Iran Delusional About Oil Potential

Oilprice.com - After 37 miserable years of the so-called Islamic Republic (IR) and more than $1.6 trillion of oil income, Iran’s oil and gas infrastructure has become ineffective and is suffering from poor management and chronic corruption. As a result, the well-respected healthy national oil company, with a 6.3 million b/d crude production prior to the revolution, plunged to a near bankrupt industry with at best a little above 3 million b/d production.

Massive Deterioration Of The Iranian Oil Industry

Iranian output has reached a plateau for some time now, and production has been on the wane by over 200,000 b/d/year for the past decade. Pressure dropping in reservoirs and continuous year-to-year decline in production appear to have been triggered by long periods of technical constraints on operations and by natural aging of the Iranian fields. The lack of regular maintenance and application of new technology, and particularly extensive neglect of the fields in the last several years under sanctions, have resulted in further damage to the Iranian reservoirs.

Geologically, high degradation of reservoirs can take place while wells have been shut-in or declining in production. This condition is exacerbated if gas injection has not been performed on reservoirs for a while.

According to U.S. EIA, the National Iranian Oil Company (NIOC) needs to inject at least 260 million cubic meters of gas daily to its matured oil fields. But in recent years, NIOC has never had the capability to inject more than half of this volume per day, and recently, since the production of gas is hardly even equal to domestic consumption, no gas remains to be injected. Therefore, EIA concludes that old Iranian oil fields are naturally losing pressure, which causes 8 to 13 percent oil production to deplete each year. Currently, the majority of power plants in the country use liquid fuel due to scarcity of gas, which leads to terrible air pollution. According to the International Health Organization, damages resulting from air pollution in Iran cost $16 billion annually.

Iran has built refineries in various non-democratic countries with which it has good rapport. Billions of dollars of Iran’s oil money that should have been invested in its own dilapidated oil and gas industry, along with millions of barrels of free crude, have gone to Syria, Sudan, Zimbabwe, Tanzania, Gambia, Gabon, Bolivia, Ecuador, Cuba, Uganda, Sri Lanka and even oil-rich Venezuela to keep their refineries running. In contrast, not even one refinery was built in Iran since 1979, with the exception of the inauguration of the Arak refinery and Bandar Abbas complex, which were near completion in the monarchical government.

The deputy oil minister and head of the National Iranian Oil Refining and Distribution Company Abbas Kazemi recently said, “After the lifting of sanctions our policy will be purchasing foreign oil refineries and their shares abroad.”

Oil minister Bijan Namdar Zanganeh and his deputies take any occasion that arises to deliver untrue information and empty promises: oil discoveries, gas production, petrochemical potential, construction of new refineries – they portray such a rosy future for the country and the Iranian petroleum industry after sanctions are lifted. These statements are overly optimistic illusions, and they are impossible under the ambitious timeframes laid out.

Iran Petroleum contract

As the world leaders and the Islamic Republic reached an agreement over Iran’s nuclear program on July 14, major oil companies’ attention was immediately directed toward the vast amounts of Iranian oil and gas. Further, Iranian oil officials have tried to take advantage of the situation to lure investors to Iran and came up with the proposal of an entirely new set of oil and gas agreements. Iranian oil minister Bijn Namdar Zanganeh time and again has requested huge investments—hundreds of billions of dollars—within the next five years in order to rejuvenate the impaired Iranian oil industry.

Rehabilitating Iran’s aged and damaged fields will be an enormous job and will require a lot money. Yet, all this can be materialized if the NIOC regains lost customers for its crude. Experts believe that Iran will have a difficult time in regaining the market share that it lost over three years ago.

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To convince international oil companies to invest in Iran at the same time that oil markets are flooded with product and low demand will be extremely difficult. Nevertheless, in order to lure these kinds of investments to Iran, the Islamic Republic’s officials often have said that foreign companies can easily participate in the already-planned privatization of state owned companies in the country.

Iran postponed several times a planned oil and gas informative meeting in London, where the oil ministry’s officials are to introduce the “Iran Petroleum Contract” (IPC) to international oil companies. It has been expected that Iran’s officials will deliver in detail the terms and conditions of the proposed new 25 year contract to the audience, provided that the IAEA verifies that the terms and conditions of the nuclear agreement negotiated on July 14 are honored by Iran.

Evidently, IPC will replace the previous “buy back” contract. This new model for oil projects aims to entice international producers. The new oil contract terms apparently give oil producers some share of a given field’s production under the agreement. The Chairman of Iran’s oil contracts restructuring committee, Mehdi Hossein, in mid-August announced that Iran has selected 50 oil and gas projects to offer to major oil companies at a conference in London initially on December 14-16.

He stated that the new oil contract models include exploratory blocks that Iran will offer to oil producers, and they will have three months to consider to bid on the projects. Hosseini said “production sharing” replaces the “buy back” contracts and “in the short run our goal is to produce 5 million b/d and increase that immediately to 5.7 million”. However, the December date for IPC presentation was postponed to Feb. 22-24 2016. Zanganeh believes IPC should be introduced after sanctions are ended.

Apparently, the new terms in the IPC are more generous than the “buy back” deals. Unlike the “buy back” contract that merely paid an agreed upon fee when the contract was completed, the new model apparently could provide oil producers some share of any field’s production under the agreement. Therefore, companies have the right to book more reserves on their balance sheet. Furthermore, the length of the contract could be up to 25 years. It seems it is easier for investors to tap into Iran’s lucrative oil and gas riches.

Iran’s officials have time and again stated that the country imposes no limitations for foreign oil companies to invest in its energy industry. In fact, the need to prepare these new models of contract is a true testament to Iran’s bankrupt and ineffective oil industry.

Investors that are planning to make deals with the Islamic Republic should be aware that they still face a lot of uncertainty and risk with the possibility of the return of sanctions looming for years to come.

Oil companies planning to do business in Iran should be wary of the problem of chronic corruption in the governing system of the country. There are bureaucratic attitudes that dominate the business environment in Iran. So long as this ill-managed regime is in control, investments in the Iranian oil industry, along with opportunities they might provide, could also be a great risk to prospective contractors.

Further, the present governing system in Iran certainly raises questions over the security of investments by major oil companies in Iran.

Therefore, the question is, can NIOC deliver as its officials claim? The fact is, the capabilities of Iran’s petroleum industry fall short of said rhetoric.

By Mansour Kashfi for Oilprice.com