Global Energy Review
Iran: Trying to prevent a Decline in Output
A Report by Dr Paul McDonald Consulting Editor, Oil and Energy Trends
- An examination of Iran’s plans to raise its oil production
- With an analysis of the problems that may prevent it from achieving its goals
- And a forecast for crude oil and NGL production for 2015
- Together with links to archive material from OET and hyper-links to relevant web-sites.
Contents
- Introduction
- Struggling to Raise Output
- Reserve Increases
- Production History
- Seeking Solutions
- Modest Prospects
- Problems with Gas
- Implications for Oil Production
- Outlook for Oil Production
- Outlook to 2015
- Latest Developments
List of Tables
- Table 1 Iran: Oil Reserves & Production, 2006
- Table 2 Iran: Oil Production, 1966-2008
- Table 3 Iran: Reserve Additions, 1980-2008
- Table 4 OPEC: Reserve Increases, 1984-90
- Table 5 Iran: Oil Balance, 2008
- Table 6 Iran: Production Profile, 2008
- Table 7 Iran: Production Plans
- Table 8 Iran: Oilfield Development Plans
- Table 9 Iran: Gas Reserves, 2008
- Table 10 Iran: Gas Balance, 2008
Introduction
Iran has recently announced plans to raise the production of crude oil and natural gas liquids (NGL) by 21% within two years. It is struggling, however, to maintain production even at existing levels, and provisional estimates for 2008 suggest a slight decline in output over 2007.
The oil industry needs to deal with natural declines of 10% per annum from some of the country’s older fields. Plans to commission new, replacement fields, however, have been delayed following disagreements with several foreign oil companies. Moreover, the recent fall in oil prices has reduced the funds available to the National Iranian Oil Company (NIOC) for upstream investment.
It is not only the oil industry that is affected by project delays. The development of the country’s main gas field-complex at South Pars is also behind schedule and this, in turn, causes further problems for the oil industry.
Large quantities of natural gas are required for injection into oilfields in order to stabilize reservoir pressures. Without this, oil production from many of the older oilfields could fall even more sharply than at present, leading to the possibility that Iran’s oil production could actually go into decline within a few years.
The situation is made worse by the controversy over Iran’s nuclear programme, which has led to the imposition of sanctions, and considerably raised commercial risks for foreign companies investing in Iran. All this will make it difficult for Iran to meet its production targets. It now appears that the best Iran can hope for is a small increase in its combined production of oil and gas liquids between now and 2015.
Struggling to Raise Output
Iran’s struggle to raise output is, on the face of it, a puzzle. The country appears amply endowed with reserves and has in recent years attracted several offers of foreign investment in its oil and gas sectors.
Proven reserves of oil and gas liquids are stated at 138.4 bn bbl: sufficient for 88 years at existing rates of production, suggesting that there is considerable scope for an increase in output. Indeed, the government previously announced proposals for output levels of up to 8 mn bpd over the next seven years. This has proved to be a grossly unrealistic target, though, for a number of reasons.
In the first place, there is good reason to suppose that the actual size of Iran’s reserves has been considerably overstated. Iran has not always claimed such enormous reserve levels. Reserve estimates during the early 1980s were at a much more modest level. Not only that: 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 between 1980 and 1988 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 about 4.3 mn bpd at present.
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, in 2003, 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).
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’ (i.e. reserves in known reservoirs identified as being recoverable under existing economic conditions using current technology). 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.
Since that time, Iran has continued to raise its reserve estimates, resulting in a net gain of 45 bn bbl, or 49%, to this year’s total of 138 bn bbl. Notwithstanding this, Iran’s Deputy Oil Minister, Ghulam Husain Nuzari, has gone on to claim that the 138 bn bbl figure is a small fraction of the country’s potential reserves.
On 1st February, 2008, Nuzari told prospective foreign investors that Iran had over 630 bn bbl of crude oil in place, along with a 110 bn bbl of NGL (see Table 1). The Deputy Minister was soliciting offers of interest in 17 upstream blocks on offer to private investors. It was not made clear where these additional reserves might lie and the figures must be regarded as highly speculative and having no bearing on the country’s immediate production prospects
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.
