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Mansour Kashfi

Mansour Kashfi

Mansour Kashfi, PhD, is president of Kashex International Petroleum Consulting and is a college professor in Dallas,Texas. He is also author of more than 100…

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Is A Full Recovery Possible For Iranian Oil And Gas?

Bijan Zanganeh Iran

In January 2016, the Islamic Republic of Iran (IR) agreed to scale back its nuclear facilities in exchange for the lifting of economic sanctions. During the sanction years, it had dreamed of a stampede of international oil companies returning to Iran and injecting substantial investment of capital into the waning Iranian energy industry. The IR was therefore expecting a quick rejuvenation of its oil and gas industries and an economic bonanza following the end of international sanctions.

National Iranian Oil Company (NIOC), The Country’s Economic Engine

It is a fact that Iranian oil output has been at a plateau for some time now, and production has been on the wane year after year. Dropping reservoir pressure and a continuous decline in crude production appear to have been triggered by long periods of technical constraints on operation and by natural aging of the major Iranian oil fields. The lack of regular maintenance and application of new technology and particularly the extensive neglect of the reservoirs in the last several years under sanctions have resulted in further damage to the Iranian oil-producing fields.

Oil production after the Islamic revolution 38 years ago never returned to its previous peak, not because the IR did not want to have production over 6 million barrels per day, but because experienced, well-educated, and properly trained oil workers from all levels in every industry sector were arrested or terminated, and many fled the country. Further, the eight-year war with its neighbor Iraq and naturally poor management with roots in bribery and corruption inevitably caused a drastic drop in oil production.

Nowadays, the U.S. State Department has recognized that the NIOC is an entity of the Islamic Revolutionary Guard Corps (IRGC). The IRGC is notorious for its control of major sectors of Iran’s economy and its involvement in terrorist activities outside of Iran. Further, it is an industrial empire with political clout that has grown exponentially since the establishment of the clergy regime in Iran. The IRGC is essentially the owner of the most lucrative parts of the Iranian industry including the country’s major source of income, the oil and gas industry. The IRGC operates almost all industrial segments in the country with huge political control and influence over governing groups. The IRGC is the only power structure of the IR that answers to no one and sees itself as the sole defender of the Islamic ideology and the only organization able to protect the so-called Islamic revolution.

Foreign Oil Companies and a History of Corruption

French Total Oil Company has been involved in the Iranian oil industry since 1995, when it signed its first contract with NIOC for offshore activities. Later Total was awarded the development of Phases 2 and 3 of the giant South Pars gas field in 1997, and shortly thereafter Phase 11 was added. But unexpectedly, in 2009 Total was relieved of the ongoing Phase 11 project, and with the start of international sanctions, incomplete petroleum projects that had been in the hands of foreign companies including Phase 11 were awarded in 2012 to domestic companies belonging to the IRGC.

In 2013, Total agreed to pay a 400 million dollar fine to settle a Foreign Corrupt Practices Act case based on U.S. Securities and Exchange Commission and Justice Department charges of two incidences of bribery of the IR’s Oil Ministry officials. Related: Iran Takes Advantage Of OPEC Cuts To Boost Market Share

According to documents presented in court, Total intermediaries in 1995 paid a $16 million bribe to IR’s Oil Ministry officials for a contract to develop offshore Sirri A and E oil and gas fields. Then in 1997, while Namdar Zanganeh was appointed oil minister (first term) by reputedly moderate and reformist clergy President Mohammad Khatami, Total entered another corrupt arrangement with the IR’s Oil Ministry. This time, company intermediaries paid a $44 million bribe to gain a contract to develop Phases 2 and 3 of the South Pars gas field. Of course, for that the company was awarded a juicy 40 percent interest in those phases of South Pars. The Phase 11 contract was cancelled because the bribe for that was not delivered to the Oil Ministry.

In another well-published bribery case during Namdar Zanganeh’s first term as oil minister, Norway’s Statoil in 2006 acknowledged the payment of bribes in 2002 and 2003 to the IR’s Oil Ministry office to secure a development contract for part of the South Pars gas field. Statoil paid fines and disgorgement in the U.S. and Norway totaling $21 million and submitted to a 3-year deferred prosecution agreement.

IR’s Oil Ministry in 2010 had a contract with Crescent Petroleum Co. to export natural gas to the UAE, but the agreement was abruptly cancelled after disclosure of corruption involved in the deal.

End of Sanctions- Start of New Iran Petroleum Contracts (IRC)

For years the IR’s tactic was to claim that sanctions were not hurting the country, and that the IR’s economy under all international pressure was rather stable and functioning well. And with about 80 percent of the regime’s income arising from the selling of crude oil, the Oil Ministry and its officials have always been spreading empty rhetoric regarding the satisfactory performance of the Iranian oil industry. The reality is that the international sanctions imposed in 2012 on the IR choked Iran’s oil production, and lack of investment and application of modern and up-to-date technology has brought the Iranian oil industry into ruin and bankruptcy.

