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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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Saudi Arabia's Archenemy Is Taking Advantage Of The Oil War

Iran is positioning itself to benefit from the fallout from Saudi Arabia’s latest disastrous handling of the global oil markets. The Kingdom’s ability to metaphorically shoot itself in the foot has been well-documented by OilPrice.com and is perhaps nowhere better illustrated than by its recent announcement that oil and gas giant, Aramco, has been given the go-ahead to launch the Jafurah shale gas field project. Saudi Arabia trumpeted this as the biggest shale gas development outside the U.S. and one which will allow the Kingdom to become a net exporter of gas. Saudi Arabia added that it would free up more oil (that would have been burned for domestic power generation) for export and intimated that Jafurah would be the first of a number of such shale projects in the future.

The supreme irony here is that although, as OilPrice.com has shown, the Jafurah shale project is a typical Saudi sham that will not allow it to achieve any of its stated aims, the threat of the Kingdom looking to diversify its oil and gas development plans into shale was a key reason why Russia decided not to support the Saudi calls for massive further cuts to OPEC+ oil production quotas. “With oil already looking soft ahead of [last] Friday’s expected decision on more cuts from OPEC+, Russia decided that the time was right to kill two birds with one stone: try to bankrupt as many U.S. shale producers as possible and push the Saudi budget [this year’s breakeven price per barrel of Brent is US$84] further down into a death spiral by not agreeing to any more cuts at all,” said a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry.

Just to underline the point, Russian energy minister Alexander Novak said that producers would be able to pump at will, ending three years of supply cuts designed to support prices. “Saudi was already looking shaky, with budget deficits entirely possible to 2028 and maybe further, but this move by the Russians poses an existential threat to the House of Saud,” the Iran source added. Indeed, it comes at a time when the long-running broader geopolitical relationship with the U.S. outlined in-depth in my new book on the oil markets is already more strained than at any time since the Oil Crisis of 1973 and at a point when the current de facto ruler of Saudi – Crown Prince Mohammad bin Salman – is facing another potential crisis to his authority. This was underlined over the weekend as reports suggest that Salman ordered another round-up of his high-ranking opponents (the previous major one was at the end of 2017), including Prince Ahmed bin Abdulaziz, a younger brother of King Salman, and Prince Mohammed bin Nayef, the King’s nephew and a former crown prince. Related: Oil Prices Rise As Market Expects Large OPEC+ Cut

For Iran, being sanctioned clearly has serious negative implications but it also has one great advantage in the current global oil order: it is an outlaw that can do anything it wants if it can get away with it. In practical terms, as OilPrice.com has consistently highlighted, this means continuing to produce as much oil and gas as it can for whatever it can get, generally to Asia and Eastern Europe, in whatever ways that it can. These include, most notably, rebranding Iranian hydrocarbons as Iraqi hydrocarbons via the extremely long and extremely porous border with Iraq and through Turkey and through Former Soviet Union states, in addition to shipping products to the East and Africa on vessels that then ‘disappear’ from tracking.

This phenomenon – far from being the great technical feat that may imagine - actually only involves turning off a switch on the AIS (Automatic Identification System) transponders. Therefore, all Iran has to do in the current situation is to wait for Saudi to go bankrupt and to gradually replace the oil supply deficits and contracts that result as this process evolves or it could be speeded up if there happened to be another attack on Saudi oil facilities by some rebel group, perhaps the Houthis, or Hezbollah, or Hamas, or the PIJ, or any of the other groups that detest the faltering Saudi-U.S. alliance.

Iran has three key strands of business that it has always looked to boost in times of sanctions-related turmoil, and these are of equal importance to its overall strategy: the supergiant non-associated South Pars natural gas field, petrochemicals, and the West Karoun oil fields. OilPrice.com has covered the first two areas in depth in the past and will continue to do so but the immediate focus now for Iran is increasing output of oil from the hugely resource-rich cluster of oil fields in the West Karoun region. It is a plain fact that these fields together contain at least 67 billion barrels of oil in place, so for every one percent increase in the rate of recovery, the recoverable reserves figure would increase by 670 million barrels.

This equates to US$33.5 billion in revenues with oil at a US$50 per barrel average. Iran’s current rate of recovery across all of its fields has dropped to 4.5 percent, from 5.5 percent before sanctions, according to senior Iran sources spoken to by OilPrice.com last week, which compares to at least 50 percent in Saudi Arabia, although Saudi has plans – real and believable ones for a change – to boost this to 70 percent within a couple of years at most.

