Iran – Craving Advanced Technology
Vadim Kravets
In late October 2015, US President Barack Obama ordered the Government to prepare documents that would begin the process of removing the sanctions against Iran. The Iranian nuclear program will now be free from restrictions, yet the sanctions against cruise missile development will remain in force. The European Union said it would not lift the sanctions until at least next January to make sure Iran had in fact began to dismantle centrifuges, destroy the enriched uranium and rebuild the heavy water reactor in Arak.
Sanctions against Iran can be divided into several categories depending on who imposed them. Broken down this way, they include:
» sanctions imposed by the US;
» sanctions imposed by the EU;
» joint sanctions imposed by Canada, Australia, South Korea and Japan;
» sanctions imposed by the UN.
The United States were the first to impose sanctions in several stages.
1979 was the year of Iran’s Islamic Revolution. Soon afterward, rumors began to circulate that Shah Mohammad Reza Pahlavi, who had fled the country shortly before the revolution, may be granted political asylum in the United States. Angered by these rumors, a group of radical students stormed the US Embassy in Tehran, taking 52 diplomats hostage. In response, the United States froze all Iranian assets and gold reserves in US banks. The sanctions banned United States individuals and entities from doing business in Iran or engaging in joint ventures with Iranian companies, including in the oil and gas sector. The US Government had also introduced sanctions against companies identified to be breaching the American embargo, no matter what country they were from.
The second wave of the US sanctions was introduced during the Iran-Iraq War of 1980-1988. In particular, sanctions introduced in 1984 banned lending to Iran by international financial institutions and prohibited arms sales and any kind of aid to Iran. In 1987, all trade between the United States and Iran was banned.
In 1995, the sanctions were eased a little for the first time: US President Bill Clinton allowed sales of US non-military goods to Iran through third-party countries.
In 1996, the United States Congress passed the law introducing the new restrictions, saying that any company that invested more than $20 million in Iran’s energy sector would be punished by sanctions, such as:
» ban on interbank operations;
» cancellation of licenses for exporting equipment to the US;
» ban to borrow more than $10 million from American banks;
» ban on American companies to invest in the company accused of sanctions breaching;
» ban on purchasing US Treasury Securities;
» ban for American companies to sell equipment to certain countries.
Currently, the US sanctions are mainly regulated by the following documents.
The Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA) signed in 2010 forbids US and non-US companies from selling petrol and equipment for petrol production to Iran and allows the United States Treasury Department to impose «secondary» sanctions against foreign banks which help the Iranian Government to develop nuclear weapons (missile delivery systems) or cooperate with Iranian individuals or companies included in the UN or United States blacklists. Such foreign banks may not be allowed to open or use correspondent accounts in the United States.
Executive Order No. 13590 of US President Barack Obama (2011), authorizing the imposition of sanctions against foreign companies providing equipment or services to Iran’s oil and gas and petrochemical sectors.
The National Defense Authorization Act (2011), imposing sanctions against foreign banks conducting transactions with the Central Bank of Iran.
Executive Order No. 13622 of US President Barack Obama (2012), introducing sanctions against foreign financial institutions purchasing oil or petroleum products from Iran.
The Iran Threat Reduction Act (2012), extending sanctions against foreign banks operating in the interests of Iran’s oil and gas sector.
Executive Order No. 13645 of the US President (2013), prohibiting foreign companies with operations in the United States from providing goods or services to Iran’s automotive industry and also prohibiting foreign banks from conducting transactions in Iranian rials.
During 2010-2012, the EU imposed the following sanctions against Iran:
» a ban on supplying «critical» technologies and equipment to Iran’s oil and gas sector, and also on any investment by European companies in Iran’s oil and gas sector (2010);
» a ban on the import of Iranian crude oil, petroleum products and natural gas (2012);
» a ban on the export of key metals, such as aluminum and steel, to Iran (2012);
» cutting off Iranian banks from the SWIFT system.
The joint sanctions of Canada, Australia, South Korea and Japan (2010) included restrictions in the financial sector and did not affect Iran’s oil and gas sector. Similarly, the oil and gas sector was not affected by the UN sanctions set forth in four resolutions: No. 1737 of 2006, No. 1747 of 2007, No. 1803 of 2008 and No. 1929 of 2010.
