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Western oil groups in no rush to return to Iran

November 03, 2016/ 12:16

Washington. In southern Iran, workers are putting the finishing touches to the latest extension to South Pars, the world’s largest gasfield.

This work on Section 19 of the field is notable because it has been carried out by Iranian companies rather than western groups. “This site proves that Iranians have finally learned how to do the job,” says a young engineer at South Pars, near the port of Assaluyeh, before adding pointedly: “But we still need the western technology and knowledge direly.”

France’s Total and Norway’s Statoil helped develop South Pars in the late 1990s and early 2000s, but they and other international oil companies — including Anglo-Dutch group Royal Dutch Shell and Spain’s Repsol — left at the turn of the decade amid complaints about the terms under which they operated in the country. These companies were also wary of escalating tensions between the Iranian government and western countries over Tehran’s efforts to make a nuclear bomb.

The stand-off eased markedly in January, when the US and EU lifted many nuclear-related sanctions that had enfeebled Iran’s oil industry. But Tehran is struggling to persuade western energy companies to make a rapid return to Iran and ensure alasting revival of the country’s antiquated oil and gas industry, the information publication the Reuters.

Iran has the world’s second-largest gas reserves, and fourth-largest oil reserves, according to the US Energy Information Administration, and the country wants $200bn of investment in its energy industry over the next five years in order to ramp production.

The South Pars field is estimated by the International Energy Agency, the global energy advisory body, to hold 51tn cubic metres of gas.

This resource-rich area in the Gulf has transformed Qatar into the world’s largest exporter of liquefied natural gas, but because of sanctions Iran has been unable to exploit South Pars to its full potential or other fields including North Pars.

Total stopped all exploration and production activity in Iran in 2010, while Statoil, which was once the offshore operator for parts of South Pars, has had no presence in the country since 2011.

Section 19 has therefore been developed by two Iranian companies with links to state-run organisations: Petropars and the Iranian Offshore Engineering and Construction Company.

“Almost 11,000 workers were working here at the peak of the project [about eight months ago],” says Hamid-Reza Massoudi, director of Section 19 for Pars Oil and Gas Company, a subsidiary of the National Iranian Oil Company, the country’s state-controlled energy group. “They are less than 4,000 now which means the project is [nearly] complete.”

This work has been boosted by one beneficial consequence of the lifting of sanctions: the Iranian companies have been able to buy western equipment, such as compressors and turbines, more easily.

But western energy companies involved in exploration and production have not so far returned to Iran because of several outstanding issues.

European oil majors are seen as much likelier investors in Iran than their US counterparts, because Washington is persisting with certain sanctions due to Tehran’s alleged financing of terrorism.

However, European groups have so far taken a cautious approach and no substantive agreements have yet been signed.

Chief executives say the political risks and uncertainties in Iran make it hard to justify investment at a time of weak oil prices and resulting capital scarcity.

“We have no shortage of projects to invest in — most of them more straightforward than Iran,” says one industry executive.

There have been some tentative signs of companies rebuilding ties with Tehran. The UK’s BP, which has its roots in the Anglo-Persian Oil Company that pioneered exploration in Iran, this month bought its first shipment of Iran oil since sanctions were lifted.

Bob Dudley, BP chief executive, said this month that the deal was “a good step to learn how to work with Iran”.

But he warned that US sanctions were an obstacle for European as well as US oil groups. “We’re going to have to be very careful. We don’t want to violate sanctions,” he said.

Western energy companies are interested in investing in Iran, but stress they need for an appropriate business framework.

Iran has been slow in finalising a new contract under which western energy groups would gain rights to exploit Iran’s oil and gas reserves.

The old contract was disliked by western groups because it did not allow them to book reserves or take equity stakes in Iranian projects. The new contract is meant to encourage overseas investment, but a domestic row over whether the terms are too generous to western companies has so far prevented Iranian authorities from signing any deals.

This delay highlights splits within Iran’s leadership over the country’s dealings with the west. Moderate forces led by president Hassan Rouhani have pushed for foreign investment, including in the oil and gas industry, but supreme leader Ayatollah Ali Khamenei’s economic stance is seen as having limited tolerance of overseas money.

Eni says: “We are still trying to understand the [Iranian] contractual frameworks that will be adopted for the oil and gas industry.”

Total signed a memorandum of understanding with the National Iranian Oil Company in January under which the Iranian group would provide some technical data on potential oil and gas projects.

But Total says it will not start investing in Iran again until the right incentives are in place. “We need to find a mutually acceptable and profitable business framework,” it adds.

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