Iran needs to move off high center on LNG exports

Oil & Gas Journal: FACTS Inc.: Iran needs to move off high center on LNG exports

“With Shell putting Persian LNG as its top priority, we consider Persian LNG ahead of the pack,” said analysts.”

Sam Fletcher

Senior Writer

Posted 15 Sept 04

HOUSTON, Sept. 14 — Iran needs to decide “if it wants to export natural gas and LNG or not,” says FACTS Inc., a Honolulu consultancy headed by Fereidun Fesharaki.

“If there are no firm commitments, it should cease all discussions and be open about its doubts. The government cannot afford to hesitate and keep its customers in limbo,” said FACTS in a recent report.

Iran is seeking buyers for natural gas from its supergiant Pars field and is planning three LNG projects. Rokneddin Javadi, managing director of National Iranian Gas Export Co., said an LNG project would take 5 years to complete, but the company in February awarded a 1.6 billion euro contract to a group comprising Total SA, Malaysia’s national oil company Petronas, and National Iranian Oil Co.’s NIOC LNG to build an LNG plant utilizing natural gas feedstock from South Pars (OGJ, July 12, 2004, p. 9).

Finding buyers was expected to take 7-8 months. Total also is said to be a strong contender for Phase 11 of the 25-phase South Pars development project that is expected to be awarded shortly. BP PLC, Statoil ASA, and ENI SPA also are competing for development of Phase 11 gas, earmarked for European markets.

South Pars Phases 1-10 are scheduled to be on stream by the end of 2007, producing 10 bcfd or the equivalent of 70 million tonnes/year of LNG and as much as 450,000 b/d of condensate. However, FACTS noted, “None of the 10 bcfd of gas is anticipated to be exported in the form of LNG” in that period. Phases 1-5 and 9-10 are slated for Iran’s domestic grid. “So far, only the three phases of 6, 7, and 8 are slated for reinjection, and Phase 15 may be set aside for this purpose also. These phases yield 4 bcfd of gas for reinjection, compared [with] 5.4 bcfd foreseen in the fourth 5-year plan, which started from Mar. 1,” FACTS said.

“While the South Pars gas projects continue their pace, Iran’s LNG industry has made little progress. For Iran to export LNG, the government needs to make a commitment to establish a framework for an integrated upstream-downstream project management,” said FACTS.

Phases vs. trains

In its LNG development, Iran continues “to think in terms of phases” when it should instead “think in terms of trains,” said FACTS analysts. “Each train needs to have a proper management team to ensure execution of both upstream and downstream segments simultaneously. Project management must be integrated and act with full authority without having to refer to the minister and politicians for every minor issue,” they argued.

For example, Phases 11-12 are expected to yield two full 4.2 million tonne/year trains, but there are doubts as to whether there is enough gas to support two trains,” FACTS said. “Iran should consider merging all phases and pay rate-of-return for the development of these phases. It can then designate individual trains to different contractors [or] LNG buyers.

“Without such a major rethinking of the process, things will just linger on, and Iran will lose credibility,” FACTS analysts warned.

Meanwhile, they said, “While Iran complains about Qatar’s fast pace of gas development and utilizing the joint reserves too fast, indeed, Iran’s development has been faster, except the gas is not exported—it is utilized directly for the domestic grid or for gas reinjection.”

NIOC field engineers claimed that close to 8 bcfd of gas is required for reinjection. “However, retired NIOC reservoir engineers have approached us, vehemently arguing that needed gas is some 15-20 bcfd, which would consume almost all of South Pars gas,” said FACTS officials.

New discoveries

Although they do not match South Pars’s potential volumes, new gas discoveries will add substantially to Iran’s gas reserves and production. NIOC “claims it has discovered the second largest offshore gas reservoir after South Pars, located around Lavan Island in the Persian Gulf, with an estimated 7 tcf of gas in place. This reservoir is ready for development now. NIOC is also working on another newly discovered gas field (Balal), in which one exploratory well has been drilled, and NIOC is now processing the data for release in the next 2 months,” said FACTS in a July report.

Tabnak, Iran’s largest low-sulfur onshore gas reservoir, has a reserve estimated at 14.8 tcf. Workers have drilled 12 production wells. A further 10 wells are to be ready by December to raise production to 27-30 million cu m/day (MMcmd) of gas and 15,000 b/d of condensate. In Phase 3, 8 more wells are to be ready by July 2005 to reach final production of 40-45 MMcmd of gas and 21,000 b/d of condensate. Gas will be transported to the Parsian gas plant via a 30-in. diameter, 38 km pipeline.

Other Iranian gas fields include Homa, 4.1 tcf of reserves; Shanool, 6 tcf; Varavi, 1.4 tcf; and Gordan, not yet in Iran’s development plan, 1.8 tcf.

Antiexport lobby

Opposition to the export of Iranian gas “has once again gathered strong momentum” from a group led by a prominent NIOC retired executive.

“Accusing proponents of gas exports as ‘traitors,’ the group has constantly battled export plans,” FACTS reported. Meantime, the growing potential of US imports of gas and the prospects for a significant increase in LNG prices over the next few years “has added to the doubts in the minds of officials who see a logic for slowing down the process until the market turns into a seller’s market later in this decade,” FACTS said.

A new NIOC decree states that South Pars phases awarded for LNG, such as Phase 11, may produce gas for sale “into the [domestic] grid until such time as it is decided that gas is to be converted into LNG. Many believe this decision was to appease some contractors and provide an avenue for the upstream parts of the LNG projects to proceed even if the downstream portion is not final,” said FACTS analysts. “As such, the rate of return for gas production will be paid to the buyback contractors until a final decision on LNG is made.”