The above restrictions have had a significant impact on many sectors of the Iranian economy. Sanctions introduced in 2011-2012 were especially painful for the oil and gas sector. As a result, crude oil exports from Iran fell by approximately 1 mln barrels per day (bpd).
According to the International Monetary Fund (IMF), Iran’s revenues from natural gas exports in the 2011/2012 fiscal year (which ended on March 20, 2012) reached $118 billion. In the 2012/2013 fiscal year, these revenues declined by 47%, down to $63 billion. The IMF says that in the 2013/2014 fiscal year, Iran’s revenues declined even further – by 11%, dropping to $56 billion. This plunge in revenues mirrored the sharp decline in crude oil exports between 2011 to 2013.
On the contrary, exports of the Iranian natural gas increased during 2011-2013. Still, the sanctions have impeded development of Iran’s largest natural gas project, the South Pars field in the Persian Gulf. Containing 40% of the country’s natural gas resources, the project was abandoned by foreign investors.
At the end of November 2013, Iran and five permanent members of the UN Security Council – the United States, United Kingdom, France, Russia and China, plus Germany (“5 +1”) – signed a Joint Action Plan. The Plan began to be implemented in January 2014. After six months of negotiations, Iran agreed to cancel or suspend certain parts of its nuclear program in exchange for easing some of the sanctions.
In April 2015, Iran and six world powers (United States, Russia, China, United Kingdom, France, Germany) together with the EU agreed on the key details of the agreement on Iran’s nuclear program. If the deal is successful, the international sanctions against Iran will be lifted. The parties agreed that the final agreement, ensuring the peaceful nature of the Iranian nuclear program, should be concluded before the end of
June 2015.
In mid-July 2015, Iran and six the above mentioned countries agreed on a comprehensive action plan for the final resolution of the Iranian nuclear problem and concluded an agreement. According to this document, Iran agrees not to seek to possess, develop or obtain access to any kind of nuclear weapons. In exchange, the United States will remove certain sanctions against Iran (the sanctions related to human rights violations in Iran will remain in force). The International Atomic Energy Agency (IAEA) will be responsible for making sure that Iran fulfills its obligations with respect to its nuclear program, as stipulated in the agreement.
Concluded in July 2015, the agreement lifts the sanctions against Iran’s oil and gas and financial sectors. As a result, Iran plans to restore its pre-sanctions market share of 42-43% on the European market of crude oil.
In the middle of March 2015, Iran’s Oil Minister Bijan Namdar said Iran was in a position to increase its oil exports by 1 million bpd within a few months after the removal of the embargo. However, most experts believe that Iran is unlikely to increase its exports by more than 500,000 bpd.
In the short term, Iran will be able to increase its oil exports by tapping the country’s accumulated reserves rather than by increasing production. ANZ Bank believes that Iran has 30 million barrels of oil stored in tankers. Brokerage company EA Gibson Shipbrokers Ltd says that it is closer to 34.5 million barrels. According to the US Government, Iran stores 7-17 million barrels of crude oil in tankers and reservoirs. The boldest estimate with respect to Iran’s oil reserves is 37 million barrels.
According to World Bank, if Iran returns on the global oil market early in 2016, the price for one barrel of Brent oil can fall from $48-50 (mid-October 2015) to $38-40 per barrel. Pessimists say the price may plunge to as low as $20 per barrel of Brent oil.
Tough Setup
About 80% of the Iranian oil is concentrated in the fields in Khuzestan Province, as well as on the offshore fields in the Persian Gulf. Production costs in these regions reach $3-4 per barrel.
Iran’s fields have a relatively high decline rate of 8%-11%, combined with low oil recovery rate of 20-25%. This requires a standard set of measures to prevent a decline in production, such as high-tech directional drilling of new wells with proper support operations, sidetracking in wells with low flow rates and various methods of enhanced oil recovery. All this means Russian oilfield service companies with their lack of advanced technologies won’t get any piece of the Iranian pie.
