Deadlock over Iran oil and gas takes toll

Oil and gas-rich Iran may shrug off the impact of US and European Union sanctions over its nuclear programme, but at the country’s annual oil and gas exhibition it is clear that the measures are having an effect on its hydrocarbons sector.

At the opening ceremony of the 16th International Oil, Gas, Refining and Petrochemical Exhibition, which ended on Tuesday, Iranian officials boasted that 10 American companies had defied sanctions to attend the event.

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Mohammad-Reza Rahimi, the country’s first vice-president, even urged the oil ministry to award the companies contracts to show appreciation for the risks they had taken.

But journalists and industry observers could find neither any American brands nor track down their front companies at the exhibition. Oil analysts believe the claims of US attendance, whether or not a bluff, are an illustration of the country’s desperation for western investment and technology to develop and maintain its oil and gas fields.

The threat of legal action for sanctions violations, combined with the unattractive terms that Iran offers operators in the oil and gas sector, and a purge of experienced oil officials, have undermined the productivity of the country’s oil and gas fields. These need at least $200bn in investment by 2015, according to the oil ministry.

The international pressure has led leading oil companies, such as Royal Dutch Shell and France’s Total, to refuse to sign gas deals in the Islamic Republic despite years of negotiations over contract terms.

Such obstacles have not prevented Total, Norway’s Statoil and Austria’s OMV from setting up large stands at the annual exhibition, even though they do not have any projects lined up in Iran for the foreseeable future and have dramatically reduced their staffing in the country.

Shell, however, which had one of the biggest stands in previous years, was a noticeable absentee this year.

To make up for the loss of western oil companies, Iran has given its multibillion-dollar contracts in recent years to state-owned or quasi-private Iranian companies and Asian groups, such as China’s Sinopec and China National Petroleum Corporation.

There were 166 Chinese companies at this year’s exhibition, almost as many as German, Italian, British, French and Dutch companies combined.

But even with Asian and European companies filling Tehran’s 71,000 sq m exhibition space, Iran’s oil and gas sectors suffer from the absence of oil majors and the large-scale investment that only they are able to support.

Ahmad Ghalehbani, head of the National Iranian Oil Company, for the first time admitted at the exhibition that the country’s oil production had fallen by 25,000 barrels a day compared with a year ago, while independent analysts say Iran’s oil production capacity has fallen to between 3.7m and 3.8m b/d from 4.2m b/d six years ago.

South Pars, the world’s biggest gas field, in southern Iran, which is shared with Qatar, has dramatically lagged behind its development schedule because of a shortage of investment and equipment.

The companies that are operating in Iran find it difficult and expensive to obtain the quality of machinery they need. Lee Zhang, marketing supervisor at the Blooming Drilling Rig, a Chinese drilling company, says: “We import [US-made] high-technology equipment, but the price is very high and it takes a long time.”

Financing is an even bigger problem. Western oil officials say they use networks of banks to transfer money for their running costs and continuing projects from previous years, sometimes resorting to cash transactions through unofficial channels.

“Money should go from one European bank to another European bank and then to an Asian country like Malaysia, Singapore or China and then to Dubai, Qatar or Turkey and finally to Iran,” a western oil executive says.

Failure to meet gas production targets prevents Iran from reinjecting gas into ageing oilfields to prolong their life. The country also needs to meet its rapidly increasing domestic gas consumption and export commitments.

Oil analysts believe the present deadlock cannot continue indefinitely because oil export revenues are vital to Iran’s state-run economy. And they say the world cannot afford to ignore Iran’s huge energy resources in the long term.

This might explain why leading oil companies are unwilling to shut down offices completely.

“Western companies struggle as much as they can to keep even a small operation in Iran because they know if they leave they might never be able to come back when sanctions are lifted, as happened to some American companies in Libya,” says Hatef Haeri, chief executive of ICG energy consultancy in Tehran.

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