Given that the lifting price – a proxy for ease of recovery - for oil in both countries is almost identical at around the US$2 per barrel level, there is no empirical reason at all why there should be a 45.5 percent disparity in the recovery rates between the two states. Just prior to the re-imposition of sanctions by the U.S. in 2018, a very well-known, high-level, Western oil firm was ready to sign a deal with Iran to boost its recovery rate to at least 12 percent within a year and to at least 15 percent within two years. This would mean an increase for Iran in revenues of US$402 billion and US$502.5 billion respectively.

So, Iran has in recent days announced some new plans for its key West Karoun oil fields. Azadegan – split into North and South development fields, the latter of which was to have been developed by France’s Total before allegedly the U.S. pressured it out of Iran (it dropped its South Pars Phase 11 investment, of course, as well) – is one such focus. Iran’s largest oil field and the third-largest field in the world, just behind Saudi Arabia’s Ghawar and Kuwait’s Burgan oil fields, Azadegan was discovered in 1997 and initially estimated to hold 33 billion barrels of oil. However, in 1999, a new oil layer with 2.2 billion barrels was discovered in the field as well, and unofficial further estimates from Iranian data sources suggest that there may be total reserves across the field of 42 billion barrels of oil. Currently, the South Azadegan site is producing a steady 105,000 barrels per day (bpd) with spikes to 115,000 bpd-plus but the plan is for this to rise to 320,000 bpd in Phase 1, and 600,000 bpd in Phase 2. Related: Here’s Why Oil Prices Should Go Higher

With Chinese (in particular) and Russian companies engaged in – under the radar – ‘contractor’, ‘supplier’, and ‘technical advisory roles’, Iran has moved in the last few weeks to building mobile treatment units with a capacity of 50,000 bpd under build-operate-own deals, and has upped the tempo of indigenizing the required and associated technologies, equipment, and processes necessary to increase the recovery rate over time. This will be boosted by the ongoing oil industry-academic tie-up between the Petroleum Ministry, National Iranian Oil Company, and Tehran University that aims to utilise and deploy the very latest in Enhanced Oil Recovery techniques (EOR) on the South Azadegan field.

Much the same development template is either to be employed, or is being employed already, across the other major fields in West Karoun, such as the Yadavaran oil and gas field. Initial studies had put the field’s oil capacity at 17 billion barrels, with an EIA-estimated 3.2 billion barrels of recoverable oil reserves and 2.7 trillion cubic feet of recoverable gas reserves. However, according to Hadi Nazarpour, the Yadavaran project director for the Petroleum Engineering and Development Company (PEDEC), recent explorations have pointed to a total oil capacity of 34 billion barrels. Currently producing around 100,000 bpd with spikes to 110,000 bpd, PEDEC’s chief executive officer, Touraj Dehqani, recently underlined that PEDEC will drill 25 new wells in the coming months to add 50,000 bpd to the field’s output, with the Phase 3 target being a steady 300,000 bpd.

For the Azar oil field meanwhile, Dehghani recently stated that its first phase development will be complete by the end of the current Iran calendar year (ends on 20 March 2020), producing at least 65,000 bpd of crude oil. He added that around 18 wells were almost ready for production in the field, which would start production once processing units become fully operational, and that the lower pressure and high-pressure flares of the unit are now engaged, following full pre-commissioning tests. The plan is, according to the Iran source, for the turnaround time for wells to be drilled to be halved, with the utilization of acid stimulation of wells, and horizontal and directional drilling, together with other technology and processes to which Iran gained access after the implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear accord on 16 January 2016.

By Simon Watkins for Oilprice.com

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Leave a comment
  • Jessie Phillips on March 09 2020 said:
    If oil is so low, why are gas prices so high? Another record breaking profits for oil companies?
  • david macdiarmid on March 11 2020 said:
    State and county gas taxes + the thin margins for station owners will keep prices high
  • Jing Ping on March 22 2020 said:
    Who needs an archenemy to do the sabotage. A frackin' redneck, an oidsand Canuck, an Odin warrior, a vodka pickle, or a Saudi prince,... They all have reasons to do it, and they all have means to do it...

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