OET ARCHIVE
'OPEC battles with financial crises and recession' Focus Nov08
Production History
Iran produces some 3.9 mn bpd of crude oil and a further 0.4 mn bpd of gas liquids (see Table 5). This is well below levels seen in earlier years. Its highest recorded annual output was 6.1 mn bpd in 1974. Some of Iran’s heavier oil production remains shut-in, but even if Iran were to produce at its maximum capacity, its output would be limited to 4.6 mn bpd (see Table 6)
Raising production presents a considerable challenge. The natural decline of the country’s oilfields means that Iran must bring about 0.4 mn bpd of new crude oil production each year simply in order to keep its output at existing levels. Iranian plans are to raise production by 1 mn bpd by 2015 (see Table 7).
Recent production history shows how difficult it has been to raise production over the last four years when, despite considerable efforts on the part of NIOC, combined production of oil and NGL has remained more or less unchanged (see Table 2). Over the same period, NGL output has risen, suggesting that crude oil output has fallen.
The government has tried to reverse this decline by inviting the participation of foreign oil companies, but their success has been limited by disagreements over contract terms, especially for projects aimed at recovering liquids from natural gas projects. Several companies have found Iran’s oil contract terms unattractive as well.
OET ARCHIVE
'Iran struggles to expand gas industry’ Focus Aug08
'Iran exports gas crisis as imports cease’ Gas & Power, Feb08
Hyperlinks
A new problem has emerged in the shape of Iran’s nuclear power programme, which the US and some of its allies have claimed is not solely aimed at producing electricity. The US has for some years banned investment in Iran by American companies and placed an embargo on the supply of US upstream technology to Iran (see above).
More recently, the EU has expressed strong misgivings over Iran’s nuclear ambitions, which has discouraged upstream participation by European companies. The whole nuclear controversy, combined with the troubles in the US and European banking sector, has made it all but impossible for NIOC to raise finance abroad. The Ministry of Petroleum recently announced that the industry required some $145 bn of investment over the coming decade, of which half would need to come from external sources.
Hyperlinks
Seeking Solutions
One response to this state of affairs has been for Iran to seek investment from outside the western oil industry and to turn to companies in Asia, Russia and elsewhere. Tehran has been particularly active in trying to encourage the involvement of companies from Russia and China. Discussions have been held with Russia’s Gazprom, PetroChina and China National Offshore Oil Corporation. Another Chinese company, Sinopec, is to develop the Yadavaran oilfield.
The onshore Yadavaran field is said to have recoverable reserves of 3.6 bn barrels, of which 3.2 bn bbl are crude oil and the rest condensate. Its development has been delayed by a number of factors, including the need to clear the field of landmines sown in the Iran-Iraq war of 1980-88. There have also been contractual difficulties with the Chinese. The original deal involved the supply of LNG to China, but this provision appears to have been renegotiated owing to delays to Iran’s gas export programme.
Yadavaran is supposed to produce 85,000 bpd from 2012, rising to 185,000 bpd in 2015. Iran’s Petroleum Engineering and Development Company (PEDEC) says that output could eventually rise to 400,000 bpd, but this is little more than speculation at present since Sinopec has not been able to do any on-site survey work on the field owing to the continuing presence of landmines.
Another large field proposed for development is Azadegan oilfield. This also lies along the Iraqi border and has suffered delays whilst mines were being cleared. Reserves are reported at an unlikely 31 bn bbl, which would make Azadegan one of the world’s largest fields.
Production began in July 2008, but only after a series of delays. Apart from the problem with landmines, there were disagreements with the company originally contracted to develop the field, Japan’s Inpex. The Japanese, blaming rising costs, withdrew from the project; but the Iranians accused Inpex of giving-in to American pressure.
The field is now being developed by a number of Iranian companies led by Petroiran. Initial output was only 3,000 bpd, but there are plans to raise this in stages to 150,000 bpd, 260,000 bpd and eventually to 340,000 bpd. Before any firm timetable can be drawn-up, however, Iran needs to find a foreign partner to replace Inpex. Russia’s Lukoil is reported to be interested.