After the IR reached an agreement over its nuclear intentions, a number of international energy companies quickly directed their attention toward the vast amount of Iranian oil and gas reserves. Meanwhile, in an effort to take advantage of this situation to lure energy companies to Iran, the IR’s oil officials came up with the proposal of an entirely new set of oil and gas agreements. The Oil Minister Namdar Zanganeh and his associates frequently have requested huge amounts of investment -hundreds of billions of dollars - till the year 2020 in order to revive and activate the Iranian petroleum industry. In order to attract these kinds of investments to the country, the IR’s officials often have openly invited foreign companies to participate in the already planned privatization of state-owned companies in Iran.

In November 2015, the Oil Ministry introduced a new model of contract known as IPC. In this new form of contract, NIOC offers very inviting terms, such as full recovery of cost for foreign oil companies and up to 25 year contracts. The IPC model offers 52 oil and gas projects that apparently address investment risks and price fluctuation. The IPC was designed to replace the previous “Buyback” type contract which did not appeal much to international investors. In Buyback, oil companies usually achieved single digit returns, whereas IPC guarantees that new contracts will deliver returns of at least 20 percent for investors. Therefore, the terms in the IPC are much more generous than the Buyback deals, and unlike the Buyback which merely paid an agreed fee when the contract was completed, the new model apparently can provide oil producers some shares of any field’s production under its terms. Therefore, oil companies have the right to book more reserves on their balance sheet. Related: The Oil Supply Glut Is Here To Stay In 2017

The purpose has been to attract oil companies and investors to participate in the renovation of the Iranian oil industry. However, the stampede of oil companies that the IR had hoped for has still not come to fruition. Only a few international oil companies positively (though tentatively) responded.

New Oil And Gas Tentative Contracts

With the lifting of sanctions, the aforementioned Total, Norway’s DNO, and Royal Dutch Shell each signed nonbinding letters of understanding with the NIOC. This time around, Total teamed up with China Petroleum Corp. (CNPC) and Petropars, an Iranian domestic company, in the form of a joint return for Phase 11 of the South Pars gas field. The agreement is for a 4.8 billion dollar natural gas development project, of which Total owns 50.1 percent, CNPC 30 percent and Petropars 19.9 percent of the deal. This agreement is tentative but may be finalized in early 2017.

The Norwegian operator DNO, which has worked for a long time in the Kurdistan area of Iraq and apparently is well-versed in its regional geology, also signed in mid-November of 2016 a memorandum of understanding with NIOC for the development of the Changulah oil field in western Iran, which straddles the Iran-Iraq border.

The Royal Dutch Shell oil company in early December 2016 signed a memorandum of understanding with NIOC. Shell officials have said it is a nonbinding contract, and details regarding the investment amount are confidential except “to further explore areas of potential cooperation”. But the IR’s Oil Ministry revealed that there are three separate tentative contracts to develop. The most promising new fields include: the Kish gas field in the Persian Gulf, the Yadavaran oil field near the Iraqi border, and the South Azadegan oil field that crosses into Iraq, where it is known as the Majnoon field and has been developed by Shell.

Most importantly the IR is leaning toward its political supporter Russia. The two countries are jointly leading a proxy war against the West in Syria and Yemen. In mid-December 2016, Alexander Novak, the Russian Energy Minister, with a large delegation including officials from Gazprom, Gazprom Naft, and Lukoil visited Tehran and apparently signed a memorandum of understanding for seven oil and gas agreements as well as for the installation of a power station in the south and renovation of a railway in the northeast of the country. Russian investment in Iran is much more geopolitically viable than that of western firms and by far the largest share of Iran’s petroleum development is in the hands of Russian companies. Russian banks are less constrained than Western financial organizations. Moreover, Moscow considers the IR clergies its major regional ally.

Investor’s Risks And Opportunities

The IR’s constitution clearly mentions that the country’s natural resource reserves cannot be in the hands of outsiders. Therefore, the Oil Ministry requires all foreign oil companies to have an Iranian firm aboard that will be assigned to them by the ministry in the form of a partner. For example, Petropars is a domestic share-holder in the new Total and CNPC contract.

International oil companies planning to make deals with the IR should be wary of the problem of chronic corruption in the governing system of the country. There is a bureaucratic attitude that dominates the business environment in Iran. So long as this corrupt and ill-managed regime is in control, investments in the Iranian oil industry, along with opportunities they might provide, could also be a great risk to prospective investors. Aside from this uncertainty, prospective investors still face the imminent possibility of the return of sanctions for years to come.

By Mansour Kashfi for Oilprice.com

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