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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 Boosts Oil Recovery Rate To Counter U.S. Sanctions

Given the gaps available to Iran in the current U.S. sanctions environment to continue to export its oil – principally via rebranding as Iraq oil and various shipping scams – Tehran is making a move to dramatically improve the recovery rate on its key oil sites. Last week, the Islamic Republic’s Petroleum Minister, Bijan Zanganeh, announced the awarding of a US$1.3 billion contract to improve oil recovery at two onshore oil fields in Khuzestan province to Iran’s main infrastructure and power construction company, MAPNA Group. In theory, as well, the awarding of this contract to MAPNA may be a sign of a partial shift in Iranian politics back to the more Western-friendly moderate view espoused by President Hassan Rouhani and his supporters.

The mean average rate of recovery across all of Iran’s oil fields was 5.5 per cent before U.S. sanctions were re-imposed in 2018, after which it dropped to the current 4.5 per cent. By contrast, Saudi Arabia has a mean average rate of recovery of 50 per cent – genuinely correct, not one of its self-serving fantasy figures – and it has plans in place to bring this up to 70 per cent within the next three years. The ease of recovery per barrel (pb) from each country is largely the same, as evidenced by the identical lifting cost of US$2-3 pb (the total operating cost excluding capital expenditure), so there is no substantive reason why the recovery rates between the two should be much different.

The plan now from Iran’s side is to reduce this recovery rate gap with its neighbour by increasing its own mean average recovery rate across its fields to 25 per cent within the next three years as well, a senior oil industry source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week. As Iran’s key cluster of oil fields – in the West Karoun region - together contain at least 67 billion barrels of oil in place, for every one per cent increase in the rate of recovery, the recoverable reserves figure would increase by 670 million barrels. This equates to around US$34 billion in revenues with oil even at US$50 a barrel. Related: Can Digital Tech Solve Oil’s Talent Crisis?

Prior to the re-imposition of U.S. sanctions, Iran was in the process of choosing from an array of very good options on the optimal way to increase recovery rates in each of its major fields. It had signed, or was in the process of signing, deals with a swathe of international oil companies to take control of these activities, including top European and Asian firms, until the U.S. announced its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in May 2018. At that point, though, over and above the withdrawal of France’s Total from the South Pars Phase 11 gas field (and the in-principle-agreed South Azadegan oil field), various other northern European companies were still willing to deal with Iran, given that the European Union did not support the U.S. JCPOA withdrawal to such a degree that it introduced the ‘Blocking Statute’.

One of these companies with a considerable history of working with Iran, according to various sources, was absolutely confident that it could raise the mean average recovery rate to 12 per cent within a year, to 15 per cent within two years, and then to 20 per cent within three years. “As it was, though, the U.S. was able to put pressure on the company and the deal never went through, which meant that various companies associated with the IRGC [Islamic Revolutionary Guard Corps] took over the responsibilities of boosting the recovery rate, at which point it went down at least one per cent,” he told OilPrice.com. “This is why the [Iranian] government has now turned to MAPNA, as it is a proper, commercially-run, independent company with a good track record of achievement in building out Iran’s power sector,” he added. “This contract shows commercial considerations finally winning out over the move further towards the IRGC that we have seen since 2018, and may be a significant sign of things to come,” he underlined.

MAPNA not only works closely with all of Iran’s leading universities to develop the required technologies and engineering systems required for its major projects but can also draw upon the ‘extra elements’ that it might need to optimise recovery rates from a range of other sources. For example, it has a longstanding good relationship with German engineering giant, Siemens, with which only a relatively short while ago it signed an agreement that would allow it to acquire the technological know-how to manufacture the German firm’s F class gas turbines in Iran, prior to which Siemens was to deliver two of these turbines to the flagship Bandar Abbas power plant.

This commercial relationship runs in tandem with Iran’s extremely close relationship with the German government. “Germany has been the staunchest supporter of Iran against all of the recent U.S. moves against it, being an architect of the original JCPOA, and later invoking of the Blocking Statute and creating the INSTEX payment mechanism,” the Iran source said. “[Chancellor Angela] Merkel has held a personal animosity and distrust towards the U.S. ever since [2013] the revelations from Edward Snowden that the U.S. had been spying on its NATO allies for years, which went down especially badly with her, as she was brought up in East Germany being spied on by the Stasi,” he added. Related: Real Energy Independence Is An Illusion

In addition to this, of course, Iran has access to all of the oil engineering technology and expertise of China and Russia, as part of the ongoing deals between the three countries, documented in depth in OilPrice.com. “Russia faced exactly the same problem of declining recovery rates across all of its major fields towards the end of the U.S.S.R. [Union of Soviet Socialist Republics] but through the application of various technologies and IOR [Improved Oil Recovery] and EOR [Enhanced Oil Recovery] techniques completely turned the trend around to where it is now, being one of the top two oil producers,” the Iran source said. “And both Russia and China have pledged whatever financial support – of one sort or another – that Iran needs,” he added.

The immediate focus for MAPNA, then, will be on the two fields covered in the contract in the southwest Khuzestan province: Parsi and Paranj. Currently producing a combined 52,000 bpd of crude oil, the objective of the 10-year contract is to raise this to 85,000 bpd. Although the core figure of the contract is US$876 million, the total investment is expected to reach around US$1.3 billion due to the scale of the work required to develop the relatively underdeveloped fields that are estimated to hold around 12 billion barrels of oil in place. This work will include broad-based desalination and the drilling of 29 new and submersible wells in addition to aggressive EOR techniques especially on Parsi, which used to pump around 450,000 bpd on its own in its heyday.  

“If MAPNA can sustainably raise the recovery rates from these two fields and from the other fields in which it is also now engaged [Aban, West Paydar, Sepehr, Jofeyr, East Paydar, Dalpari, and Cheshmeh Khosh] to even seven per cent within the next twelve months, then it will be a major step towards reducing the influence of the IRGC in Iran’s oil sector as a whole, which in turn will mean that reconciliation with the U.S. and the resuscitation of the JCPOA gets that much closer,” the Iran source concluded.  

By Simon Watkins for Oilprice.com

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Leave a comment
  • Mamdouh Salameh on February 17 2020 said:
    With or without US sanctions, it is always good economics and equally good management for oil producers to strive to enhance their oil recovery factor (RF) through the application of enhanced oil recovery (EOR) techniques and horizontal drilling (HD) technology. This helps producers to increase production particularly from depleting wells. Iran is no exception.

    The global RF average ranges between 34%-35% though rates of 45%-50% has been reached in the North Sea and the Gulf of Mexico because of the application of EOR and HD technology at an early stage of production.

    For the benefit of the author this article, Iran’s average RF is around 20% and not 4.5% as he wrongly mentioned in his article. Both the previous sanctions and the current ones have prevented Iran from acquiring the latest oil recovery technologies.

    Moreover, Saudi Arabia has never achieved an RF of 50% in its history. Saudi RF was estimated at 25%. To explain claiming 267 billion barrels (bb) of proven reserves for 15 consecutive years according to the 2019 BP Statistical Review of World Energy despite sizeable production of 9-9.5 million barrels a day (mbd), the Saudis have been claiming an RF of 50% and unsubstantiated increases in their oil initially in place (OIIP) year after year.

    Saudi oil production has been for years underpinned by five giant oilfields, namely, Ghawar, Safaniya, Khurais, Shaybah and Zuluf all of which are more than 70 years old and fast depleting. Even with the latest technologies, Saudi Arabia could only raise its RF by only 2%-3% according to research from Norway’s oil giant Equinor (formerly Statoil).

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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