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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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Record-Breaking Gas Prices Prompt Iran To Boost Production

  • Iran looks to capitalize on record natural gas prices
  • A key focus of this ambition will be Iran’s supergiant non-associated gas field of South Pars
  • Elsewhere, the immediate focus for Iran in further developing its gas output will be on the fields originally earmarked for development by Russian companies
South Pars

As great as Iran’s oil reserves are, its gas reserves are even greater, with official estimated proven natural gas reserves of 33.78 trillion cubic metres (Tcm), second only to Russia, 17 percent of the world’s total and more than one-third of OPEC’s. If the new-found reserves in the Chalous field were added – as exclusively revealed by OilPrice.com – then Iran would have a total natural gas reserves figure of 40.9 Tcm (bigger than Russia’s, given required adjustments to that figure). In tandem with its key superpower allies – Russia and China – with which it has long-running comprehensive co-operation agreements in place, Iran is set to ramp up its production of natural gas in a global market that continues to see record gas prices. The first thrust of this new initiative will focus on investing US$11 billion to raise gas production capacity by 240 million cubic metres per day (mcm/d) in 2022, according to a statement from the managing director of the National Iranian Oil Company, Mohsen Khojastehmehr.  A key focus of this ambition will be Iran’s supergiant non-associated gas field of South Pars, and in particular Phase 11. With an estimated 14.2 Tcm of gas reserves in place plus 18 billion barrels of gas condensate, South Pars already accounts for around 40 percent of Iran’s total estimated gas reserves – mostly located in the southern Fars, Bushehr, and Hormozgan regions – and about 80 percent of its gas production. The 3,700-square kilometre (sq.km) South Pars sector of the 9,700-sq.km basin shared with Qatar (in the form of the 6,000-square km North Dome) is also critical to Iran’s overall strategy to sustain natural gas production across the country of at least 1 billion cubic metres per day (Bcm/d), with Phase 11’s target production capacity being 57 million cubic metres per day (mcm/d). It is also vital to Iran’s corollary plans to become a world-leader in the liquefied natural gas (LNG) market. 

Phase 11, however, has been a principle focus of a power struggle between the U.S. on the one side and China and Russia on the other, with Europe caught in the middle. In 2018 pressure was put by the U.S. on French oil giant, TotalEnergies, to withdraw from its 50.1 percent stake in the US$4.8 billion Phase 11, which then saw the China National Petroleum Corporation (CNPC) automatically take over the French company’s share to add to its existing 30 percent stake (with the remaining 19.9 percent held by Iran’s Petropars). CNPC was all set to continue with the development of the site, given the enormously beneficial terms that it was offered by China as part of the game-changing 25-year deal analysed in depth in my new book on the global oil markets, but as the U.S. ramped up pressure on China in the Trade War, Beijing made a policy decision to take a lower public profile on project work on Iran’s high-profile oil and gas fields wherever possible. Top of this list was Phase 11 of South Pars, so CNPC publically withdrew from the project in October 2019, having supposedly suspended further investment in it in December 2018. 

In reality, though, China’s activities on Phase 11 – and elsewhere in Iran and Iraq – did not cease but merely changed appearance into a less high-profile and therefore less U.S.-sanctionable form. Consequently, China switched to developing Iran’s oil and gas fields – including the South Azadegan, North Yaran, and South Yaran oil fields, and the South Pars gas site – by engaging in a series of ‘contract-only’ projects, such as drilling-only, field maintenance-only, parts replacement-only, storage-only, technology-only, and so on. Most of these are being done through seemingly smaller firms that are less well-known than the big state players that attract little or no publicity but, as all companies in China are part of the state and are legally bound to work towards what they are told to do by the Communist Party, it does not make any difference to the eventual outcome. Neatly closing the circle on continued China involvement in Phase 11 is that Petropars is also the partner for the various Chinese ‘contract-only’ projects going on in South Azadegan. 

Related: Southeast Asia’s Oil And Gas Output May Never Recover To Pre-COVID Levels

Any of the practical banking difficulties – specifically not being able to use U.S. dollars – threatened by Washington for companies trying to circumvent its current sanctions can be dealt with by CNPC, as it has publicly stated on more than one occasion, by use of its ‘special’ banking unit - the Bank of Kunlun - as a funding and clearing vehicle. The Bank of Kunlun had – and still has - considerable operational experience in this regard, as it was used to settle tens of billions of dollars worth of oil imports during the United Nations’ sanctions against Tehran between 2012 and 2015. Most of the bank’s settlements during that time were in Euros and Chinese renminbi and in 2012 it was sanctioned by the U.S. Treasury for conducting business with Iran. 

Aside from South Pars – and Chalous (which will be developed in tandem with Russia) – Iran is also looking to step up production from the nearby North Pars non-associated natural gas field, with US$4 billion to be spent, which could add about 100 mcm/d quickly, according to Khojastehmehr. The first exploration well in North Pars was completed in 1967 and for the next 23 years before the discovery of supergiant South Pars field in 1990, North Pars was the largest gas reservoir in Iran. Located some 120 kilometres southeast of the southern Bushehr Province, the North Pars gas field has around 1.67 Tcm of gas in place, with a conservatively estimated recoverable volume of gas of approximately 1.33 Tcm. A recent internal study of the state of North Pars by Iran determined that the field is still in a highly workable state for a quick push to significant gas output – specifically, at least 100 million cubic metres per day (mcm/d) within less than 12 months of proper development – with all of the gas recovered to be channelled into LNG production of at least 20 million metric tonnes per annum (mtpa). This is only the figure from the first 12 month phase of development only of North Pars but even this compares favourably to the entire yearly output of global LNG powerhouse – and Iran’s neighbour – Qatar, at 77 mtpa for many years. 

Elsewhere, the immediate focus for Iran in further developing its gas output will be on the fields originally earmarked for development by Russian companies before the U.S. unilaterally withdrew from the Joint Comprehensive Plan if Action (JCPOA) in May 2018. The majority of these fields had already been subject to memoranda of understandings signed between Iran and various Russian counterparts. Kish was one such field earmarked for development by Russia in 2015, just after the JCPOA had been signed on 14 July – with plans for Gazprom to develop it (along with North Pars, and Farzad A and B). The other tentative deals at that point were: GazpromNeft to develop the Changouleh and the Cheshmeh-Khosh oilfields; Tatneft the Dehloran field; Zarubezhneft the Aban and the Paydar-e Gharb; and Lukoil to develop the Ab Teymour and Mansouri oil fields. All of these deals have been subject to delay and/or change since the U.S. re-imposed sanctions in 2018. As it stands, the Kish gas field is estimated to contain as much gas as held by five phases of South Pars, with Iran intending to develop it in three phases and to raise its output to at least 142 mcm/d. Currently, all projects related to Phase 1 of its development, except for the processing unit, have been activated and the drilling of 13 onshore wells is underway.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on December 28 2021 said:
    It is a normal practice for oil and gas producers to raise their production to take advantage of higher prices particularly if they have the reserves and access to investments. Well, Iran has both with billions of dollars provided for investments by China and Russia.

    Even without the added bonus of high gas prices, Iran needs to increase production to satisfy a fast-rising domestic demand including a sizeable quantity used by the oil industry for injection into oil wells to enhance the production of crude oil.

    In so doing, China will be enhancing both its geopolitical and economic influence in the Gulf region while Russia will also be enhancing its geopolitical influence in the Gulf region and will also get some control over Iran’s gas production so as to ensure that its prominent position in the global gas market isn’t undermined by anybody.

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

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