Iran business: Out of hibernation
FROM THE ECONOMIST INTELLIGENCE UNIT
Iran’s oil minister, Kazem Vaziri-Hamaneh, is making up for the time lost during the protracted wrangles that preceded his appointment at the end of 2005. The six-month hiatus during which major projects and policy initiatives languished now appears to have ended—although the industry still faces the threat of disruption from the dispute over Iran's nuclear plans.
The signs of renewed momentum include the announcement of plans to sign contracts for two liquefied natural gas (LNG) projects, involving European and Asian firms, and the invitation to bid for the development of four more phases in the South Pars gasfield. Mr Vaziri-Hamaneh has also indicated that he intends to move promptly to clear up a number of pending issues, including a proposed review of Iran’s buyback contract terms and the status of two major oilfield development contracts negotiated with Japanese and Chinese companies.
LNG movement
Iran has designated three of the 28 phases of South Pars for LNG exports, but has made only fitful progress in getting actual projects underway. South Pars itself is the Iranian section of a giant offshore gas reservoir in the Gulf—the Qatari section, known as the North Field, already accounts for some 15% of the world's LNG trade. The first five phases of South Pars (each phase entails output of 1bn-1.5bn cu ft/day) are now in production—Phases 2 and 3 were developed by France's Total, 4 and 5 by ENI of Italy, and the first phase by a local venture. Work is also going ahead on a further five phases (6 to 10), and two local groups have been selected to work on Phase 15 to 18. The phases allocated to LNG are 11, 12 and 13, while Phase 14 has been set aside for a gas-to-liquids (GTL) project.
The main objects of international attention in the Iranian LNG programme are Phases 11 and 13, which are to supply gas for two LNG ventures involving international firms. The most important issues to be resolved for both these schemes are the integration of the upstream gas development with the construction of the onshore facilities and the eventual marketing of the LNG. At end-2004 Total subscribed to a 30% stake in Pars LNG, along with Petronas of Malaysia (20%) and the National Iranian Oil Corporation (NIOC; 50%), which is planned to receive sufficient gas from Phase 11 of South Pars to produce some 9m tonnes/y of LNG. The Royal Dutch/Shell Group and Spain's Repsol YPF are involved with Persian LNG, which is linked to Phase 13. Interest in these schemes has quickened following a statement from Akbar Torkan, the head of Pars Oil and Gas Company, which is in overall charge of South Pars, that contracts will be signed by the end of the current Iranian financial year (March 20th) with Total, Shell and Repsol covering the upstream elements of the two LNG projects. It is not clear whether Petronas remains committed to the Pars LNG project—there were reports in mid-2005 that the Malaysian firm was reconsidering its involvement.
Pars LNG has completed some of the engineering design work for its facility, but more substantial work on the project is unlikely to start before the terms for developing South Pars Phase 11 have been clarified. There is also the critical question of securing buyers for the LNG. "First of all, we have to succeed in the negotiations we're involved in on the contract that we're negotiating, on the clients who purchase the LNG eventually," Total's chief executive, Thierry Desmarest, said at a recent briefing for Total shareholders . "And, of course, that is more important than anything else. Once we've concluded that set of negotiations, then we shall see where things stand in terms of the political issues in Iran." Similar considerations clearly apply for Shell and Repsol.
Policy pointers
Mr Vaziri-Hamaneh provided insights into his approach during his first press briefing, in mid-February. He said that new proposals on the structure of buyback contracts would be complete by the end of the current financial year. Foreign companies have been pressing the terms to be adjusted to so as to improve the risk-profile of such projects, thereby providing an incentive for them to commit more financial and technical resources. According to the existing terms, foreign companies develop fields to the point of production, and then hand them over to the Iranian authorities. The foreign company is paid out of the proceeds of the sales from the field’s output. However, foreign companies find the arrangement unsatisfactory as they have little say in how the field is run after they hand it over. In addition, many of Iran’s productive fields are reaching the stage where they require the continual application of sophisticated techniques to step up recovery rates.
The new minister, an industry insider (he was deputy to the outgoing minister), was eventually approved by the Majlis (parliament), after the first three candidates proposed by the president, were judged to be unsuitable. He has yet to state clearly where he stands in the buyback debate, but his remarks on the subject suggest that he is not overly enthusiastic about making changes that would improve terms for foreign companies. He suggested that an alternative approach to financing oil and gas development projects could consist in drawing on the Oil Stabilisation Fund (OSF), and he said that the ministry had submitted a request for such funding to the government and parliament.
The review of the buyback terms is likely to have a bearing on negotiations with China's Sinopec about developing the Yadavaran oilfield to produce up to 300,000 b/d, although Mr Vaziri-Hamaneh said that the critical issues in this deal were capacity and technical questions, rather than contract terms--Sinopec is said to be seeking a lower output target. He added that if the negotiations do not reach a satisfactory conclusion, alternatives will be studied. "We will do it ourselves, if we have the domestic financing and capability. If not, we will find a replacement." Talks are also going ahead with Japanese companies about the implementation of the 150,000-d/d Azadegan project, on which only limited progress has been made since it was signed two years ago. Inpex, the lead Japanese developer, is pressing for revised commercial terms to take account of increased costs. "The Japanese side has tentatively committed to starting the development work by early next year," the minister said. "The price increase mentioned by the Japanese side is not acceptable, but we do accept the fact that production costs have risen."
