Now for Iran to get busy
Rouhani's victory in the presidential elections was good news for Iran's energy sector, but major oil and gas expansion still faces delays
At the end of April, President Hassan Rouhani inaugurated the Persian Gulf Star refinery in the southern port city of Bandar Abbas. Part of his campaign for re-election, the overdue completion of this important facility showed the inescapable link between Iran's oil and prosperity. His convincing electoral win, overcoming a potential Achilles' heel on the economy, keeps the hopes of the oil sector alive.
Rouhani, the incumbent, strikingly fought an outsider's campaign, changing tack late on to criticise his main opponent, hardline cleric Ebrahim Raisi. Rouhani won Tehran strongly, along with the ethnic and religious-minority dominated provinces, and secured a solid victory in Khuzestan, the main oil-producing region. Reformist allies swept the board in the capital's municipal elections.
Had the election been won by Raisi or the other conservative challenger, former Tehran mayor Mohammed Baqer Qalibaf, who dropped out before polling day, the outlook for the oil industry would have been very different. Their overall approach, and the dire need for foreign investment, might not have changed much. But they would have looked more to the Revolutionary Guards' construction arm, Khatam Ol Anbia, or other fronts, to execute projects, thus scaring off international partners. Rouhani's technocratic team at the oil ministry would have been dispersed, and the hardliners' political outlook would have risked a breakdown of the nuclear deal and a return of strict sanctions.
Rouhani's predecessor, Mahmoud Ahmadinejad (2005-13), had all but wrecked the crucial energy sector by feuding with qualified oil ministers and appointing unqualified ones, stuffing the National Iranian Oil Company with inept placemen, handing projects and pseudo-privatised subsidiaries to insiders or the Revolutionary Guards, and finally running the country into a virtual oil embargo over its nuclear programme.
Rouhani's energy supremo, veteran oil minister Bijan Zanganeh, has undone much of the damage. The implementation of the Joint Comprehensive Plan of Action (JCPOA) deal with the US, EU, Russia and China allowed Iranian oil exports to recover close to pre-sanctions levels by May last year. At that point, the hard work really began—and that's where Rouhani's second term needs to show progress.
Oil output has levelled out. On Opec's secondary sources, it was down slightly in April at 3.76m barrels a day, compared with January's 3.77m b/d and February's high of 3.82m b/d, while preliminary estimates suggest it was flat in May. Most of the armada of floating storage has been emptied, removing that boost to exports. Production is therefore hovering just below the agreed Opec ceiling of 3.79m b/d.
State firm Nioc has claimed that output will increase by 300,000 b/d by the end of this Iranian year, next March. Zanganeh said the country would boost condensate output from 0.6m to 1m b/d by March, and add 0.7m b/d of crude production capacity by 2021, taking it to 4.7m b/d.
It has taken a long time to finalise the new Iran Petroleum Contract (IPC), which though similar to Iraq's technical-service agreements is more flexible and should be much more attractive to investors. No final deals with foreign companies have been signed.
So there's little short-term new production to support these estimates. Iran's future output growth depends crucially on the West Karoun fields, a group of relatively fresh, giant discoveries located near the Iraqi border at the head of the Gulf, with an estimated 67bn barrels of oil in place. Development work is continuing at the Azadegan and Yadavaran fields. In November, Persia Oil and Gas, a unit of Supreme Leader Ali Khamenei's Setad organisation, signed for four fields including North Yaran, another of the West Karoun group.
At a time of relatively low oil prices, and constrained access to the global financial system, Iran can't finance its oil expansion plans on its own. Rouhani has said that West Karoun alone requires $18bn of investment. At the end of May, Zanganeh announced that Azadegan, the biggest field, would be tendered soon with a production target of 0.6m b/d, inviting proposals from Shell, Total, CNPC, Lukoil, Pertamina, OMV and 23 other firms. Shell operates Majnoon, just over the border in Iraq, Total has studied South Azadegan, and CNPC has previously worked on both North and South Azadegan. CNPC's contract, though, was cancelled in 2014 after it made little progress, slow-pedalling in the face of continuing sanctions. Inpex and Petronas have also previously signed study agreements for the field.
