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Iran's great opening

Iran's risks lie above the ground. Below it, a wealth of opportunity awaits careful investors

Iran's oil and gas upstream is a veritable Aladdin's cave of treasures. Like all fairy tales, of course, it comes with villains, both inside and out, and like many oil-rich peers, it has fallen well short of realising its potential.

On official figures, Iran has the world's largest gas reserves, 1,183 trillion cubic feet, and, at 158.4bn barrels, the second-largest conventional oil reserves behind only Saudi Arabia (even if Canada's and Venezuela's extra-heavy oil takes them ahead). Even if these figures, particularly the oil, are somewhat exaggerated, they suggest Iran could be the largest holder of hydrocarbons on the planet.

But production, though large, is not commensurate with reserves. After recovering rapidly from the export restrictions imposed by sanctions, Iran is struggling to boost oil output above its Opec ceiling of 3.797m barrels a day. Gas output has risen rapidly in the past two years with the completion of long-delayed phases of its key South Pars field.

Through its main producing heartland of the Zagros Mountains, Tertiary and Cretaceous reservoirs hold most of the oil, in giant whaleback anticlines with fractured carbonate reservoirs. These large fields, such as Gachsaran, Marun and Agha Jari, some discovered back in the 1920s and 1930s, are mature and require gas injection to mitigate steep decline rates. Iran needs here skilled operators of complex recovery operations in thinning oil rims. One such may be Schlumberger, which has signed a preliminary deal to study the Rag-e Sefid, Parsi and Shadegan fields.

With hardly any 3-D seismic coverage, the mountain belt offers many opportunities for new discoveries in subtler structural plays. Deeper Lower Cretaceous and Jurassic reservoirs, often containing gas, are also starting to be tapped.

The country's primary needs are for finance and management capabilities

In the plains of Khuzestan and along the Iraqi border lie fields more similar to those of Iraq, with primarily Cretaceous reservoirs, a mix of sandstones and carbonates. These include the relatively recent giant discoveries of Azadegan, Yadavaran and Yaran, whose development has only proceeded slowly to date. China's Sinopec and CNPC have been involved, but Azadegan is due to be tendered and Total and Shell are likely bidders as well. Meanwhile Eni is looking at nearby Darkhovin which it developed in the early 2000s. This West Karun area could yield 0.9m b/d or more in the mid-2020s, with Iran targeting a boost from 425,000 to 0.5m b/d within the next few months. Gazprom, Lukoil, OMV, Repsol and numerous others are discussing a variety of mostly greenfield projects.

The offshore Cretaceous and Jurassic reservoirs resemble those of Iran's Gulf Arab neighbours. These fields, often shared with adjoining countries, are mature but have potential for redevelopment, such as Salman (Abu Al Bukhoosh in Abu Dhabi) and Foroozan (Marjan in Saudi Arabia). The major undeveloped fields are Arash, with gas condensate, but held up by a border dispute with Saudi Arabia and Kuwait, who call it Dorra; and South Pars's oil layer, the extension of Qatar's Al Shaheen field, which was recently awarded to Total after Maersk's contract expired. Now Maersk is negotiating to be involved on the Iranian side.

The offshore is quite well-covered with seismic and future exploration will have to concentrate on more subtle plays, including stratigraphic traps, and deeper gas.

Finally, the Permo-Triassic reservoirs, equivalent to the famous Khuff Formation of the Arabian side, hold most of Iran's gas reserves, in the supergiant South Pars field and in other large accumulations, both onshore and offshore. Notable undeveloped gasfields include Kish, Lavan, North Pars, Farzad and others with several tens of trillion cubic feet of reserves each. In July, Total and CNPC were the beneficiaries of the first award under the new Iran Petroleum Contract (IPC), when they signed to develop South Pars Phase 11, initially for domestic use and possibly later for liquefied natural gas exports.

With gas up on the Turkmen border, and oil and gas of uncertain volumes found in the deep waters of its Caspian sector, other frontier basins of the country offer interesting potential. But the proved, low-risk plays of the Zagros belt and Persian Gulf will lure most investors. The technical challenges are significant enough for Iran to need help, but well within the range of a skilled operator. The country's primary needs are for finance and management capabilities. Infrastructure is well-developed and, unlike several Middle East competitors, security in most of the country is good.

Upstream uncertainty

Iran has offered some 80 upstream projects for negotiation. It is not clear how these are prioritised, and the pace of negotiation has been slow, although it should quicken following the South Pars award. There are too few skilled petroleum negotiators, lawyers and economists to conduct simultaneous discussions on all the available assets. Announcements of project progress are often over-optimistic and plans change repeatedly, making it hard for interested companies to stick to a plan. Corruption, though not as bad as in neighbouring Iraq, factional infighting, arrests of dual nationals on fabricated charges, and bureaucracy are problematic.

The biggest concern for most companies remains sanctions. Several of the approved Iranian partner companies, mandatory in the IPC, are linked to the sanctioned Revolutionary Guards. The ownership of other partners and subcontractors remains obscure, requiring careful due diligence. International banks are still very reluctant to carry out even legitimate transactions.

The Trump administration has given somewhat mixed messages on the Joint Comprehensive Plan of Action, the nuclear deal that lifted the most serious sanctions from January 2016 onwards. Though most independent observers agree that Iran is complying, the president himself has said that he would declare the country non-compliant. As the US accuses Iran of not honouring the "spirit" of the agreement, it is pretty clear that it is the US not honouring it.

But it remains to be seen whether the other parties to the deal—the EU, UK, France, Russia and China—would reluctantly comply with new sanctions, oppose them or work around them, and whether this would lead to a resumption of Iran's nuclear activities and possibly a US military attack.

Iran has today its second chance since the Revolution to make the most of its oil and gas bounty. But the window is narrow; companies squeezing through it will have to deal more with the dangers above ground than the geology below.

Source: Petroleum Economist

Robin M Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis

This article is part of a report series on Top 10 upstream bright spots. Next article is: Greenfields galore for Russia

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