The Iranian oil is medium-sulphurous, with an API gravity of 28-36. Two grades of crude oil, Iran Heavy and Iran Light, account for 80% of Iran’s oil production. Other grades include Froozan, Soroush/Norouz, Doroud, Sirri and Lavan Blend.
Iran’s largest oil fields are onshore. These include Ahwaz-Asmari, Marun and Gachsaran, all of which are located in Khuzestan Province. Iran’s largest offshore oilfield is Abuzar producing 175,000 bpd.
Iran Heavy accounts for 45% of Iran’s crude oil. It is mostly produced at onshore oilfields in the country’s southern regions. Gachsaran and Marun are the two largest fields producing Iran Heavy. This grade is also produced at Rag-e-Safid, Ahwaz, Bangestan, Mansouri and Bibi Hakimeh with high degree of depletion.
Iran Light is produced at several offshore fields in Khuzestan with three fields producing 70% of this grade: Ahwaz-Asmari, Karani and Agha Jari. Many of the fields that produce Iran Light have been in use for decades and are declining rapidly.
Needless to say that many Russian oilfield service companies are technologically weak and hardly capable of offshore drilling, including enhanced oil recovery or sidetracking. The manufacturers of offshore production equipment are out of the question. There is a reason why sanctions against Russia are intended to target offshore, in particular, Arctic oil and gas projects: they are hitting in the weakest spot of Russia’s oil and gas sector. Before the sanctions were imposed, Russian manufacturers did not plan to produce offshore equipment, as there is no need in mass production. In this field, import substitution still remains wishful thinking for the most part.
Discovered in 1999, Azadegan was Iran’s biggest oil discovery in three decades. It contains 6-7 billion barrels of proven oil reserves, but the field’s complex geologic formation complicates its development. This field consists of North and South Azadegan.
CNPC was contracted for a two-phase development
of North Azadegan, with ultimate total production
estimated at 150,000 bpd (75,000 barrels per each phase). The first phase will be implemented in 2015-2016 with development costs reaching $2 billion.
Many years of international experience suggest that Russian oilfield service companies have little chances of becoming part of this project. Chinese oil companies normally prefer to work with Chinese contractors or major international oilfield service giants, if necessary.
In 2004, a consortium including NIOC (National Iranian Oil Company, 25%) and Japan’s INPEX (75%) signed an agreement to develop South Azadegan. However, INPEX eventually withdrew from the project. In 2009, CNPC signed a memorandum of understanding with NIOC for a $2.5 billion contract to develop South Azadegan. In 2011, the Chinese company received a license. The project’s production target was to reach 260,000 bpd in a two-phase effort (150,000 and 110,000 respectively). However, in 2014 NIOC terminated its contract with CNPC citing unacceptable delays.
This is where Russian oilfield service companies may become relevant. Yet, one cannot ignore the fact that once the sanctions are lifted, Schlumberger, Halliburton and Weatherford will return to Iran. Full-fledged competition may cause price wars and bring down margins to the minimum acceptable level.
Yadavaran Field is another large upstream project. It contains 3.2 billion barrels of recoverable oil and 2.7 trillion cubic feet of natural gas. At the end of 2007, China’s Sinopec signed a repurchase contract promising to invest $2.5 billion. In 2013, the field produced 25,000 bpd.
By mid-2015, production increased to 85,000 bpd. It is planned that at the second phase of development (by 2018) production will reach 100,000 bpd. This situation with Sinopec has a lot in common with the CNPC story. Summing up all the above, we can say that the chances of certain Russian oilfield service companies entering the Iranian market in order to make up for their financial losses in Russia are rather slim. Once the sanctions are removed, Iran will expect to benefit from advanced technologies that can be provided by major international companies, such as Schlumbeger, Halliburton and Weatherford. The only way to compete with them is to offer better technologies (which is something that Russian companies are hardly capable of) or extremely low prices. This setup makes it difficult for Russia’s largest oilfield service companies to use Iran to compensate for their lost revenues on the Russian market.
For additional information on PRI reports, please contact Daria Ivantsova: +7 (495) 502 5433 / 778 9332,
e-mail: Daria@rpi-inc.ru