Many other projects have been presented, including mature fields near the Iraqi border such as Cheshmeh Khosh and Dehloran, the development of greenfields Changuleh and Azar, which straddle the border, and the oil layer of South Pars, which crosses into Qatari waters at the al-Shaheen field. Gazprom Neft has held talks on Azar—it operates Badra, its Iraqi continuation. Maersk has been in discussions for South Pars Oil, as it operated al-Shaheen until the renewed contract was handed to Total last June.
Despite progress at West Karoun, the underlying decline of Iran's mature giant fields makes boosting overall production tricky. Decline rates of at least 6% a year require replacing more than 200,000 b/d annually just to stand still. So far, foreign companies have shown less interest in various offers for redeveloping fields such as Agha Jari, in production since 1940, by implementing large-scale gas injection.
New investments by international oil companies will take several years to come to fruition, so Iran can't expect much overall production growth before 2020. That explains its willingness to come to terms with Opec. If the group's production restraint policy continues, then growth in Iran would put the deal under strain, especially given Iraq's output expansion. Saudi Arabia wouldn't be willing to lose market share to its great rival across the Gulf.
As for gas, production has shot up since 2015 as long-delayed phases of the South Pars field, the world's largest, have finally been completed. Output from there is now set to pass the amount Qatar extracts from its sector (known as the North Field), even though Iran only has about one-third of the field's total reserves.
But as with oil, Iran now faces a hiatus in new projects. Total and CNPC are imminently to sign a final deal for South Pars Phase 11. Much less advanced discussions have been held for giant fields including North Pars, Kish (earmarked to supply Oman) and others. Even if concluded soon, major new output will have to wait for the 2020s.
Iran has, for the first time, a surplus of gas, but this will disappear soon as growing domestic demand for heat and power, new petrochemical projects and reinjection for enhanced oil recovery make their claims. Pipeline export projects to Iraq, Oman, Pakistan and India (via a sub-sea line), along with an expansion of supplies to Turkey, are all in various stages of negotiation or implementation, but have been held up by unrealistic commercial demands and other problems.
All these hydrocarbon projects depend critically on international politics. In May, the Trump administration made its first extension of the sanctions waivers required by the JCPOA, which will have to be renewed every six months. But the US is adopting a sharply more sceptical and hostile line on Iran than it did under President Obama, aligning closely with Tehran's Sunni Arab opponents. There's no sign of an end to the conflicts in Syria, where Iran continues to back Bashar al-Assad's regime in alignment with the Russians, or in Yemen where modest support to the Houthi movement has drawn the Saudis and Emiratis into a quagmire.
The appointment of a hardline CIA operative to head the agency's Iran desk suggests a policy turn towards finding—or provoking—violations of the nuclear deal on Iran's side, while complying only pro forma with the US' obligations. A key criticism of the JCPOA levelled at President Rouhani during the election campaign, by Khamenei and others, was that Iran had given up its nuclear activities but not gained economically.
A US administration that has already walked away from three major international commitments won't find ready allies in Europe, Japan or China if, while Iran is generally viewed as complying with its nuclear obligations, Washington seeks to reimpose the robust sanctions regime that careful diplomacy by the Obama team put in place. Obama persuaded all countries to stop importing Iranian oil or reduce their imports significantly.
The other member of the P5+1 negotiating group, Russia, might benefit from taking Iranian oil and gas off the market and embroiling the US in another Middle Eastern conflict, but it has been one of Tehran's strongest supporters.
So it's in Iran's interest to sign field development deals soon, with Russian, Chinese and European firms, and lock in political support. Rouhani and his team need also to garner domestic support, both from their reformist-pragmatic voting coalition, and from key power-brokers. The success of the oil and gas sector, and the whole economy, is key to the next four years of Iranian politics.
Source: Petroleum Economist
*Robin M Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis