Facing an unexpectedly rigorous enforcement by the U.S. of its re-imposed sanctions on oil and the recent addition of partial sanctions on its petrochemicals sector, Iran is pushing for output increases from its massive South Pars non-associated natural gas field. The field – a 3,700-square km sector of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Field) – already accounts for around 40% of Iran’s estimated 33.8 trillion cubic metres (tcm) of natural gas reserves and around 60% of its gas production. It is also critical in Iran’s overall strategy to increase its natural gas production up to 1 billion cubic metres (bcm) per day by the end of this Iranian calendar year (ending on 19 March 2020).
A cornerstone of this output expansion strategy remains Phase 11 of the South Pars (SP11) site that has particular symbolic and logistical importance for Iran. Before the U.S. pulled out of the Joint Comprehensive Plan of Action (JCPOA) deal between the P5+1 group of nations (U.S., U.K., France, Russia, China plus Germany) and Iran, French supermajor, Total, had signed a multi-billion dollar deal to develop SP11. This marked the first major upstream hydrocarbons deal done between Iran and a Western firm since the JCPOA was agreed in 2015. That deal evaporated when the U.S. signalled that it would withdraw from the JCPOA, leaving Iran to scramble around trying to persuade any major Russian firm to take up the slack or to inveigle the other…
Facing an unexpectedly rigorous enforcement by the U.S. of its re-imposed sanctions on oil and the recent addition of partial sanctions on its petrochemicals sector, Iran is pushing for output increases from its massive South Pars non-associated natural gas field. The field – a 3,700-square km sector of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Field) – already accounts for around 40% of Iran’s estimated 33.8 trillion cubic metres (tcm) of natural gas reserves and around 60% of its gas production. It is also critical in Iran’s overall strategy to increase its natural gas production up to 1 billion cubic metres (bcm) per day by the end of this Iranian calendar year (ending on 19 March 2020).
A cornerstone of this output expansion strategy remains Phase 11 of the South Pars (SP11) site that has particular symbolic and logistical importance for Iran. Before the U.S. pulled out of the Joint Comprehensive Plan of Action (JCPOA) deal between the P5+1 group of nations (U.S., U.K., France, Russia, China plus Germany) and Iran, French supermajor, Total, had signed a multi-billion dollar deal to develop SP11. This marked the first major upstream hydrocarbons deal done between Iran and a Western firm since the JCPOA was agreed in 2015. That deal evaporated when the U.S. signalled that it would withdraw from the JCPOA, leaving Iran to scramble around trying to persuade any major Russian firm to take up the slack or to inveigle the other existing foreign partner in SP11 - Chinese state-owned China National Petroleum Corporation (CNPC) – to do the same. At the time that Total withdrew from the US$4.879 billion SP11 project, the French firm had 50.1% stake, CNPC 30%, and National Iranian Oil Company (NIOC) subsidiary Petropars a 19.9% share. Under the terms of the agreement, CNPC automatically assumed Total’s 50.1% stake, giving it 80.1% in SP11, which it was expected to develop in two phases and within the same broad timeframe as Total had agreed.
Specifically, the first phase – with an estimated cost of around US$2 billion - would comprise constructing 30 wells and two wellhead platforms connected to existing onshore treatment facilities by two subsea pipelines. The second phase would require the addition of a number of offshore compression facilities, with the number dependent on reservoir conditions at that time. This was the theoretical plan but, just as Russian companies had baulked at the prospect of openly defying Washington’s reintroduced sanctions on Iran, CNPC was told by the Chinese government not to make progress on SP11 - particularly while China’s trade war with the U.S. was also going on. Until very recently, this order from Beijing had held firm, with various Iranian oil and gas industry sources stating that China had done nothing at all on the SP11 site. Related: Middle East Tensions Move Oil Prices Higher
This decision, though, is now under review by the Chinese, on the basis of an offer made to it by Iran’s Petroleum Minister, Bijan Zanganeh, a senior oil and gas industry source who works closely with the Ministry told OilPrice.com. According to the source, the initial understanding between the U.S. and China was that in exchange for China not completely ignoring U.S. sanctions on importing Iranian oil, not driving the key SP11 gas project forward, and not stepping into the role that Total was to have taken on developing the South Azadegan oil field, China would be allowed to continue its activities in North Azadegan and would be able to go ahead with its development of Yadavaran. China had argued that this was only fair as it had already spent billions of dollars developing the second phase of North Azadegan field since it put in place its Master Development Plan to do so in 2015 and had signed the original contract for Yadavaran in good faith in 2007, way before the U.S. withdrawal from the nuclear deal in May 2018 and thus, legally speaking, it had every right to go ahead. “What has undermined this understanding between the U.S. and China, from Beijing’s perspective, is that no waivers were extended to it [China] to continue to legitimately import oil from Iran when the last waivers expired in May, so all other elements of the understanding are now fluid in their application as far as it’s [China] is concerned,” the Iran source told OilPrice.com. “China believes that either way it could gain as either it continues to import Iranian oil at knockdown prices [around a 50% reduction, OilPrice understands] or the U.S. agrees again to the trade off allowing China to go ahead with the prescribed projects providing that it doesn’t openly flout the oil embargo against Iran,” he added.
