Iran has awarded US$17 billion of contracts to attempt to reverse a dramatic projected production decline from the world’s biggest gas reservoir. Its South Pars field spans 3,700 square kilometres and holds an estimated 14.2 trillion cubic metres (tcm) of gas reserves plus 18 billion barrels of gas condensate. In addition to generating nearly 80% of Iran’s gas production, it also accounts for around 40% of its total estimated 33.8 tcm of gas reserves (mainly located in the southern Fars, Bushehr, and Hormozgan regions). The other part of the huge gas reservoir is Qatar’s 6,000 square kilometre North Dome (or ‘North Field’), which is the foundation stone of its world-leading liquefied natural gas (LNG) exporter status. Crucially in this respect, Qatar is in the midst of a programme to boost output from its side of the South Pars/North Dome reservoir through pressure-enhancement techniques. This will only worsen the production outlook for Iran, according to its Petroleum Ministry. So, can these huge new contracts reverse the forecast huge drop in South Pars’ critical gas output?
According to official Iranian government figures, the entire South Pars site currently produces around 700 million cubic metres (mcm/d) per day. Iran’s Petroleum Ministry has recently projected that the decline in production will be around 28 million cubic metres per year (mcm/y) from 2027 onwards – a fall of about 1% a year. It has added that this may increase to a loss of 42 mcm/y after 2029 – a drop of 1.6% a year. However, a senior source who works closely with the Ministry exclusively told OilPrice.com last week that these are likely to be “significant underestimates, depending on the variables.” Indeed, according to recent assessments from Iran’s own National Development Fund, Iran’s overall gas production will fall by at least 25% within the next 10 years due to falling pressure in the fields, with South Pars seeing a 30% decline over the period. Worse still was the forecast made last year by Mansour Daftarian, president of the Iranian Petroleum Institute, that in the absence of a major upgrade in the upkeep of the South Pars gas fields, by the end of 2026 daily gas production could drop to as low as 200 mcm/d, leaving a significant gap in the supply of gas for domestic heating and industrial consumption.
One of the key determinants on exactly how much Iran’s gas production will fall is how the firms awarded the big new contracts will develop each of the wells. According to the Iran source, in the period between early 2017 when Qatar lifted the longstanding moratorium on production from its own North Dome and when the U.S. unilaterally exited the Joint Comprehensive Plan of Action (JCPOA, of ‘nuclear deal’) in May 2018, Iran and Qatar had worked on ways of developing the reservoir without damaging its long-term potential, analysed in full in my latest book on the new global oil market order. “Development at that time on the Iranian side wasn’t spectacular but it was consistent, and it generally abided by the conditions aimed at safeguarding the field’s integrity that had been agreed with Qatar,” he said. “However, after the U.S. reimposed all the sanctions on Iran after it withdrew from the JCPOA, the local Iranian firms that took over didn’t have the skill, experience, technology, or machinery to take up where the foreign firms had left off, and they were also under pressure to drill more to monetise the gas,” he told OilPrice.com. “This meant they often rushed the excavations without much thought to maintaining the structural integrity of the wells, and this has significantly affected future output from several of them,” he added.
Unfortunately for Iran, its choice of willing partners to help it prevent such catastrophic gas production declines has become a lot more limited in recent weeks and months. China’s help for the country with which it had signed the ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and also fully detailed in my latest book has markedly diminished as a result of greater scrutiny of the relationship by the U.S. Meanwhile, Washington’s programme of exerting maximum pressure on Iran extends to all firms and individuals from any countries who are associated with Tehran’s oil and gas trading, among multiple other business areas, including from China and Hong Kong. This comes on top of Chinese funding for Iran having already been reduced as a result of Beijing’s struggle to fully recover economically from three years of Covid and its Draconian ‘Zero Covid’ policy. Russia has also seen its economy hit from sanctions as the war in Ukraine has dragged on. “Some of the procedures needed to significantly turn things around at South Pars could only be done using technology and equipment and expertise available at just the top Western firms, like TotalEnergies, which was involved on [South Pars] Phase 11 before the U.S. pulled out of the JCPOA,” the Iran source exclusively told OilPrice.com last week. “For example, for that Phase alone, it [TotalEnergies] was going to build a huge [20,000-ton] platform, which is much larger than anything on South Pars and two massive compressors, and the site needs around 15 of those platforms and about 30 of those compressors to help maintain pressure,” he said. “None of the Iranian firms that have been granted the contracts could achieve anything like that,” he added. “Iran has never built even a 4,000-ton platform, and the [Petroleum] Ministry confirmed recently that it is still working on the support infrastructure required to build such a piece of equipment,” he underlined.
That said, the four companies given the US$17 billion awards – officially at least — are Petropars, MAPNA Group, Oil Industries Engineering and Construction, and the Islamic Revolutionary Guard Corps’ Khatam al-Anbiya Construction Headquarters (Khatam). “Unofficially, the [Petroleum] Ministry’s direct comments on the projected fall in gas output from South Pars was a message to Russia that its companies that were handed the relevant contracts from 2019 to 2024 by Khatam should finally get on with them and make substantive progress,” said the Iran source. “The Russian firms will now take up to 35% of the increased output at a discount of 30-35% using the moving six-month average price,” he added. Making the deal even more appealing to Russia is how these South Pars contracts will bolster its usefulness to Beijing in the increasingly unequal relationship between the two countries. “Interestingly the Russian side has already set up multiple intermediary shell companies in Singapore, Malaysia and Indonesia that will act as buyers on behalf of the Chinese in an attempt to bypass the new US sanctions,” the Iran source told OilPrice.com. “The final financial structure of the deal is still fluid, but the Russians will not lose money on the deal and they will also secure unchallenged control of South Pars’ gas production levels and the price at which it is sold,” he concluded.
By Simon Watkins for Oilprice.com