Iran is launching a $70 billion investment program to halt the dramatic decline in production at its key South Pars gas field. Failure to do so will result in 40 percent of the country’s oil production from the Persian Gulf Star gas condensate refinery being lost and petrochemical costs increasing by as much as $12 billion a year, according to forecasts by the Iranian Gas Institute. “South Pars gas production accounts for nearly 80 percent of our (Iran’s) total gas production, so it is vital for all sectors of the economy and society that it does not decline significantly,” a senior energy industry source who works closely with the Islamic Republic’s Ministry of Petroleum told the Iranian Oil Ministry exclusively. Oilprice.com last week.
In general, the South Pars site covers 3,700 square kilometers and hosts an estimated 14.2 trillion cubic meters (tm3) of gas reserves and 18 billion barrels of gas condensate. In addition to accounting for 78 percent of the country’s gas production, it also accounts for around 40 percent of Iran’s total estimated gas reserves of 33.8 trillion cubic meters (most of which are located in the southern regions of Fars, Bushehr and Hormozgan). Crucially in the current context, it also forms one of the two parts that make up by far the world’s largest gas reservoir, with 51 trillion cubic meters of reserves. The other part is Qatar’s 6,000 square kilometer North Dome (or “North Field”), which lays the foundation for the country’s status as the world’s leading exporter of liquefied natural gas (LNG). Related: Hijacking of Libyan central bank sheds light on rivalry over oil wealth
Iran has divided South Pars into 24 phases for development, with overall production targets ranging from around 28 million cubic meters per day (mcm/d) to around 57 million mcm/d – the latter being a target for the ever-controversial Phase 11. After the Joint Comprehensive Plan of Action (“JCPOA” or colloquially “nuclear deal”) was implemented on January 16, 2016, then-French oil and gas major Total renewed its 2009 commitment to develop the phase, which had been abandoned in 2012 when the EU tightened its sanctions against Iran. The French oil and gas giant held a 50.1 percent stake in the Phase 11 project, ahead of the 30 percent stake of China National Petroleum Corporation and a 19.9 percent stake of Petropars, a wholly owned subsidiary of the National Iranian Oil Company. Total quickly invested around $1 billion in Phase 11 and made progress on the site until the US withdrawal from the JCPOA in May 2018, as I analyze in detail in my new book on the new global oil market order. Given the size and scope of Phase 11, it became the focus of Washington’s attention after the withdrawal, putting the French under enormous pressure to pull out of the project. Under the terms of the contract, CNPC then took over management and little progress has been made since then.
This is a microcosm of what has happened to Iran’s oil and gas sector since then. The main problem with replacing leading Western oil and gas companies with Chinese ones is that the latter do not have the latest technology available to the former. The same is now true of Russian oil and gas companies, which have been deprived of much of the same technology by various sanctions since their invasion of Ukraine’s Crimea region in 2014. According to estimates by Iran’s National Development Fund, the country’s gas production will decline by at least 25 percent over the next decade due to falling pressure in the fields; South Pars will see a 30 percent decline.
To change this, Iran’s Oil Ministry in March agreed to a $20 billion program with various local firms to build 28 giant platforms designed to increase pressure on the South Pars field. However, little progress has been made because neither the local companies nor their Chinese and Russian backers have the necessary technology and know-how. The latest program announced by the Oil Ministry – drilling 35 new wells on the South Pars field – appears to be geared towards maximizing the field’s production while it still can, rather than addressing the root causes of the pressure drop and trying to slow them down. According to official statements from the Oil Ministry, the new wells are expected to increase production at the field by 35 million cubic meters per day over the next three years. “Part of the problem is the geology of the site, with a natural drift towards the Qatari side in several places rather than the Iranian side,” the Iranian source told OilPrice.com last week. “However, another reason has been the many clumsy attempts by local contractors to optimize production over the years without thinking about the long-term consequences,” he added. “There are numerous examples of drilling in the wrong areas, which has weakened the surrounding structures, so if 35 new wells are drilled, the situation is likely to only get worse,” he said.
Against this backdrop, Iran hopes China will increase pressure on Qatar to be more cooperative in developing the two halves of the vast gas reservoir, the source added. “Qatar had a moratorium on gas production from its own North Dome field from 2005 to 2017. During that time, it frequently accused Iran of using its drilling to relieve pressure on that site and asked China to intervene with Iran on its behalf, which it did,” the source told OilPrice.com. “In early 2017, the two sides (Qatar and Iran) sat down and agreed to work together to ensure the sustainability of the site. Iran now wants the same assurance from Qatar,” he added.
This is all the more pressing for Iran as Qatar itself is currently trying to dramatically increase its production at the North Dome. The emirate’s expansion program calls for six major new construction projects in the North Field East (NFE) and North Field South (NFS) by 2029. Four new “trains” (production facilities) – each with a capacity of 8 million tonnes per annum (mtpa) – are to be built at the NFE site and two (with the same production capacity) at the NFS site, allowing for a total of 48 million mtpa of new LNG production. In late February, QatarEnergy announced another package of projects – focusing on its North Field West (NFW) – that are expected to increase its LNG production from the current 77 million mtpa to 142 million mtpa later this decade. For comparison, in 2023, 404 million tonnes of liquefied natural gas will be traded worldwide per year. Industry estimates suggest that this figure will reach approximately 625-685 million tonnes of liquefied natural gas per year in 2040.
The problem for Iran in all this is that while Qatar is famously diplomatic in its dealings with East and West, pressure from the US and its allies to steer the emirate into their sphere of influence has increased since the Russian invasion of Ukraine on February 24, 2022. Before that, the country had spent the previous year eagerly securing huge long-term LNG contracts with China, as I also analyze in detail in my new book on the new global oil market order. With extraordinary foresight – or something like that – Beijing knew in advance that a major global event would cause LNG to become the world’s emergency energy source very soon. Consequently, competition between the US and its allies and China and its partners for upcoming long-term LNG contracts with Qatar is extreme. This is likely to remain the case, as oil and gas company Shell predicts that global demand for LNG will increase by more than 50 percent by 2040, even without a new major conflict (like in Taiwan) in the next few years.
By Simon Watkins for Oilprice.com
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