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Iranian Oilfields Face Serious Damage; Under-Investment Is A Continuing Trend.

Iran's oilfields, mainly old onshore structures on stream since the 1950s, are rapidly losing reservoir pressure despite EOR systems installed to lengthen their life. According to a highly-placed APS source in Tehran, the total loss of oil production capacity now has reached almost 500,000 b/d per annum. The source says any total output level above 3.6 million b/d is no longer sustainable for more than a few days. In some onshore oilfields, there is a loss of almost four barrels for every barrel of crude oil being extracted.

This is the result of under-investment and lack of proper reservoir management, two problems which have been in place since late 1978, when a consortium of international oil companies (IOCs) had to leave Iran in a hurry following a revolution against the Pahlavi monarchy. The revolution, spearheaded by a Shi'ite Islamic movement under Ayatollah Ruhollah Khomeini, led to the downfall of Shah Mohammad Reza Pahlavi in early 1979.

No proper investment and upstream management in the oilfields took place in the subsequent years, mainly because of a devastating war between Iran and Iraq from 1980 to August 1988. In the first phase of the war, from September 1980 to June 1982, the military hostilities concentrated on Khuzistan, the south-western province of Iran where most of the country's onshore fields are located.

Rehabilitation work in the oilfields after 1982 was interrupted by frequent raids by the Iraqi air force which affected the petroleum installations including vital refineries. It was not until late in 1989 that the Iranian government managed to get some help from qualified upstream companies contracted to assist the state-owned National Iranian Oil Co. (NIOC) and its various subsidiaries. But investment in reservoir management remained far from being adequate in the subsequent years.

It was not until 1999 that a bigger number of Western firms began working on oilfields under buy-back contracts which were of limited duration and offered the firms little incentives to do what was necessary. The trend of under-investment has since been continuous.

Only a limited number of qualified foreign companies are involved in Iran's petroleum E&P sector. NIOC has more than 120 affiliated companies involved in various aspects of petroleum E&P in Iran; but only a few of them have become qualified with the help of foreign firms brought in as sub-contractors.

Of all the Western super-majors, only Shell maintains a presence in Iran. But its role now is limited and the prospects ahead depend on the government improving the buy-back formula as Oil Minister Kazem Vaziri-Hamaneh has been promising since late 2005.

No new developments seem to be forthcoming. European oil majors like Total of France and Agip of Italy have maintained a presence but are waiting for the buy-back formula to be improved. Statoil and Norsk Hydro of Norway are present and working on some fields. Sinopec of China is seeing its deal finalised for the Yadavaran oilfield (see below). But the role of these companies, together with Petronas of Malaysia, is way below what is required for Iran's damaged oilfields to be rehabilitated and for the drop in reservoir pressure to be halted. The small number of foreign companies attending the 11th IIES International Oil & Gas Forum in Tehran on Nov. 20-21 was an indication of declining interest in Iran's E&P sector.

Iran is under US economic sanctions and at odds with the US and the EU over its nuclear ambitions. The Iranian constitution forbids foreigners from holding rights to natural resources. Instead, foreign companies may have buy-back agreements to finance the development of reserves, hand them over to Iranian control and then recover their investment at an agreed rate of return from subsequent production.

Oil Minister Hamaneh on Nov. 20 told the Tehran conference US companies were prevented from participating in Iran's oil development activities due to Washington's economic policies. He said security of oil and gas supplies required investment in the petroleum sector, adding that security of energy supply will be put at risk if consumers did not co-operate in this regard.

Addressing the same Tehran conference, Deputy Oil Minister and NIOC Managing Director Gholam-Hossein Nozari said Iran's crude oil production capacity will rise from the current level of 4.3m b/d to 7m b/d by 2014. He said the country's natural gas production to 1.565 BCM/day by 2014, from 500 MCM/day at present. He said Iran by 2014 will be exporting natural gas to Asian, European and African markets.

Nozari said Iran's crude oil in place now stood at 740 bn barrels and its recoverable oil reserves were estimated at 137.5 bn barrels. Elsewhere in his remarks, he highlighted the need for investment in the oil industry and said that to attract more capital, the buy-back contract would be improved. But neither he nor Minister Hamaneh has so far explained what improvements will be made to the formula, with speculation that the contract's duration might be extended from seven to 15 or 20 years.
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Publication:APS Review Oil Market Trends
Date:Nov 27, 2006
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