Iran's upstream sector battens down for survival
Sanctions scrape the remaining shine off tarnishing sector
Iran's upstream sector, having basked in a degree of optimism fostered by the 2016 joint comprehensive plan of action (JCPOA), has returned to a struggle for survival, following the re-imposition of American sanctions.
Sustaining oil exports has replaced new field developments as the key priority. But some of the sector's gloss had already flaked away, as would-be new entrants struggled to make any headway.
Following the JCPOA, the new Iran petroleum contract (IPC) was trumpeted as the upstream sector's much-needed investment vehicle. Iran's mature fields require refurbishment and more advanced technology, while most green-field project progress had been stunted by previous sanctions.
But the Ministry of Oil was slow to introduce the IPC, nor did the industry see its terms as particularly attractive, particularly in a low oil price environment and when lingering US sanctions and international banks' caution still gave cause for pause.
The US election day that brought Donald Trump to power saw the only IPC signed with a major international company, with Total and China's CNPC signing up for South Pars Phase 11-an initially domestic gas market project, with a possible later LNG export phase. But Total's March 2018 US sanctions waiver application always looked more hopeful than realistic. Since its August withdrawal on ever receding waiver prospects, CNPC appears to have taken over Total's share.
In May, Pergas—an obscure consortium including Emirati, Norwegian and UK service firms, the Philippines national oil company and an Iranian university—signed for the re-development of the mature Karanj field. But its prospects of raising requisite financing look bleak.
Russian state oil firm Zarubezhneft signed preliminary agreements for the Aban, West Paydar, Shadegan and Rag-e Sefid fields, but has now handed this responsibility to a unit of Russia's oil ministry. Otherwise, four IPCs have been signed with local Iranian companies, which face technical and financial hurdles to progress.
Given decline rates in mature fields, Iran's target has targeted expanded output from the newer West Karun area, including the super-giant Azadegan and Yadavaran fields, as well as Yaran, Jufair, and Darkhovin, initially developed by Eni in the early 2000s. West Karun currently produces 330,000-350,000bl/d of Iran's 3.8mn bl/d crude oil capacity, with plans to boost it to 1.25mn b/d by 2025. China's Sinopec has been working on Yadavaran, but slow progress saw CNPC removed from South Azadegan.
Chinese, and potentially Russian, companies may well continue working in Iran's upstream, but, as under Obama-era sanctions, they will likely make limited commitments and try to do just enough to avoid expulsion.
Given the re-imposed sanctions, Iran will struggle to export crude even current levels. April 2018's 3.84mn bl/d mark was the most recent production high point. After the Trump administration declared its intention of cutting Iranian exports to zero, and fully reinstating sanctions by 4 November, production and exports have steadily fallen.
Production dropped to about 3.4mn bl/d in October. Exports of 2.5mn bl/d in the first half of 2018 had fallen to 1.5-1.8mn b/d by October, although, with the use of floating storage, Iranian efforts to disguise tanker locations by shutting off their transponders, and delivery into Chinese bonded warehouses, it is becoming hard to assess when, and whether, sales to end-users have been made and thus arrive at exact figures.
Condensate output expanded with a growth in South Pars gas production, but condensate exports have already fallen owing to the start-up last year of the Persian Gulf Star condensate splitter. Unlike under previous sanctions regimes, condensate is a target, and Dubai's Enoc, for one, is reportedly trialling alternatives to its usual Iranian feedstock diet.
Waivers not the answer
By September, US allies South Korea and Japan had cut their Iranian imports almost to zero, France had also ceased purchases, and Greek and Turkish volumes were substantially down. Imports by India and China, on the other hand, were volatile on a monthly basis, but overall about the average of the past year.
On 4 November, the US announced that eight countries-China, India, Japan, South Korea, Taiwan, Turkey, Greece and Italy-would be granted at least six-month waivers to continue importing limited amounts of Iranian oil. France and Spain, the other two main European importers historically, did not get waivers. Since South Korea and Japan were already close to zero imports, the waivers could see a short-term rebound in Iranian exports, before the fall continues.
Unlike the Obama-era sanctions, the current US measures are unilateral and have not attracted any of Iran's main customers' co-operation. But potential buyers and their bankers' fear of being frozen out of the American financial system is a major deterrent. Even the funds from purchases made under waivers are supposed to be deposited into escrow accounts to be used only for humanitarian trade, and the US has made no effort to facilitate these channels.
The EU plans a special-purpose vehicle (SPV) to handle Iranian oil trade and to try to insulate its companies from sanctions, and China and Russian may choose to work with it. But setting up the SPV will take time, and it will likely encompass only small-scale and humanitarian trade.
The ability of China and India—which took respectively 26pc and 23pc of Iranian oil exports in the first half of this year—and Turkey to develop, and to shield from US interference, import and purchasing channels are thus key to the near-term future of Iran's oil exports. Iran runs a large trade deficit with China, but a significant trade surplus with India; it could therefore barter goods for oil with Beijing but the potential of this with New Delhi is limited.
Russia has talked vaguely of a $50bn "goods for oil" deal, but, logistically, Iran cannot deliver significant volumes directly to Russia.
Iran seeks to maintain its customers by offering discounts, and paying for delivery itself, using its own tankers to bypass shipping and insurance sanctions. In a 'moderate cuts' case, crude production could drop from its 3.8mn bl/d-plus peak to around 2.8mn bl/d by May 2019, with exports of about 1.1mn bl/d.
Brighter spot in gas
The gas picture is more optimistic. The long-awaited completion of several South Pars phases has seen domestic demand largely satisfied—with a sharp drop in the burning of liquid fuels for power—even with remaining peak demand shortfalls. Marketed gas output, excluding flaring and reinjection, rose from 203bn m³ in 2016 to 224bn m³ in 2017 and about 225bn m³ on an annual equivalent basis in the first seven months of 2018. In June 2017, Iran started gas exports to Iraq; for now, Baghdad has received a US waiver to continue these. Turkey too will continue buying Iranian gas, given that its south-east regions, cold in winter, have limited other options.
Proposed pipeline exports to Pakistan and Oman will go nowhere, in part owing to sanctions, but also those markets have found alternative supply. A mid-scale floating LNG export plant, proposed by Norwegian project developer Hemla, was nixed in February by Iranian parliamentary opposition, another blow to the country's near half-century old quest to become an LNG exporter.
With a shadow over South Pars Phase 11, and few other large developments in the works, the future of exports depends on whether the rapid growth in domestic demand will slow down under recessionary economic pressure and efficiency measures. Even then, realistically they will be by pipeline only.
Iran has to some extent learnt how to operate under sanctions, to keep oil exports flowing and field developments moving ahead, albeit at reduced pace. But its domestic industry and remaining international partners will need much ingenuity to keep the country's economic heart beating.
Robin M Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis