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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Russia To Help Iran In Developing Crucial Gas Reserves

  • After years of planning, Iran is moving to increase production at Phase 11 of South Pars.
  • The first phase involves the drilling of 30 wells plus the fabrication and erection of two production platforms, each containing 15 wells.
  • Following the start of the Ukraine war, China made way for Russia to enter Phase 11 of South Pars.

Along with the (recently achieved) completion of the crucial Goreh-Jask pipeline oil export route, the (ongoing) ramping up of production from its hugely oil-rich West Karoun cluster of oil fields to at least 1 million barrels per day (bpd) within the next two years, and the (continuing) building out of its value-added petrochemicals production to at least 100 million metric tons per year by 2022, optimising gas production from its supergiant South Pars gas field is a top priority for Iran. In the current global gas market, characterised by questions over future supplies, it is currently perhaps the very top priority for Iran, and the Islamic Republic has brought in Russia to help it expedite and increase gas production from the perennially controversial Phase 11 of South Pars. With an estimated 14.2 trillion cubic metres (Tcm) of gas reserves in place plus 18 billion barrels of gas condensate, South Pars already accounts for around 40 percent of Iran’s total estimated 33.8 tcm of gas reserves – mostly located in the southern Fars, Bushehr, and Hormozgan regions – and about 80 percent of its gas production. The 3,700-square kilometre (sq.km) South Pars sector of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Dome) is also critical to Iran’s overall strategy to sustain natural gas production across the country of at least 1 billion cubic metres per day (Bcm/d). 

Phase 11’s original target production capacity was 57 million cubic metres per day (mcm/d), and this is still the output goal, according to a comment last week from Iran’s Petroleum Minister, Javad Owji. The first phase of the current development program, according to Iran’s lead developer on the project, Petropars, involves the drilling of 30 wells plus the fabrication and erection of two production platforms, each containing 15 wells, with the aim being to produce 2 billion cubic feet (56.6 mcm/d) of gas per day as well as 80,000 barrels of liquefied natural gas (LNG). This will require construction of additional liquefied natural gas (LNG)-related installations and two 32-inch pipelines, totalling 270 kilometres (km) in length. The second phase of the development program will address the likely fall in pressure during the first three years of full production, with the graduated installation of the pressure equipment related to different enhanced gas recovery techniques. 

Related: Is The Oil Market Really Broken?

This all sounds good in theory, but the practical problem Iran has faced in moving Phase 11 ahead has been its inability to put the right equipment, technology, processes, and people in place on the project - and to keep them there - to turn theory into reality. Several high-level international companies have been involved at one stage or another in Phase 11 of South Pars, only to withdraw due to the toughening up of sanctions in 2011/2012, or the reimposition of sanctions in 2018. 

Given the size and scope of Phase 11, it became a focal point of U.S. attention in the aftermath of its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and during the active re-imposition of sanctions toward the end of that year. At that time, French supermajor, then-Total (now TotalEnergies), held a 50.1 percent stake in the US$4.8 billion Phase 11 project, and had already invested around US$1 billion into it. 

According to a source who worked very closely with Iran’s Petroleum Ministry at the time, and spoken to exclusively by OilPrice.com: “On the eve of the signing of the next wave of financing for Phase 11, the U.S. Treasury Department telephoned senior bankers at the bank that was organising the money and told them that if the financing went ahead then the U.S. would instigate a full historic investigation of all of the bank’s dealings since 1979 to every country that had been blacklisted by the U.S., and it told the French government the same thing,” he underlined. “The U.S. Treasury also said that all French companies would not win any major contracts with U.S. companies whilst Total stayed in Iran, but if Total withdrew then the U.S. would make a similar project available to it to compensate,” he told OilPrice.com. 

Understandably, the French withdrew from Phase 11, at which point, China National Petroleum Corporation (CNPC) automatically took over Total’s stake (of 50.1 percent) – as automatically occurred in the terms of the contracts - to add to its existing 30 percent stake. The remaining 19.9 percent stake was held by Petropars. CNPC was all set to continue with the development of Phase 11, given the enormously beneficial terms that it was offered by China. Specifically, as analysed in depth in my latest book on the global oil markets, Iran’s Petroleum Ministry offered the Chinese a 15 percent discount for nine years on the value of all gas it recovered from the site, with this being the value of the gas as applied to CNPC’s cost/return formula against the open market valuation. The net present value at that time of the entire South Pars site was US$116 billion (shortly after it jumped to US$135 billion, and now it is higher again). 

Following various veiled threats from the U.S., CNPC said in relation to all its dealings with Iran – and to Phase 11 of South Pars as well – that it was prepared to use its ‘special’ banking unit - the Bank of Kunlun - as a funding and clearing vehicle if and when it took over the full operations of Phase 11 in line with its new 80 percent+ stake. The Bank of Kunlun had – and still has - considerable operational experience in this regard, as it was used to settle tens of billions of dollars’ worth of oil imports during the United Nations’ sanctions against Tehran between 2012 and 2015. Most of the bank’s settlements during that time were in euros and Chinese renminbi and in 2012 it was sanctioned by the U.S. Treasury for conducting business with Iran. These sanctions had no significant effect whatsoever on either the Bank of Kunlun or China. 

Related: Energy Shortages And Inflation Threaten Civil Unrest In Europe

Crucially, though, the U.S. ramped up pressure on China in the Trade War under the unpredictable former President, Donald Trump, particularly looking to increase sanctions on its most important technology companies, including Huawei. This, together with the fact that China was already locked into the new supercharged 25-year deal with Iran, as exclusively broken by me in September 2019, prompted Beijing to adopt a lower public profile on high-visibility Iranian oil and gas fields wherever possible. Top of this list was Phase 11 of South Pars, so CNPC publicly withdrew from the project in October 2019. 

This said, China’s activities on Phase 11 – and elsewhere in Iran and Iraq – did not cease entirely but merely changed appearance into a less high-profile form that was unlikely to cause an unpredictable reaction from Trump. “It was one thing for China to quietly ignore all sanctions that the U.S. had imposed on importing Iranian oil and gas, but it was quite another thing for it to blatantly put its major state companies on the ground in Iran at that point in the [President Donald] Trump administration when tensions were so high,” said the Iran source. “At that time these included the U.S.’s sanctioning of China over its [alleged] human rights violations against Muslim minorities in the Xinjiang region, and the extension of U.S. sanctions against Huawei over cyber-espionage and technology theft concerns,” he added. 

China had been poised to make a dramatic public return to Phase 11, and elsewhere in South Pars, according to a source close to the European Union’s energy security apparatus, in the belief that Trump’s successor, Joe Biden, was proving less of a challenge in the geopolitical power domain than his predecessor. However, after Russia’s invasion of Ukraine on 24 February, it was made clear to China’s President Xi Jinping by the White House that China should ‘tread lightly’ in its dealings not just in Eastern Europe but also in the Middle East. Consequently, given the broad and deep cooperation that China and Russia have been using to great effect in multiple political hotspots around the globe in recent years, China made way for Russia to enter Phase 11 of South Pars instead. 

This grand entrance appeared way down the list of memoranda of understanding (MoUs) signed in July between Russia’s state corporate proxy, Gazprom, and the National Iranian Oil Company (NIOC), but it is extremely significant. In tandem with all the other deals agreed in the MoUs, Russia’s spearheading of Phase 11 (with Petropars to play a supporting role on the ground) gives the Kremlin enormous control over Iran’s gas resources. Iran’s senior people, including Owji himself, think that this is a partnership, but it may not turn out to be quite that after all.

By Simon Watkins for Oilprice.com

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