the production of natural gas to rise by about 7 bn cfd by 2015 for Iran to remain more or less self-sufficient. At the same time, NIOC says it requires an extra 8 bn cfd for reinjection into oil reservoirs: a figure that some inside NIOC believe is a gross under-estimate, with figures up to 20 bn cfd mentioned as necessary. Whichever figure is chosen, the combined figures for domestic use and reinjection are greater than South Pars is likely to produce over the next 10-15 years.

Exports nevertheless still have their supporters, who point to the much higher returns available for gas in the international markets compared with the low prices obtained in the domestic market. The introduction of higher domestic prices for gas might make sales there more attractive. It might have the further effect of dampening Iranian demand for gas, thus freeing some for export. The decision in the end, though, will owe as much to domestic politics as economics.

Problems ahead

A decision in favour of exports may hasten the development of some developments in South Pars and elsewhere, but the whole programme remains behind schedule and further delays appear more than likely. Many international oil and gas companies remain unhappy about Iran's upstream terms, arguing that they do not give a sufficiently attractive rate of return.

Iran also lacks some of the technology to exploit its offshore deposits fully, owing at a US embargo on the provision of oil technology. It is not clear, either, where the capital to develop South Pars and other gas fields is to come from, particularly if foreign companies cannot be attracted in sufficient numbers to the upstream sector. A figure of $50 bn has been mentioned by the Iranians as necessary to cover the development of South Pars between now and 2015, but this could well prove to be an underestimate.

It looks therefore as if Iran will have to carry out a thoroughgoing reform of its gas policy and upstream administration before there can be any major increase in gas production. That there is much to do in these areas is evident from the fact that Iran cannot supply its existing market properly with gas despite apparently having the second-largest proven reserves in the world. Every winter, there are reports of gas shortages. Power stations and other large industrial users are obliged to install units that can run on oil as well as gas in order to be able to keep running during peak periods.

Another factor holding back the development of the gas industry is that it is historically part of the oil industry. This dates back to the time when most of the country's gas was produced in association with oil and decisions about gas policy were subordinate to those concerning oil. Gas comes under the Ministry of Oil and the production of natural gas is the preserve of the national oil company, NIOC. The national gas company, NIGC, is a domestic distributor and marketer. Exports come under a third body, the National Iranian Gas Exporting Company. It may now be time for Iran to take the gas industry out of the Oil Ministry and to concentrate its functions into a single, new national gas company.

More Condensate

Iran produced just over 125,000 bpd of condensate in 2005. Output is expected to rise to 250,000 bpd by 2007. A further 200,000 bpd should be on-stream by late 2008 with perhaps a further 100,000 bpd available by 2010, all of which will form an important replacement for Iran's declining crude oil capacity ( see above).

OET ARCHIVE

'Condensate's prospects boosted by shortage of light crude' Focus Nov05

Output for Liquids' Production, 2005 & 2015

Iran produced 3.9 mn bpd of crude oil and 0.1 mn bpd of condensate in 2005. Crude oil production will probably decline over the coming decade to be replaced by increasing output of condensate as follows:

(mn bpd)
2005
Crude Oil 3.9
Condensate 0.1
Total 4.0
2015
Crude Oil 3.5-3.7
Condensate 0.6-0.8
Total 4.1-4.5

Oil Consumption

Iran consumes 1.7 mn bpd of oil at present, allowing net exports of around 2.4 mn bpd of crude oil ( see Table 5). Demand is rising at more than 5% a year, encouraged by high population growth and low domestic prices for refined products. The growth in gasoline consumption has been particularly high, forcing Iran to import some 200,000 bpd of motor spirit in order to supplement its own refinery production.

Oil consumption is likely to go on rising at around 5% per year despite the government's attempts to substitute natural gas for oil in industries such as power generation. Gas is even seen as a way of providing transport fuels such as gasoline via the gas-to-liquids (GTL) synthesis process.

OET ARCHIVE

'Liquids from gas: technological fix or expensive mistake?' Focus Oct03

GTL is unlikely to make much of a dent in Iran's gasoline shortage. Only one GTL plant – at the most – is expected to be in operation by 2015 ( see Table 9) and even its future is uncertain. Gas substitution may help to curb the rate of increase in oil consumption, but delays to various phases of the South Pars development will curb its effectiveness in reducing the growth in demand for oil.

This only leaves nuclear power and some hydro-electricity as major substitutes for oil. Iran plans to build 20 reactors with a total generating capacity of 20 GW. Given the international controversy surrounding its nuclear programme, it appears unlikely that Iran would have much of a commercial nuclear power sector by 2015.

Outlook for Oil Consumption, 2005 & 2015

Iran consumed just over 1.6 mn bpd of oil in 2005 and demand continues to rise. Taking this into account, oil consumption for the period is forecast as follows:

(mn bpd)
2005
Total 1.6
2015
Total 2.3

Crude Oil Exports

Maintaining Volumes

Iran's exports are being squeezed by stagnating production and rising domestic demand. A further problem for the Iranians is that their heaviest crudes are unpopular with many buyers. The lack of demand for crude oil from the new Nowruz and Soroosh fields has curtailed production and led to the putting of some of the fields' output into floating storage ( see above).

Most of Iran's crude oil is exported to Asia ( see Table 11). The country has benefited from the loss of Iraqi crude since the US-led invasion of 2003. NIOC plans to make its heaviest crudes more attractive by spiking them with condensate. The principal short term threat to Iranian exports is some form of UN-backed sanctions imposed to prevent Iran from developing nuclear weapons. Such sanctions could involve the suspension of banking and credit facilities covering the export of oil.

Table 11
Iran: Crude Oil Exports, 2005*
Country Volume
(mn bpd)
Asia
China 0.3
India 0.2
Japan 0.5
South Korea 0.1
Taiwan 0.1
Other 0.2
Total Asia 1.4
Europe
Total 0.6
Other
Total 0.5
Total 2.5
* Gross exports
Source: Oil press; Middle East Economic Survey

OET ARCHIVE

'Iran faces US opposition in its bid to steal a march on Iraq' Focus Jun03

Outlook for Oil Exports, 2005 & 2015

Iran's net exports of oil in 2005 amounted to 2.4 mn bpd. In the absence of any major political upheaval caused by its nuclear programme, its net exports of oil are forecast as follows:

(mn bpd)
2005
Production 4.0
Consumption 1.6
Net Exports 2.4
2015
Production* 4.3
Consumption 2.3
Net Exports 2.0
* mid-range of forecast given above

In the most favourable of circumstances, Iran might be able to export up to 2.2 mn bpd of oil in 2015 ( see ‘Outlook for Liquids' Production' above); but the general prognosis is for a decline in net exports as production problems mount in the country's ageing fields, gas developments remain behind schedule and oil consumption goes on rising.

Latest Developments

Gas Exports

OET ARCHIVE LINK: ‘Pakistan examines new gas options’, Gas & Power, Feb09

Previous

Oil Production

OET ARCHIVE LINK: ‘Iran struggles to raise production’, Focus, Dec08

Energy Security

Tensions rose in the Persian Gulf as Iran announced it was putting the country’s Revolutionary Guards in charge of defending the waterway in order to pre-empt any attack on its nuclear facilities by the US or Israel.

Kuwait said it was drawing-up plans for an emergency crude stockpile outside the Gulf in order to allow it to sell its oil during any future periods of tension there.

Natural Gas

OET ARCHIVE LINK: ‘Iran exports gas crisis as imports cease’, Gas & Power, Feb 08

Geopolitics

The US imposed financial sanctions on Iran as relations deteriorated over Iran’s nuclear programme.  The French Foreign Ministry meanwhile asked its own firms not to invest there.

Gas Exports

OET ARCHIVE LINK: ‘Russia pre-empts Iranian and Caspian pipeline plans’, Gas and Power, Nov07

Oil Exports

French diplomatic pressure on Iran over its nuclear programme has made some French banks reluctant to provide letters of credit for companies buying Iranian crude

Oil Exports

Japanese refiners are planning to pay for crude oil supplied under contract from Iran in yen rather than dollars. Tehran wants its oil customers to switch from the US unit to other currencies.

Oil Imports

Venezuela has agreed to supply gasoline to Iran to relieve shortages there. Rationing was introduced at the end of June. Tehran has announced approval for a number of refinery upgrades designed to end the country’s petrol shortages.

Oil Consumption

Riots followed the introduction of gasoline rationing in Iran on 27th June, amid a shortage of supplies across the country. Some rioters ensured that supplies would become even scarcer by setting fire to petrol stations. The government is trying to cut the level of mogas imports, which are now running at 200,000 bpd. A Committee of the US House of Representatives has meanwhile called for a tightening of economic and investment sanctions against Iran, which would lead to even greater product shortages there.

Production

NIOC says that Iran’s production capacity is 4.17 mn bpd and that it plans to raise this to 5.3 mn bpd by 2015.

Natural Gas

Iran has signed service agreements with Shell and Repsol for the development of Phases 13 and 14 of South Pars.  The two phases are designed to produce together some 3.0 bn cfd of gas and 110,000 bpd of condensate.  Around 2.1 bn cfd will be exported as LNG.

Exports to Turkey have been resumed following a 70% cut in December.

Natural Gas

Iran has signed a contract with China National Offshore Oil Corporation (CNOOC) to develop the 80 trillion cf North Pars gasfield. The field will be developed in four stages of 1.2 bn cfd each, two of which will be for LNG.

OET ARCHIVE LINK: ‘ Turkey looks elsewhere for gas', Gas & Power, Jan07.

Oil Production

Following a long dispute with Japan 's Inpex over the development of the 26 bn bbl Azadegan field, Iran has handed the lead role to the state-owned Petroiran.

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