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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 Is Preparing For An Oil Export Boom

In the current straitened sanctions period, Iran’s focus in its oil sector is broadly to increase the capacity of its fields in West Karoun and from the huge fields that it shares with Iraq. This strategy allows it firstly to generate income even in the low price oil environment - its US$1-2 per barrel lifting cost is the same as Saudi Arabia’s - and secondly to position itself to take up any slack in supply caused by dint of the oil price war. According to a senior oil sector source who works closely with Iran’s Petroleum Ministry, Tehran expects Saudi Arabia, for one, to struggle to meet the fantastical supply figures that it has given to key potential buyers, particularly in the East, in the coming weeks and beyond. This view appears entirely reasonable, given that just last week Saudi Aramco reportedly rejected at least three Asian refiners’ requests (one Korean, one Taiwanese, and one Chinese) for additional crude for April, on top of their long-term supply deals.  The development of the West Karoun fields does not just involve the continued exploration and development of the biggest well-known fields in the oil-rich region - North Azadegan, South Azadegan, North Yaran, South Yaran, and Yadavaran – but also of the lesser-known sites as well. The development of this latter segment of oil resources will be necessary to achieve the aim stated by Iran’s Petroleum Minister, Bijan Zanganeh, which is that the West Karoun fields will produce at least one million barrels of oil per day when access to sufficient investment and technology has been restored. In the interim, the region is producing around a third of that level. Even at this point, though, every incremental barrel increase is being sought as, according to the Iran source, for every one per cent that the rate of recovery from West Karoun is increased the recoverable reserves increase by 670 million barrels. At an average Brent oil price of US$30 per barrel that equates to just over US$20 billion in additional revenues for Iran. 

Such a field is Darquain (or ‘Darkhoein’), located 45 kilometres north of the city of Khorramshahr and 100 kilometres south of the oil-rich city of Ahvaz, in the Khuzestan Province. With an estimated minimum five billion barrels of oil in place, 1.3 billion barrels of which are deemed recoverable, the field was initially developed by Italy’s ENI based on its successful 2001 buyback contract tender, together with local partner Naftiran Intertrade. Production of the light oil (API gravity of 39) began in 2005, with Darquin-1, and the Darquain-2 development followed in early 2011. Both of these have been focused on the exploitation of the Fahlyan reservoir formation, with the resultant oil flows being delivered into the Ahvaz-Abadan oil pipeline. 

Related: Oil Climbs As U.S. Pushes For An End To The Price War
As it stands, Iran is laying the groundwork for final talks with Chinese and Russian developers to take a more central development role in the field, once the global oil market has settled into a new equilibrium. Indeed, before the re-imposition of U.S. sanctions in May 2018, the contract for Darquain had been one of the US$30 billion of ‘strategic’ energy deals agreed by Iran with Russia during President Vladimir Putin’s visit to Tehran in November 2017. These were to involve the state-owned Russian heavyweights Rosneft (oil) and Gazprom (gas), according to the Iran source. 

“Firm talks can only move forward again once the effects of the global lifecycle of the coronavirus have been fully factored in, irrespective of the rebound in Chinese demand that we are likely to see from the latter half of this quarter,” said the source. “Additionally, Iran will not want to make long-term deals even immediately after that if the oil price war is still going on as it will mean that the average pricing reference points in the contracts will be low,” he added. Nonetheless, in preparation for this, the new contract to be offered any foreign developer for Darquain will not be the unpopular buyback contact but rather the new Iran Petroleum Contract (IPC) model. 

The aim of the next phase – Darquian-3 – will be to get production up to 200,000 barrels per day (bpd) within a five year period from the commencement of the new contract, which the Petroleum Ministry estimates will cost around US$1.5 billion is extra funding to achieve. “Before the public backlash in Iran over reports that China was aiming to take over its oil and gas sector, the understanding between the Petroleum Ministry and China had been that in order to get the very preferential terms offered on taking over Total’s stake in South Pars [Phase] 11, China would guarantee that the output from West Karoun fields would go up to 500,000 barrels per day within two years,” the Iran source told OilPrice.com last week. “It may be that ENI comes back but the most likely outcome is that Russian firms continue to work on a ‘contractor’ basis [to avoid tangential U.S. sanctions on Iran] for the time being and then are in prime position to take over development when the oil market returns to more of an equilibrium point,” said the source.

Related: Not Even The $2 Trillion Stimulus Package Can Save Oil Markets

This third phase development of Darquian will not only involve exploiting the more difficult areas of the previously developed Fahlyan reservoir formation but also on the development of the Ilam and Sarvak reservoirs. This follows the findings of previous ENI studies indicating that heavy crude in the two layers are recoverable. Given this difference in product, both water- and gas- injection will be used across the field and already, according to Iranian sources, 31 oil well, 6 gas injection wells, crude oil processing facilities including line pipes, processing installations, gas compressors, infrastructure including crude oil storage tanks and roads are already underway. Based on these advances alone, according to a comment last week from Jahangir Pourhang, chief executive officer of Arvandan Oil and Gas Production Company (AOGPC), Darquain’s output capacity increased 20,000 bpd over the past year. 

Arvand itself is also seeing movement, spurred on by its status as also being a field Iran shares with Iraq. The two states share a number of major oil fields containing about 14 billion barrels of recoverable oil, principally: Azadegan (Iran side)/Majnoon (Iraq side), Azar/Badra, Yadavaran/Sinbad, Naft Shahr/Naft Khana, Dehloran/Abu Ghurab, West Paydar/Fauqa, and Arvand/South Abu Ghurab. For a long time, Iran was playing catch-up with Iran over exploiting the resources of these shared sites, given its previous period of long-running sanctions, especially when they were increased in 2011/12. Now, though, with Iraq in domestic political and economic disarray – not to mention, its increasingly strained relationship with the U.S. – Tehran believes that the time is right to drill more aggressively, including more horizontally. 

Arvand, therefore, is also one of the fields that saw its foreign participation contract model change from buyback to IPC. Also located in Khuzestan Province, around 50 kilometres south of Abadan, the field has around one billion barrels of oil in place, and the recovery rate is 15 per cent. It also has at least 14 billion cubic metres of dry gas and 55 million barrels of gas condensate in place, according to Petroleum Ministry estimates. Discovered in 2008, it has relatively light crude (API gravity of 44) and because of the estimated relative ease of extraction and relative small scale, requires just US$135 million of investment to achieve a sustained daily output figure of around 20,000 bpd, although this could be increased through enhanced oil recovery techniques. “Arvand is regarded by the Petroleum Ministry as being an ideal, bite-sized site through which a big foreign player from China or Russia could come back in a full exploration and development contract, which would be profitable to it in itself but which would also allow it to gauge the reaction from the U.S. and from the Iranian people,” the Iran source concluded. 

By Simon Watkins for Oilprice.com

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Leave a comment
  • Christopher Moses on March 26 2020 said:
    America loves cartels... Like the central banking cartels, sugar cartels, Big Pharma, Big Agro, Big Medical, media cartels, etc...

    The U.S. Government a don’t think overlords they really serve is a petulant child, kicking rocks when someone beats them to the punch.

    To make ANY reference to the US Government being the victim, standing on the moral high ground is UTTERLY LAUGHABLE! If that’s what any of you believe, you need to pick up a book, and realize the US has created most of its own misery, as well as the rest of the world. IS hegemony IS a virus, as it is explicitly totalitarian inhumanity. America is dead, and the bureaucrats and corporate banking thieves killed it with their greed. We should hunt them down, jail them and return the favor.
  • Mamdouh Salameh on March 26 2020 said:
    Since 1982 when OPEC introduced production quotas for its members and allocated a 4.0- million barrels a day (mbd) production quota for Iran, the Iranian oil industry never ever managed to fulfil its quota. The highest figure it ever managed was 3.87 mbd in 2017 according to the authoritative 2019 OPEC Annual Statistical Bulletin.

    Iran’s oil industry has been hampered by extensive damage to its reservoirs as a result of producing 6.0 mbd for considerable time under the Shah, followed by the Islamic Revolution , an 8-year war with Iraq and sanctions on and off since then. This chain of events has thwarted Iran’s attempts for securing the investments and the latest technology and also finding the time to repair its reservoirs.

    Therefore, talking about Iran preparing for an oil export boom is unrealistic and, if I may add, flippant.

    Moreover, Iran’s lifting cost per barrel is estimated at $18.17 compared with $2.8 a barrel for Saudi Arabia. In addition, Iran’s oil recovery factor (RF) is estimated between 15%-20%, well below the global average RF of 34%-35% because of the damaged reservoirs.

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

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