Sunday, June 29, 2008

Iran in focus

With huge reserves Iran desperately needs foreign investment to turn potential into profit.

Oil has been the dominant industry in Iran since the 1920s. The nation still holds massive oil and natural gas reserves, which should, provided the country's international relations improve, ensure that energy remains the country's core industry for many years to come.

Oil

According to most independent analysis, Iran has proven oil reserves of around 136 billion barrels, with 40 production sites - 27 of which are onshore and 13 offshore. In 2006 Iran produced 3.8 million bbl/d of crude oil, equal to 5% of world production and found mainly in the southwestern Khuzestan region near the Iraqi border. The crude oil generally has medium sulphur content and is in the 28o - 35o API range.
Despite best efforts, Iran has not yet been able to reach the 6 million bbl/d produced in 1974. The oil fields are in desperate need of structural upgrades, with an estimated 400,000 - 500,000 bbl/d lost due to reservoir damage and decreases in oil deposits.
The government has set a target of 5.8 million bbl/d by 2015, which, according to Global Insight, will need around $25-35 billion of foreign investment - something hampered by Iran's current political relations.
The state owned National Iranian Oil Company (NIOC) is responsible for all oil and gas production and exploration within Iran. The National Iranian South Oil Company (NISOC), a subsidiary of NIOC, controls 80% of local oil production in the regions of Khuzestan, Bushehr, Fars and Kohkiluyeh va Boyer Ahamd.
Although private ownership of any upstream function is prohibited under the Iranian constitution, buy-back contracts have been allowed, enabling IOCs to engage in production and exploration if done through an Iranian affiliate.
Iran's oil consumption was around 1.6 billion bbl/d in 2006, and oil remains heavily subsidized by the government, increasing domestic demand but creating budget deficits. In 2005 the IMF estimated energy subsidies account for 12% of Iran's GDP, the highest rate in the world according to an IEA study.

Shipping
IEA (International Energy Agency) statistics put Iran's net crude oil exports averaged 2.5 million bbl/d in 2006, primarily to Japan, China, India and other OECD nations, with export revenues at around $54 billion.Iran holds the largest fleet of oil tankers in the Middle East. The National Iranian Tanker Company (NITC) has 29 ships in operation, including Very Large Crude Carriers (VLCCs).
Kharg Island, the country's largest terminal, has a holding capacity of 16 million barrels of oil and a loading capacity of 200,000 bbl/d.
The Strait of Hormuz, found off the south coast of the country, is only 34 miles wide at its narrowest point yet 17 million barrels - roughly two-fifths of all seaborne traded oil - travels through the Strait every day.
Iran has a total refinery capacity of around 1.5 billion bbl/d with nine operational refineries run by National Iranian Oil Refining and Distribution Company (NIORDC), a subsidiary of NIOC.
There are plans to increase the capacity by a further 985,000 bbl/d by 2012 with expansions and upgrades to existing refineries, as well as new sites at Bushehr, Abadan and Bandar Abbas, however, much of this expansion is reliant on foreign capital investment, which is not forthcoming.

Gas

With an estimated 974 trillion cubic feet in proven natural gas reserves - the second largest in the world behind Russia, Iran is looking at stepping up production in the coming years.
Existing supplies are found mainly in the South and North Pars fields, Tabnak and Kangan-Nan, although approximately 62% of reserves are at non-associated fields as yet undeveloped.
Consumption and production of gas has grown rapidly over the last 20 years, mainly for Iran's domestic consumption and re-injection into mature oilfields.
In 2005, according to the US Energy Information Administration (EIA), 65% of natural gas was marketed for production, 18% was used in EOR gas re-injection and 17% was lost due to flaring and reduction of wet natural gas from hydrocarbon extractions. Natural gas, like oil, remains heavily subsidized by the government.

The state-owned NIGC (National Iranian Gas Company) controls all natural gas upstream activity. Due to buy-back regulations and US sanctions, BP and Sipetrol have divested from Iran.

However, Total, Eni and Shell are the largest remaining foreign investors. Iran has looked increasingly to Eastern firms for investment in upstream activities under buy-back regulations; firms such as Indian Oil Corporation, China Petroleum and Chemical Corporation and Sinopec. They would have to hand over operational fields to NIOC, and in return receive payments from production to cover their investments.

Future projects

The most significant upstream project undertaken by the Iranian government is the South Pars field. Found 65 miles off the coast of Iran, it has an estimated 450 Tcf of natural gas reserves - 47% of the nation's total. The government has installed a 25-phase development scheme spanning the next 20 years; with each phase expecting to yield 1 Bcf/d.

Iran is hoping that the first 16 phases will have been completed by 2010. Phase 12 of the scheme is a $500 million contract for LNG, which will be controlled by PAGC (Pars Oil and Gas Company). Most of the South Pars scheme will be natural gas consumption, the rest being either exported to South Asia or Europe, for LNG production, or GTL projects.