Modest Prospects
Iran has few other major oilfield projects after Azadegan and Yadavaran and those that are planned have fairly modest production forecasts (see Table 8). The Iranians will therefore have to look elsewhere for the liquids they require to meet their production targets. NIOC has recently announced plans to raise recovery rates from existing fields. It also held an upstream licensing round in early 2008. In addition, there are plans to increase the production of gas liquids substantially (see Table 7)
Field |
Operator |
Development Timetable |
|
Year |
Projected Output |
||
(th bpd) |
|||
Azadegan |
Petroiran |
2008 |
3 |
|
|
2009 |
20 |
|
|
2014 |
150 |
|
|
TBD |
260 |
|
|
TBD |
340 |
Yadavaran |
Sinopec |
2012 |
85 |
|
|
2015 |
185 |
|
|
TBD |
400 |
Darquain III |
TBD |
2009-10 |
100 |
Jufeyr |
Belarusneft |
2009-10 |
15 |
|
|
2011-12 |
25 |
Anaran |
TBD |
2011-12 |
70 |
|
|
2015 |
130 |
Paranj |
TBD |
2013-14 |
50 |
TBD = to be decided | |||
According to Iran’s Ministry of Petroleum, recovery rates from Iranian oilfields are 25-26%: about two-thirds of the world average. The Ministry’s plan is to raise this through the use of enhanced oil recovery. This would require both capital and technology, much of which might have to come from abroad. In the current political and economic climate, Iran may be able to do little on this front.
The offering of 17 exploration blocks on 1st February, 2008 was another effort to provide Iran’s oil industry with a secure future and to enable it to meet the government’s targets for increased production set out in Table 7. The blocks on offer are Bandar Abbas, Danan, Fasa, Ilam, Kalat, Kavir, Mughan I and II, Naft Shahr, Quchan and Maraveh Tapeh, which are all onshore, and the five offshore blocks of Alvand, Dayyer, Ferdowski, Laleh and Taban. There have been several expressions of interest by foreign companies but several remain wary for political reasons, whilst others have reservations about Iran’s upstream contract terms.
Iran hopes to offset the natural decline of its oilfields from an increase in the production of NGL, mainly from new gasfields in the Persian Gulf. These form part of the South Pars field-complex, which is being developed in conjunction with several international oil and gas companies.
Output of NGL is supposed to rise from 400,000 bpd to 1 mn bpd by 2015. But South Pars, like many of Iran’s oil projects has run into a series of contractual and political problems, which Iran needs to resolve quickly if it is not to risk an actual decrease in production as its older oilfields continue their natural decline.
Problems with Gas
Iran claims natural gas reserves of 948.2 trillion cubic feet: the second-largest total in the world after Russia, which has 1,680 trillion cf. The only other country that comes anywhere near Iran in terms of proven reserves is Qatar, with 905.3 trillion cf. The fourth-largest country in terms of reserves–Saudi Arabia–is well below, with only 252.6 trillion cf. Yet despite this, Iran is a net importer of gas and is struggling to increase its output.
There are several estimates of the size of Iran’s gas reserves. All of them, however, suggest that the volumes are huge (see Table 9). This implies that there is considerable scope to increase production. Output was supposed to rise from 12.6 bn cfd in 2007 to 45.9 bn cfd in 2020, but the latest data for 2007 and 2008 suggest that Iranian production was below target in both years (see Table 10)
Iranian gas plans have fallen behind schedule for a variety of reasons, many of which are the result of disputes between Iran and the foreign companies it has invited to invest in gas production. A major contributory factor to these disputes has been the government’s inability to decide which of its major gas developments should be aimed at exports and which should be for the domestic market. The rapid growth in domestic demand has led to attempts to give priority to the home market, often to the chagrin of foreign companies that wanted to export their share of the gas production.
Implications for Oil Production
Delays to the gas programme have important implications for the oil industry. In the first place, large volumes of natural gas are needed for reinjection into oilfields in order to maintain pressure in reservoirs. Secondly, liquids recovered from natural gas production are slated to form an increasing proportion of Iran’s total output of hydrocarbon liquids. The plan is for NGL output to rise as follows:
| Year | Output |
|
(mn bpd) |
2008 |
0.4 |
2010 |
0.7 |
2015 |
1.0 |
Most of this is set to come from the offshore South Pars field, in the Persian Gulf, but this is where most of the problems and delays have arisen. South Pars is being developed in 28 phases, of which the first 8 phases are in production. Phases 9 and 10 were supposed to have been on-stream in 2007 but now look unlikely to be in production before 2009. Phase 11 typifies the problems of many of South Pars’ development plans.
An agreement to develop Phase 11 as an LNG export scheme was signed as long ago as February 2004. A venture known as Pars LNG was established, owned 50% by NIOC, 40% by Total and 10% by Petronas. Since then neither Iran’s French partner nor the Malaysian company has made a final investment decision, citing amongst other things sanctions imposed by the UN, EU and US over Iran’s nuclear programme.
