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Iran Pushes Development Of Major Oil Region Under 25-Year China Deal

Whether the Iranian leadership thinks that new U.S. President Joe Biden is set to go easier on the Islamic Republic or on China is unclear as yet but whichever it is, Tehran is pushing to increase oil output from all available fields in the coming 12 months. The focus of these efforts remains on the oil-packed West Karoun region, the recoverable reserves of which increase by 670 million barrels for every one per cent that the rate of recovery from the area. At an average Brent oil price of US$50 per barrel this increase in recoverable reserves equates to just over US$33 billion in additional revenues for Iran. However, so confident is Iran of China’s appetite to buy all of the oil that Tehran wants to send it – for reasons connected to the game-changing 25-year deal between the two countries – that it is not just pushing the development of the biggest of the West Karoun region’s fields but also of more challenging fields in reservoirs that it shares with Iraq.

Located in Mehran at the edge of the Zagros mountains and the other side of the shared reservoir that yields the Badra field on the Iraq side, Azar is a prime example of this latter type of development. The entire area surrounding the field had been peppered with a vast number of mines planted during the 1980-1988 Iran-Iraq war and only when they had been cleared – and it took years – could developers move in. When they did, though, they were faced with Azar’s surface stony ground and condensed reservoir rock, with each well taking an average of 500 days to drill. Nonetheless, with the overriding concern that neighbouring Iraq would develop its side of the shared fields in a manner geared towards expedience rather than sustainability of the oil reservoir – thus damaging Iran’s eventual oil yields from the shared sites – Tehran put the development of its shared fields on the same priority level as the fields of West Karoun. These shared fields also include Dehloran (Iraq side, Abu Ghurab), Naft-Shahr (Khorramshahr), Azadegan (Majnoon), Naft Shahr (Khorramshahr), and Yadavaran (Sinbad). Related: How Oil Could Go To $100 Per Barrel

China for its part in the 25-year deal that focused on oil and gas development committed in 2019 not just to increasing the then-355,000 barrels per day (bpd) output from the West Karoun oil fields cluster by another 145,000 bpd in the first phase (to 500,000 bpd) and then by another 500,000 bpd (to 1 million bpd) but also to supporting the parallel development of the fields Iran shares with Iraq, however difficult. This includes the further development of Azar, the initial production in which began in the first quarter of 2015 at 15,000 bpd, with eight wells completed at that time. After the implementation of the Joint Comprehensive Plan of Action (JCPOA) on 16 January 2016, however, the drilling time was more than halved once Iran gained access to a wider range of technology and materials, which included the utilisation of acid stimulation of wells and horizontal and directional drilling equipment.

Since then, said the Petroleum Engineering and Development Company’s (PEDEC) Keyvan Yarahmadi last week, the Azar field has produced over 36 million barrels of crude oil, with production having hit 30,000 bpd in May 2017 and then full Phase 1 target production of 65,0000 bpd within the last few weeks. This followed the recent successful commissioning of oil trains and the ancillary central processing facility and the site acceptance testing of the crude oil metering system in the joint field.

This drive to complete the early phases of the Azar field development has not just been a product of the general wish to optimise oil production from the fields it shares with Iraq but also of new studies that sharply revised up the in-place oil reserves of this field to 4.3 billion barrels, more than twice the previously estimated figure. These developments open the way for the move to the Phase 2 output target of at least 71,500 bpd - plus around 80 million standard cubic feet of gas per day (mmscfd) – according to a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry.

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“There was always a plan for a third phase as well, which would involve pushing production up to over 100,000 barrels per day, but this was always contingent on the participation of a major IOC [international oil company],” the source exclusively told OilPrice.com. “This is essential due to the complexity of the field in terms of drilling and of the type of oil produced – which has an API gravity of 33, light by Arabian standards, but with high sulphur content - that requires high-spec technology and machinery made from advanced alloys,” he said. “Because of the difficulties with the Azar field, the original plan was to allow any participating IOC to also develop the nearby Changuleh and Dehloran fields under very beneficial terms to offset the extra costs associated with the Azar development,” he added.

In this context, originally Norway’s Statoil had begun developing the Anaran oil field in 2003 and when oil was found in 2005 (in both Azar and Changuleh) it was joined by Russia’s Lukoil in developing the site. Lukoil pulled out of its 25 per cent stake in the entire Anaran block in 2008/9 after various sanctions by the U.S. and E.U. countries were imposed, followed by Statoil from its 75 per cent stake in 2011, after the sanctions were intensified. When the JCPOA was agreed in principle in 2015, a number of IOCs signed memoranda of understanding for fields in the Anaran block, either for singular or multiple fields, including Norway’s DNO, Thailand’s PTTEP, and Russia’s Gazprom Neft and Lukoil again. A corollary of that was that a preliminary agreement with Austria’s OMV was also reached to invest up to US$6 billion in a petrochemical plant at the Dehloran site.

Given the unilateral withdrawal of the U.S. from the JCPOA in 2018 and the subsequent far-reaching sanctions imposed, Iran has been left to look for assistance from China and Russia, with Tehran wanting to indigenise as much of the technology, equipment, and expertise as quickly as possible in the process. In this vein, the second half of last year saw the National Iranian Oil Company (NIOC) sign 13 contracts worth IRR7,160 billion (US$170 million) with local universities and research centres to carry out studies on oil and gas fields. This added to the 22 major research contracts worth IRR 10,090 billion that had been signed in the previous five years aimed at improving enhanced oil recovery (EOR) techniques across Iran’s oil fields.

These contracts allow for the organisations involved to avoid being top of the U.S.’s list of entities to sanction as and when the new Biden administration decides to adopt that strategy against China. “Providing Iran with the ability to indigenise equipment, technology, materials, and processes, is understood by Beijing to be part of the trade-off for unlimited access to oil and gas fields across the country, as is China’s participation in the development of the more difficult fields alongside the easy pickings in West Karoun and the shared reservoirs with Iraq,” concluded the Iran source.


By Simon Watkins for Oilprice.com

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