There has been an agreement made between Iran, IOCs associated with the South Pars project and SKS, a private Malaysian firm, to develop the non-associated Golshan and Ferdas fields for LNG exports, with and investment thought to be in the region of $16 billion.

An early proposal has also been made to build the 2,050 mile Nabucco pipeline from Iran and the Caspian states through Turkey and into Austria and other EU nations.

Construction would start in 2009 at a cost of $6.8 billion, and it would have a delivery capacity of 300 Mcf/d. More controversially, a proposal to build a $7.4 billion Iran-Pakistan-India (IPI) pipeline has been made, extending the existing IGAT-7 pipeline to a total of 1,724 miles in length and a capacity of 5.4 Bcf/d, due to be completed by 2011.

In March 2007 Swiss company Elektrizats-Gesselshaft Laufenburg signed MoUs for a 25-year gas deal with NIGC worth $42 billion, the first time in recent history a European energy company will sign a firm contract with Iran. It would see 5.5 billion cubic meters of gas delivered into Europe along the proposed Nabucco pipeline.
Joachim Conrad, member of EGL's Executive Management and Head of EGL's Gas Division, said of the deal: "Natural gas from Iran is necessary to the opening of a fourth gas transportation corridor to Europe.
This corridor will ensure diversification and security of supply on the continent as Europe needs to tap into new gas sources in the immediate future, and EGL today made an important contribution to reaching this goal."
However, whether the project will be given the green light is debatable given the increasingly tough stance taken by the EU against Iran.ProblemsPolitical relations are putting strain on what should be a blossoming energy industry for Iran. The country desperately needs to find solutions to the problems they are beginning to face if they are to meet their energy targets.

The US and the UN have imposed sanctions making movement of goods, technology and money increasingly difficult - although, it is interesting to note that US sanctions are not actually enforced by the US president.

Samuel Ciszuk, Middle East energy analyst for Global Insight, said: "Just the threat of an over night enforcement of this law has been very successful in deterring companies from committing to large scale investment, especially as many or most of these projects are mid to long-term, which makes it very dangerous to commit funds to Iranian investments."

"Unilateral US and implied UN sanctions against the financial industry in Iran have cut off most of the Iranian banks and banking systems from the international money flows, which are hurting all operations in the country - including all imports and transport of technology, goods and material into the country," Ciszuk adds.

It is a challenging dilemma for the western majors considering Iranian opportunities, which often leads to companies stalling on the projects.

"They continue to keep there foot in the door and continue to hold their contracts, while actually doing as little as possible and stalling on decisions. This has been a tactic quite successfully deployed for well over a year or two years now by most companies," he says.

There has been talk of Iran seeking investment from Chinese, Russian and Indian IOCs as an alternative, and even looking at smaller western companies who usually would be outbid by the western majors.

However, their relative lack of experience and technical expertise makes them less attractive, especially in terms of LNG developments. Ciszuk explained that even recruiting outside the western majors would not be a viable alternative.

"During the last year we have had several instances of companies, especially Chinese, signing up for quite large projects in both gas and oil. But when they actually signed up they started applying the same strategy as the western companies - stalling on time and not committing," he said. The reason: The same US and UN sanctions which are forcing western IOCs to stall on projects.

"Even some of the smaller western companies - companies that usually wouldn't be able to pick up such projects because they are totally out of their league - are picking up these contracts and then just stalling their commitments like the majors," says Cizsuk.

There are also major issues concerning the infrastructure and technology of existing oil and gas plants, as well as a so called "brain-drain" of skilled engineers. International isolation is making it very hard for Iran to attract the necessary investment and technology.

Iran is really suffering from a technology fall-behind, with a lot of their infrastructure not being upgraded since the 1970s. There is also a considerable brain-drain, with high calibre people finding that opportunities are better outside the country, due to a global shortage of oil engineers which is pushing up salaries.

Much hope for the nation's energy industry, according to Ciszuk, will be pinned on the presidential elections of both the US and Iran.

"I think, from an IOC point of view, everyone is waiting for two things to happen right now. They are first waiting to see what US policies will be under the next US president and to be able to assess any long-term US attitude to Iran. And then I also think everybody is also waiting in Iran - what is going to happen after the Iranian presidential elections in summer 2009 and which faction will come to power."

After recent news of Shell and Repsol-YPF pulling out of phase 13 of the South Pars project, doubt remains over all Iran's future projects.The nuclear debate and poor political relations, government skepticism of foreign investment, buy-back contracts and high risk projects burden Iran's oil and gas industry.

"It all adds up to make the Iranian business climate un-ideal to say the least," observes Ciszuk.

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