Iran has, as a result, approached other foreign partners to develop Pars LNG. It has already offered a stake to China National Petroleum Corporation and plans further involvement by Chinese and other African companies. All this, though, simply adds to the already formidable delays experienced by some of the phases of South Pars.
Outlook for Oil Production
NIOC requires approximately 350 mn cfd for reinjection into oil reservoirs. This total is supposed to rise to about 750 mn cfd by 2010 and 1,055 mn cfd by 2015 under NIOC’s existing plans. Given the rapid decline rate experienced by some older fields, however, NIOC may well require volumes in excess of 2,000 mn cfd by 2015, if not earlier, according to the most pessimistic estimates, simply to maintain output of crude oil at or near 4 mn bpd.
Given the present state of Iran’s gas industry such additional volumes are most unlikely to be available in such a timeframe. The result of this will almost certainly be a decline in the production of crude oil. Some additional output of NGL is likely to be available, but it may not be sufficient to allow Iran to increase its total output of hydrocarbon liquids. Indeed, it may even be insufficient to allow their production to remain at existing levels.
In the immediate future, Iran should benefit from additional NGL output from South Pars Phases 6-8, which began production in October 2008. These should provide 120,000 bpd of condensate later in 2009. That year should also see the commissioning of Phases 9 and 10, providing a further 80,000 bpd of NGL. These new phases should also see additional gas available for reinjection into oil reservoirs.
Further crude oil production will be available from Azadegan and Yadavaran, if these two fields are developed according to schedule (see Table 8). Moreover, it is possible that Iran’s rate of reservoir depletion has been overstated. The lowest estimates in circulation are around 400,000 bpd annually, but some US sources quote figures as high as 480,000 bpd. In 2007, the Ministry of Petroleum quoted a figure of 500,000 bpd, but this may well have been an attempt by the Ministry to persuade government and Majlis to increase its upstream budget allocation.
The last reliable estimate of annual decline rates appears to come from 2005, when they were estimated by the Ministry at 200,000 bpd. It has almost certainly risen since then, but may not yet be as high as 400,000 bpd a year. Perhaps a figure of 350,000 bpd might be appropriate for 2008.
Outlook to 2015
Taking the most optimistic view, output of liquids should remain at least stable. It might even rise, subject to world market conditions. But it is unlikely to rise by very much. Assuming Iran continues to produce at close to its production capacity (see Table 6), Iran’s total output of liquids may rise as follows:
|
(mn bpd) |
2008 |
|
Crude |
3.9 |
NGL |
0.4 |
Total |
4.3 |
2015 |
|
Crude |
3.9 |
NGL |
0.8 |
Total |
4.7 |
This scenario allows for some minor delays to new oil and gas projects. It is some 11% below the plan target for 2015 (see Table 7) but more optimistic than some of the more apocalyptic forecasts emanating from the US. It assumes that there is no major deterioration in Iran’s foreign relations over its controversial nuclear programme.
Latest Developments
Oil Pipeline
Baghdad has resumed discussions on a 150,000 bpd export pipeline to Iran, designed to reduce Iraq’s reliance on its vulnerable northern route.
Previous:
Natural Gas
OET ARCHIVE LINK: ‘Iran tries again to complete South Pars’, Gas & Power, April 10
Sanctions–Imports
Vitol has become the latest oil trader to cease taking part in tenders to supply Iran with gasoline. The US government has threatened sanctions on firms that supply Iran with gasoline. Imports are currently around 100,000 bpd.
Oil Imports
Iran has increased its stockpiles of refined products in the face of threatened US sanctions on firms supplying refined products to Iran, in the latest round of the dispute between Washington and Tehran over Iran’s nuclear programme.
Oil Imports
Iran has announced plans to produce more gasoline in an attempt to forestall a proposed move by the US to impose sanctions on companies that supply motor spirit to the Iranians. Iran imports 135,000 bpd of gasoline. Tehran says the additional domestic production will reduce imports by nearly two-thirds.
Oil Imports
The Iranian government said it needed an additional $6.5 bn to cover additional imports of gasoline and diesel.
Oil Imports
The US is pressing the UN to ban the export of gasoline to Iran as part of its campaign to put pressure on Tehran over what Washington calls Iran’s ‘nuclear weapons programme’. Iran imports about 120,000 bpd of motor spirit, of which around a third is supplied by China, which is thought likely to veto any UN resolution on Iranian sanctions.
Gas Production
OET ARCHIVE LINK: ‘Iran tries again on South Pars’, Gas & Power, Aug 09
