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No hope for expansion for National Iranian Oil Company

Only a thaw in relations in the west can help Iran’s state firm

Iran, says Bijan Namdar Zanganeh, recently appointed to his second stint as the country’s oil minister, will increase oil production to 4.2 million barrels a day (b/d), a level last reached when he was last in office in 2005. Wisely, he gave no timeline for the revival. As an old hand in Iran’s oil sector, he will know better than many just how implausible the target sounds.

Iranian oil production was about 2.7m b/d in July, around 1m b/d beneath last year’s average. It will not be rising significantly any time soon.

Hamstrung by the Western embargo on the country’s oil and financial sectors, National Iranian Oil Company (Nioc), the state-owned firm that along with a string of subsidiaries controls Iran’s petroleum sector, is doing all it can to keep production where it is now. Hopes of increasing output – which would require extensive use of enhanced oil-recovery techniques to deal with fields – are fanciful. “At the sort of levels they’re producing now, they can survive,” says Paul Stevens, a fellow at UK think tank Chatham House. “But there are no hopes of expansion.”

Restrictions

A lot of Nioc’s problems stem from the embargo – but not all of them. The loss of oil-export revenue, which Opec said fell by 14% last year to just over $101bn, has squeezed the government’s spending. Analysts say the administration of former president Mahmoud Ahmadinejad plundered the oil sector for cash to plug gaps elsewhere.

The oil ministry has been fighting back. But even if it wins an argument to increase its allocation of oil revenue from 14.5% to 25%, it won’t be enough to cater for the sector’s reinvestment needs, wrote William Yong, a fellow at the Oxford Institute for Energy Studies, earlier this year.

High-quality foreign investors have largely pulled out of the sector, leaving Nioc and its subsidiaries on their own to deal with complex projects.

The multi-phase South Pars gasfield development, which would once have seen a host of foreign companies produce gas for the local market and liquefy it for export, has been crippled. Sonangol pulled out last year. Statoil was caught up in a corruption scandal involving its phase of the project. Other foreign firms have retreated. The local firms now trying to deliver the projects have little chance of taking gas output to the target of 30bn cubic feet a day (cf/d).

Output is thought now to be about 8bn cf/d – and even that is a battle, given falling wellhead output on some of the phases and rumours of reservoir damage. Production from the oil layer is now only around 35,000 b/d, or about a third of the target.

While Qatar, which shares the field (which it calls the North Field), has created the world’s biggest liquefied natural gas industry on it, Iran – holder of the world’s second largest reserve of conventional gas – barely produces enough (160bn cubic metres [cm]) to meet local consumption (156bn cm). Assuming it can build a bigger surplus, it plans to sell some gas to Iraq and still hopes to pipe supplies to Pakistan.

The sanctions have steered most big firms away. The terms of investment, which included the 1990s buy-back scheme Iran hoped would lure international oil companies, put off many others. Iran has been left relying on Asian investors whose enthusiasm has been lukewarm and whose expertise is questionable. Nioc was forced to freeze Chinese firm CNPC’s contract at South Pars 11 for lack of progress. It hopes Indian firm Oil and Natural Gas Corporation will defy the embargo to help develop a large gasfield in the Hormuz Strait, but no agreement has been signed.

As punitive as the sanctions have been, just as problematic for Nioc was the politicisation of the oil sector during Ahmadinejad’s presidency, says Stevens.

“Lots of people left, they just gave up because of the politics,” he says. Much of the energy sector has fallen under the control of the Revolutionary Guards (IRGC), the internal protectors of the Islamic State. The previous oil minister Rostam Qasemi, whom Zanganeh replaced in August, was an IRGC commander. Its commercial interests are said to have spread throughout the oil sector. The old guard at Nioc has been replaced by a “very weak set of individuals who don’t have either the background or the experience,” says Stevens. Engineers and geologists were among the people who gave up.

Ageing oilfields

Many of the oilfields Nioc relies on now were considered old and in need of repair when the state company launched a big plan to rejuvenate them before. But that was in 1977. The revolution, war with Iraq, and then the sanctions put paid to that plan.

There is some hope for the company and Iran’s oil sector. The reserves – 1,187 trillion cf of natural gas and 157bn barrels of oil – remain among the world’s biggest.

The election of president Hassan Rohani, whose tone in talking about the West has so far been more moderate than his predecessor’s, has given some commentators hope that a breakthrough in nuclear negotiations between Tehran and foreign powers may be reached.

But lifting the sanctions would take some time and, for the US Congress, require proof that Iran had abandoned both its alleged nuclear weapons programme and its support of terrorist groups in the Middle East. It would take time, too, for Nioc to recover its lost human capital.

It may also find some competition at home in future. One way the government has tried to get its oil out, in defiance of the embargo, is by handing some sales contracts to individuals.

A nascent teapot refining sector has cropped up to meet local demand. Much of the country’s refining capacity – where, despite the sanctions, capacity has actually risen in the past two years – may be sold off. Last year, the government said most other Nioc units would be privatised, too.

Alongside Iran’s semi-successful efforts to phase out fuel subsidies, a newly competitive oil sector could one day emerge from the mess. 

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