As it stands, according to comments last week from Iran’s Oil Industries Commissioning and Operation Company that is operating North Azadegan under CNPC’s supervision, the field is now producing at least 75,000 barrels per day (bpd), whilst China’s Sinopec has managed to increase production from Yadavaran - comprised of two former fields, Koushk (discovered in 2000) and Hosseinieh (discovered in 2002) – from initial production in 2013 of 25,000 bpd to the current 120,000 bpd. The third phase target remains 300,000 bpd by the end of 2021, with a further NIOC target being 400,000 bpd by the end of 2025, although this is not yet in Sinopec’s contract.
Given these developments, according to the Iran source, the offer from Iran’s Zanganeh currently being weighed by China is that in exchange for China re-engaging with the development plan originally agreed between the Petroleum Ministry and France’s Total, China will get a 17.25% discount for nine years on the value of all gas it recovers. “This is the value of the gas as applied to CNPC’s cost-return formula against the open market valuation, and currently the net present value of the site is US$116 billion,” he said. China will also have to agree to increase the production from its oil fields in the West Karoun area – including North Azadegan and Yadavaran - by an additional 500,000 bpd by the end of 2020. This accords with Iran’s plan to increase the recovery rate from these West Karoun fields that it shares with Iraq from the current 5% (compared to Saudi Arabia’s 50%). “For every one percent increase, the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in revenues with oil even at US$50 a barrel,” the Iran source concluded. Related: $4.5-Trillion: The Price Tag of A Fossil Fuel-Free U.S.
Elsewhere on South Pars, progress towards 100% completion is continuing. Last week, the Pars Oil and Gas Company (POGC), which operates Phase 14, announced that the third platform of the offshore field was loaded for installation in its designated spot. Once operational, the platform will produce 500 million cubic feet - 14.1 million cubic metres per day (mcm/d) of natural gas. Phase 13, targeted to produce 57 mcm/d of gas on its own, saw two platforms (B and D) become ready for operation prior to this, which would allow production of 28 mcm/d of natural gas at launch, plus 75,000 barrels per day (bpd) of condensate and other associated products. In the offshore sector of SP13 located in the north-western part of the gas field, 38 offshore wells have now been drilled, with delivery of gas to the onshore refinery scheduled to begin when an offshore pipeline becomes available to transmit gas to be used to produce sweet gas, ethane, propane, butane, gas condensate and sulphur products. In preparation for this, a fourth train is now ready, allowing for the processing of up to the full 57 mcm/d of nominal gas capacity, which would then be fed into the Iran Gas Trunkline (IGAT) system. Currently, the four trains receive sour gas from Phases 6 and 8 for injection into the IGAT gas grid.
The recent launch of Phase 13 means that – with the exception of Phase 11 – all of the South Pars blocks on the border of Qatar’s North Dome field would be operational to one degree or another. The previous delay on reaching this milestone was progress on Phases 22 to 24, which had been earmarked to produce a combined 51 mcm/d by 20 March but the lack of hard foreign currency after the U.S. withdrawal from the nuclear deal meant the timeframe had to be adjusted. Despite this, Chinese technology enabled the installation in February of a second offshore platform for the three phases, although given the U.S.-centric constraints, three phases will not be launched operating at full capacity but rather at around 50-55%,” according to the Iran source.
By Simon Watkins for Oilprice.com
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