Price has also become a bone of contention in a deal for the sale of gas from Iran's Salman field to Sharjah. Following criticism of the terms of the deal from the National Accounting Office, Mr Vaziri-Hamaneh, in his remarks to the Iranian media in mid-February, said that the two parties would need to agree on a new price for the contract to be fulfilled. The 25-year contract was signed in 2001 between National Iranian Oil Company and Crescent Natural Gas Corporation, and most of the work on the fields involved and on the pipeline is now complete. It envisages the supply of some 600m cu ft/day of gas via the Mubarak field. Mr Vaziri-Hamaneh said that "necessary provisions have been made for unusual energy price changes, and the contract price will change accordingly", noting that when the contract was signed, oil and gas prices were much lower than they are now. He said that as the contract was negotiated between two companies--and not between governments--it did not require parliamentary approval. However, he said: "If the country's interests are not secured, no natural gas will be exported to the UAE. Crescent issued a statement that the contract is "firm and internationally binding on both parties". Neither the price nor any adjustment formula has been disclosed.
In the meantime, NIOC has invited international oil companies to apply by April 1st to pre-qualify for the development of phases 19 to 22 of the South Pars gasfield on a buyback basis. The project will entail producing 3.5bn cu ft/d of natural gas for domestic use, as well as the recovery of 2m tonnes/year (t/y) of ethane for use as feedstock in Iranian petrochemical plants, 2.1m t/y of liquefied petroleum gas and 160,000 b/d of condensates.
Nuclear shadow
The development of Iran's oil and gas industry has been affected by political factors for more than two years, as decision-making has been complicated by parliamentary and presidential elections and the risk-assessments of international companies have been coloured by the nuclear dispute. High oil prices mean that Iran has the ability to finance a large part of its equipment requirements from its own resources. However, without significant technological and marketing input from international companies it will be hard for Iran to do much more than keep oil output steady at about 4m b/d, and there will be little chance of it joining the ranks of LNG exporters. The evolution of the nuclear dispute will therefore have a crucial bearing on the pace and scope of Iran's oil and gas development.
SOURCE: ViewsWire Middle East
Iran’s oil minister, Kazem Vaziri-Hamaneh, is making up for the time lost during the protracted wrangles that preceded his appointment at the end of 2005. The six-month hiatus during which major projects and policy initiatives languished now appears to have ended—although the industry still faces the threat of disruption from the dispute over Iran's nuclear plans.
The signs of renewed momentum include the announcement of plans to sign contracts for two liquefied natural gas (LNG) projects, involving European and Asian firms, and the invitation to bid for the development of four more phases in the South Pars gasfield. Mr Vaziri-Hamaneh has also indicated that he intends to move promptly to clear up a number of pending issues, including a proposed review of Iran’s buyback contract terms and the status of two major oilfield development contracts negotiated with Japanese and Chinese companies.
LNG movement
Iran has designated three of the 28 phases of South Pars for LNG exports, but has made only fitful progress in getting actual projects underway. South Pars itself is the Iranian section of a giant offshore gas reservoir in the Gulf—the Qatari section, known as the North Field, already accounts for some 15% of the world's LNG trade. The first five phases of South Pars (each phase entails output of 1bn-1.5bn cu ft/day) are now in production—Phases 2 and 3 were developed by France's Total, 4 and 5 by ENI of Italy, and the first phase by a local venture. Work is also going ahead on a further five phases (6 to 10), and two local groups have been selected to work on Phase 15 to 18. The phases allocated to LNG are 11, 12 and 13, while Phase 14 has been set aside for a gas-to-liquids (GTL) project.
The main objects of international attention in the Iranian LNG programme are Phases 11 and 13, which are to supply gas for two LNG ventures involving international firms. The most important issues to be resolved for both these schemes are the integration of the upstream gas development with the construction of the onshore facilities and the eventual marketing of the LNG. At end-2004 Total subscribed to a 30% stake in Pars LNG, along with Petronas of Malaysia (20%) and the National Iranian Oil Corporation (NIOC; 50%), which is planned to receive sufficient gas from Phase 11 of South Pars to produce some 9m tonnes/y of LNG. The Royal Dutch/Shell Group and Spain's Repsol YPF are involved with Persian LNG, which is linked to Phase 13. Interest in these schemes has quickened following a statement from Akbar Torkan, the head of Pars Oil and Gas Company, which is in overall charge of South Pars, that contracts will be signed by the end of the current Iranian financial year (March 20th) with Total, Shell and Repsol covering the upstream elements of the two LNG projects. It is not clear whether Petronas remains committed to the Pars LNG project—there were reports in mid-2005 that the Malaysian firm was reconsidering its involvement.
