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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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Huge Oil Fields Could Help Iran To Seize Saudi Market Share In China

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Given that China’s oil demand has now recovered from the COVID-19 outbreak to even higher levels than before, Iran is operating at full tilt to optimise the oil available to key ally Beijing from any and all of its fields. Principally this involves optimising output from the cluster of supergiant fields in the West Karoun oil region, attempting to increase the average recovery rate from older fields, and pushing forward on production increases from fields shared with Iraq and Kuwait. All of this is geared to twin objectives: increasing Iran’s crude oil production to 5.7 million barrels per day (bpd) by the end of the sixth development plan (ending in 2021/22), and ensuring that it is able to provide China with the steady flow of oil that it requires. Given the variability of Russia’s support for Iran over recent years, Tehran believes that China is a better bet for Iran’s future. Like Russia, China has one of just five Permanent Member votes in the United Nations Security Council (plus the U.S., U.K., and France) but, unlike Russia, China absolutely needs both Iran in its Middle East client-state line-up, given its multi-generational ‘One Belt One Road’ strategy.

Aside from the supergiant fields of West Karoun that OilPrice.com has covered extensively in recent months, top of the list of key sites for Iran are two fields that have always been deliberately kept under the international radar by Iran for two main reasons. First, virtually all of their output goes exclusively to China, so given the current sanctions-happy U.S. Presidential Administration that is sanctioning Iran and is set to resume where it left off in a full-scale trade war with China, it pays to keep this arrangement quiet. Second, given the tumult that resulted amongst large swathes of the Iranian people when it was revealed that China was receiving extremely beneficial deals for some of Iran’s prime oil and gas assets, it pays to keep the fact that China is also receiving huge discounts on the oil from these fields quiet as well. Related: Will There Be Another Oil Price War?

The ‘lesser’ of these two fields – which has quietly been producing around 200,000 bpd of oil for export to China for years – is Doroud. Conservatively estimated to contain 7.6 billion barrels of oil in place, Doroud’s full output potential has been hindered over the years by various incompetent attempts to increase production, including damaging efforts to inject water and gas by domestic and foreign operators. As a result of this, up until recently it was anticipated that just 1.5 billion barrels of oil were recoverable from the field. However, recent estimates, factoring in advances in technology that is still accessible for Iran despite sanctions, have increased this figure to 2.5 billion barrels and Tehran-based oil and gas industry figures spoke to by OilPrice.com last week, believe that the real figure is probably over 3 billion barrels.

The first big development effort came in 1997 when 42 wells were drilled in the field, comprised of 19 offshore and 23 onshore. Two years later, Iran signed an agreement with French energy major Total for the development of Doroud but its plan to inject gas into the field in a specifically sequenced schedule did not happen and the project was halted. Nonetheless, in 2002 the first wave of enhanced recovery from the Doroud field began in earnest at a rate of 15,000 to 16,000 bpd, with production increasing as new wells were drilled in the field. Currently, the crude oil processing installations are used for treating 100,000 bpd offshore and 110,000 bpd onshore and according to a statement last week from the National Iranian Oil Company’s (NIOC) Directorate of Corporate Planning, the investment needed in the Doroud field to bring it up to full capacity will be recouped over a six-year period from the increase in the crude oil production capacity. “China is the backstop bid for all of Iran’s oil and gas-related projects, and will also provide all necessary technology if Iran is lacking it, and is very keen to put its own people on the ground in Iran at any and all of these projects as well,” a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week.

The other – ‘major’ – field is Arvand, although the current situation there is unsettled. “Basically, the Arvand site comprises three areas from a legal perspective and there are ongoing issues with which country – Iran, Iraq, and/or Kuwait, and any combination of those – owns what part,” the Iran source said. “There are two segments jointly owned by Iran and Iraq – and there are various disputes going on over where the exact boundaries are and the drilling activities of each in these - and there is a third section which is disputed by Iran, Iraq, and Kuwait, with Kuwait’s claim based on the claim that its territory extends into the Persian Gulf offshore section,” he added. “Although the Kuwait claim looks tenuous at first sight, the fact is that there are legacy issues relating to the Iraq invasion of Kuwait many years ago, and also questions over the shape and extent of the undersea reservoir and added to this is that Kuwait is a firm ally of the U.S., whereas obviously Iran is not and Iraq is under review in that context,” he highlighted. Related: Have Oil Traders Abandoned Fundamentals?

The problem for Iran is that this third section is the biggest of all three by a very long way. The areas of Arvand over which Iran currently definitely has some claim are estimated to contain around one billion barrels of oil in place with a recovery rate of about 15 per cent, and the site also holds around 14 billion cubic metres of dry gas and about 55 million barrels of gas condensate. These parts of the Arvand field lie parallel along the Iran-Iraq border, with drilling having started in 2006 for the purpose of estimating the hydrocarbon potential of the formations in the Khami and Bangestan centres. Logging operations were also carried out at about that time in the Fahlyan formation to prove the existence of oil and gas there as well, with all activities administered by the Arvandan Oil and Gas Production Company (AOGPC). Partly in anticipation of a massive surge in output - both from the two sections of Arvand shared by Iran and Iraq and on the promise of much more to come from the third segment - the AOGPC, under the orders of the NIOC, constructed a 165,000-barrel-per-day processing unit very close to the drilling sites.

However, according to the Iran source, the section that is under dispute by Iran, Iraq, and Kuwait, is estimated to have reserves of 6 billion barrels, with at least 18 per cent of that deemed recoverable. “The [Petroleum] Ministry’s estimates – and those of the NIOC – are that this section is relatively straightforward to develop, given the right equipment and technology, with an average cost recovery per barrel being at least 15 per cent lower than the lowest average recovery rate in the region – that is US$1.65 to US$1.70 per barrel - whereas the average low for Iran, Iraq, and Saudi Arabia is around US$2.00 per barrel,” he said. “The NIOC estimates that crude oil production from this section could rise to 1.4 million barrels per day within the first five years of proper development and could be stabilised around that level, making it one of the biggest producing oil fields in the world,” he told OilPrice.com. “From the U.S.’s perspective, this would be extremely undesirable, given the current sanctions environment, especially as the output from this, along with most of the other output from the other two Arvand sites on Iran’s side, would go to China, to which effect Iran is offering China’s CNPC a discount of around US$4.50 per barrel,” he concluded.

By Simon Watkins for Oilprice.com


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