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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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Iran Moves Ahead With $500 Million South Pars Oil Development Deal

  • Iran is set to move ahead with a $500 million deal for the production, development, and enhanced oil recovery from the South Pars oilfield.
  • The project will introduce new horizontal drilling and foreign technologies for the first time ever.
  • This project could be even bigger than expected, as analysts estimate the field is likely to have a lot more oil than public estimates.

Iran is moving ahead with a US$500-million contract for the production development and enhanced oil recovery from its strategically vital South Pars Oil Layer signed between the National Iranian Oil Company (NIOC), the Iranian Offshore Engineering and Construction Company, and an as-yet officially undisclosed foreign company. “In this contract, for the first time, horizontal drilling with new foreign technologies and water injection will be used as one of the methods of production enhancement,” said NIOC chief executive officer, Mohsen Khojasteh-Mehr. “The two key points to understand about the [South Pars] Oil Layer is that it is likely to have a lot more oil in it than has been publicized by the [Petroleum Ministry] and even more importantly it has always been seen by the [Petroleum] Ministry as being a doorway for foreign firms to participate more deeply in the ongoing development of the [South Pars] Gas Field,” one of the sources said.  The South Pars non-associated natural gas field’s 3,700 square kilometers (km) sector of the 9,700 square km basin shared with Qatar (in the form of the 6,000 square km North Field) holds an estimated 14.2 trillion cubic meters (tcm) of gas reserves in place plus 18 billion barrels of gas condensate. It already accounts for around 40 percent of Iran’s total estimated 33.8 tcm of gas reserves and about 60 percent of its gas production, with this set to rise. It is so important to Iran’s future prosperity and places in the world that it is regarded by the Islamic Republic as a core strategic project with the latest accurate information relating to it seen as a matter of national security. Nonetheless, as part of the detailed analysis of it and of all Iran’s core oil and gas assets contained in my new book on the global oil markets, with the addition of the export and sanctions-avoiding Guriyeh-Jask pipeline, the net present value of the South Pars gas field has jumped from an estimated US$116 billion two years ago to just under US$150 billion now, according to sources close to the Petroleum Ministry.

According to the only previous public statements from Iran on the South Pars Oil Layer (SPOL) project, the former deputy head of the National Iranian Oil Company (NIOC), Gholamreza Manouchehri, has said that the project is a complex process requiring integrated development and that: “We are looking for a competent contractor who can make a commitment to production…We are looking for cumulative production.” Earlier last month, Mohammad Meshkinfam, the managing director of the Pars Oil and Gas Company, which is in charge of developing the South Pars site, said that the company was in talks with a number of Iranian companies on the development of the oil layer of the field. He added that these negotiations were confidential.

This said, just prior to discussing the possibility of pushing the development of the SPOL, the Iranian minister of transport and urban development, Rostam Ghasemi, was at the head of a delegation that flew to Moscow overnight on 26 April to meet his Russian counterparts in order to sign several wide-ranging agreements connected to transport and transit infrastructure. According to local Iranian reports, the agreements included the activation of the International North-South Transport Corridor (INSTC) and the development of maritime, air, and rail cooperation between Iran and Russia. Part of this includes the operation of the rail corridor from Chabahar Port in Iran to Russia and the electrification of the Incheborun-Garmsar Railway. 

Chabahar Port has been designated by China and Russia as one of the key port and later air facilities that can be assigned ‘dual use’ for civilian and military purposes both under the 25-year China-Iran deal originally agreed in 2019, as analyzed in-depth in my new book on the global oil markets, and under the rolling 10-year cooperation agreements between Russia and Iran. The railroad, from Garmsar on the Tehran–Mashhad mainline to Inchehborun on the border with Turkmenistan, is part of a transit route connecting Kazakhstan and Turkmenistan to Amirabad Port in Iran’s Mazandaran province. Meanwhile, as Finland pushed for NATO membership in the aftermath of Russia’s invasion of Ukraine, it is apposite to note that the North-South railway corridor starts from Helsinki in Finland and passes through Russia, Azerbaijan, Iran, and Mumbai.

Related: The War In Ukraine Has Stalled Global Efforts To Cut Emissions

Previously, the main international oil companies with interests in the SPOL were Denmark’s Maersk Group and French oil supermajor Total. Ironically, given the subsequent turn of events regarding Iran’s supergiant non-associated South Pars gas field, many in the oil industry believed that one of the reasons for Total’s US$7.45 billion purchase of Danish A.P. Moller-Maersk’s oil and gas unit was to boost the French company’s chances of being allowed to run the flagship Phase 11 of the South Pars field by being allowed first to develop the SPOL. According to one of the Iran sources exclusively spoken to by OilPrice.com, Maersk was just days away from being awarded the SPOL contract – alongside Royal Dutch Shell - before Iran’s NIOC heard that Total was going to buy the Norwegian firm, so held off awarding the contract.

According to the NIOC’s Khojasteh-Mehr, the development of the second phase of the SPOL has been negotiated within the framework of the new upstream contract model of the Iran – the Iran Petroleum Contract (IPC), as also analyzed in-depth in my new book on the global oil markets. As such, he added, the project entails upgrading and modifying the existing processing vessel and platform, overhauling existing wells, drilling new wells including production and water injection wells and appraisal, construction of oil discharge and loading system, and strengthening the water injection system. 

Iran started pumping oil from the oil layer in March 2017, with an initial production of just 5,000 bpd that has risen now to 25,000 bpd, and this has been focused on the proven oil areas of the SPOL, including Sarvak, Kazhdomi, and the Upper Darian and Lower Darian formations. However, previous internal Petroleum Ministry estimates have been that the SPOL may hold around seven billion barrels of oil. This original estimate has officially been revised down to just under one billion barrels, but this is regarded by the Iranian sources spoken to by OilPrice.com as being an attempt to minimize any potential wrangling with neighboring Qatar over boundaries and the future development of the site. 

In this context, much of the SPOL’s reserves are projected to be located about 100 kilometers from the Iranian coast, in the north-eastern extension of Qatar’s Al-Shaheen field in the Persian Gulf. Given that the site is located at around 67 meters of water depth, the lifting costs (excluding capital expenditure) will be higher than the usual figure in Iran. However, the usual figure – a US$2-3 per barrel lifting cost range – is the lowest in the world, along with Iraq, and Saudi Arabia, so a few extra dollars per barrel would still place the site amongst potentially the most profitable in the world, depending on the per barrel remuneration rate given to participating firms by the Petroleum Ministry.

By Simon Watkins for Oilprice.com

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