Pars LNG has completed some of the engineering design work for its facility, but more substantial work on the project is unlikely to start before the terms for developing South Pars Phase 11 have been clarified. There is also the critical question of securing buyers for the LNG. "First of all, we have to succeed in the negotiations we're involved in on the contract that we're negotiating, on the clients who purchase the LNG eventually," Total's chief executive, Thierry Desmarest, said at a recent briefing for Total shareholders . "And, of course, that is more important than anything else. Once we've concluded that set of negotiations, then we shall see where things stand in terms of the political issues in Iran." Similar considerations clearly apply for Shell and Repsol.
Policy pointers
Mr Vaziri-Hamaneh provided insights into his approach during his first press briefing, in mid-February. He said that new proposals on the structure of buyback contracts would be complete by the end of the current financial year. Foreign companies have been pressing the terms to be adjusted to so as to improve the risk-profile of such projects, thereby providing an incentive for them to commit more financial and technical resources. According to the existing terms, foreign companies develop fields to the point of production, and then hand them over to the Iranian authorities. The foreign company is paid out of the proceeds of the sales from the field’s output. However, foreign companies find the arrangement unsatisfactory as they have little say in how the field is run after they hand it over. In addition, many of Iran’s productive fields are reaching the stage where they require the continual application of sophisticated techniques to step up recovery rates.
The new minister, an industry insider (he was deputy to the outgoing minister), was eventually approved by the Majlis (parliament), after the first three candidates proposed by the president, were judged to be unsuitable. He has yet to state clearly where he stands in the buyback debate, but his remarks on the subject suggest that he is not overly enthusiastic about making changes that would improve terms for foreign companies. He suggested that an alternative approach to financing oil and gas development projects could consist in drawing on the Oil Stabilisation Fund (OSF), and he said that the ministry had submitted a request for such funding to the government and parliament.
The review of the buyback terms is likely to have a bearing on negotiations with China's Sinopec about developing the Yadavaran oilfield to produce up to 300,000 b/d, although Mr Vaziri-Hamaneh said that the critical issues in this deal were capacity and technical questions, rather than contract terms--Sinopec is said to be seeking a lower output target. He added that if the negotiations do not reach a satisfactory conclusion, alternatives will be studied. "We will do it ourselves, if we have the domestic financing and capability. If not, we will find a replacement." Talks are also going ahead with Japanese companies about the implementation of the 150,000-d/d Azadegan project, on which only limited progress has been made since it was signed two years ago. Inpex, the lead Japanese developer, is pressing for revised commercial terms to take account of increased costs. "The Japanese side has tentatively committed to starting the development work by early next year," the minister said. "The price increase mentioned by the Japanese side is not acceptable, but we do accept the fact that production costs have risen."
Price has also become a bone of contention in a deal for the sale of gas from Iran's Salman field to Sharjah. Following criticism of the terms of the deal from the National Accounting Office, Mr Vaziri-Hamaneh, in his remarks to the Iranian media in mid-February, said that the two parties would need to agree on a new price for the contract to be fulfilled. The 25-year contract was signed in 2001 between National Iranian Oil Company and Crescent Natural Gas Corporation, and most of the work on the fields involved and on the pipeline is now complete. It envisages the supply of some 600m cu ft/day of gas via the Mubarak field. Mr Vaziri-Hamaneh said that "necessary provisions have been made for unusual energy price changes, and the contract price will change accordingly", noting that when the contract was signed, oil and gas prices were much lower than they are now. He said that as the contract was negotiated between two companies--and not between governments--it did not require parliamentary approval. However, he said: "If the country's interests are not secured, no natural gas will be exported to the UAE. Crescent issued a statement that the contract is "firm and internationally binding on both parties". Neither the price nor any adjustment formula has been disclosed.
In the meantime, NIOC has invited international oil companies to apply by April 1st to pre-qualify for the development of phases 19 to 22 of the South Pars gasfield on a buyback basis. The project will entail producing 3.5bn cu ft/d of natural gas for domestic use, as well as the recovery of 2m tonnes/year (t/y) of ethane for use as feedstock in Iranian petrochemical plants, 2.1m t/y of liquefied petroleum gas and 160,000 b/d of condensates.
Nuclear shadow
The development of Iran's oil and gas industry has been affected by political factors for more than two years, as decision-making has been complicated by parliamentary and presidential elections and the risk-assessments of international companies have been coloured by the nuclear dispute. High oil prices mean that Iran has the ability to finance a large part of its equipment requirements from its own resources. However, without significant technological and marketing input from international companies it will be hard for Iran to do much more than keep oil output steady at about 4m b/d, and there will be little chance of it joining the ranks of LNG exporters. The evolution of the nuclear dispute will therefore have a crucial bearing on the pace and scope of Iran's oil and gas development.
SOURCE: ViewsWire Middle East
posted by Marko at 3/11/2006 06:05:00 AM
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