Earlier this year, NIOC, Total, and Petronas formed a joint venture, Pars LNG, to produce Iranian LNG. The JV’s upstream issues “seem to have been resolved, but there is no progress on the downstream front as yet. There is no firm agreement on price, take-or-pay, and other key issues,” FACTS noted.

However, Persian LNG, a JV of Repsol YPF SA, Royal Dutch/Shell Group, and NIOC, “seems to have made some progress on the downstream front, particularly on pricing to Spain, but upsteam is not finalized. With Shell putting Persian LNG as its top priority, we consider Persian LNG ahead of the pack,” said analysts.

Current plans are for exports from NIOC LNG and Persian LNG to go to Europe, while those from Pars LNG would go to Asia. “There is also consideration being given to the possibility of LNG from later trains in Iran to be shipped to eastern Mexico, where Shell is constructing a terminal at Altamira by 2006. Prices at Altamira will be Henry Hub-based and substantially higher than Europe’s,” FACTS said.

Contact Sam Fletcher at [email protected]

Oil & Gas Journal: Consultant: US pressure disrupts development of Iran’s South Azadegan field

“Royal Dutch/Shell Group declined an offer from the third partner, Inpex Corp., to join that consortium.”

Sam Fletcher

Senior Writer

Posted 15 Sept 04

HOUSTON, Sept. 14 — Foreign companies being wooed by Iran to help the Persian Gulf nation develop its vast oil and gas resources are balking amid US pressure and concerns over fiscal terms.

Under pressure from the US government, Tomen Corp., “now controlled by Toyota [Motor Corp.],” already has pulled out of the Japanese consortium that was awarded the development of Iran’s supergiant South Azadegan field, and Japan Petroleum Exploration Co. (Japex) “is thinking of pulling out, too,” said officials at Fesharaki Associates Consulting & Technical Services Inc. (FACTS Inc.), Honolulu, in a recent report.

Royal Dutch/Shell Group declined an offer from the third partner, Inpex Corp., to join that consortium. “Other companies are now being courted, particularly Statoil [ASA],” FACTS reported. “Total [SA], Statoil, [OAO Lukoil], ONGC [India’s state-owned Oil & Natural Gas Corp.], and Chinese companies seem interested in northern Azadegan .”

However, the report said, “Many international oil companies may not find the rate-of-return attractive enough under the revised buyback system, although Azadegan is seen to have similar terms to Darkhoin [oil field in Iran], which is a relaxed version of the revised buyback system.”

Buyback contract

Under the buyback contract, an interested foreign contractor, operating through an Iranian affiliate, enters into a contract with state-owned National Iranian Oil Co. (NIOC). The contractor develops the field, and NIOC repays costs that comprise capital expenditure, operating expenditure, and accrued bank charges. Additionally, the contractor receives a previously agreed remuneration fee, normally by way of an entitlement to an amount of produced hydrocarbon.

In February, Japan and Iran signed a basic development agreement for South Azadegan field, with the project to be led by a Japanese consortium of Inpex, Tomen, and Japex (OGJ Online, Mar. 25, 2004). Naftiran Intertrade Co. Ltd. (NICO)—which earlier split supergiant Azadegan field into north and south projects—was given 30% of South Azadegan.

Under terms of the contract, both Inpex and NICO would become contractors to NIOC to develop the field. The two sides are reported to have agreed to invest a total of $2 billion, with the Inpex group contributing 75% and NICO 25%. NICO is now the largest private upstream company in Iran and owns Petropars Ltd. and PetroIran Development Co.

Development is to be implemented in two phases, targeting production at 150,000 b/d in Phase 1 and 260,000 b/d in Phase 2. Initial production of 50,000 b/d is expected within 40 months, rising to 150,000 b/d after 52 months and 260,000 b/d in 8 years. The contract stipulates the drilling of 36 wells in Phase 1 and 39 more in Phase 2, along with construction and installation of oil and natural gas production facilities, laying oil and gas pipelines for export, and injection of both water and gas to maintain pressure in Azadegan field. Japanese participants in the oil consortium initially planned to set up a project firm with a capitalization of 10-30 billion yen. Japan Oil, Gas & Metals National Corp., an independent administrative agency, was to contribute 49% of the capital, and Inpex, Tomen, and Japex the remaining 51%.

The field, some 80 km west of Ahvaz in Khuzestan Province near the Iraqi border, is believed to be Iran’s largest onshore project since the 1979 Islamic revolution. Iranian officials estimate Azadegan contains 35-45 billion bbl of OOIP, with 5-6 billion bbl considered recoverable. It would require substantial investment to develop.

Meanwhile, one more round of bid submission has been requested for Ahwaz Bangestan oil field. “BP [PLC] has submitted its bid, and Total will submit shortly,” FACTS reported. “This is a one-horse race, as BP, despite its best intentions, is unlikely to be able to actually take on any project in Iran, due to severe US opposition and its vulnerability to the displeasure of the US administration.”

It said, “The new areas of Kushk and Hosseinieh have generated serious interest, and big players—Shell, Total, Petronas, Repsol [YPF SA], Sinopec, and ONGC—have bought the [bid information] packages.”

Special requirements

FACTS noted, “Surprisingly, companies like Petronas were asked to bring in a Western partner. It seems that some of the nonmajors are being asked to bring in partners. Even more surprisingly, Repsol, too, was asked to join with a Western partner.

“Moreover, NIOC has added a condition: The winner must agree to buy 5 million tonnes of LNG from National Iranian Gas Export Co. (NIGEC). It is not specified at what price, what terms, and from what upstream South Pars project the LNG will come from.” FACTS concluded, “It makes no sense to link the upstream project and LNG together, as the linkage will only delay the projects and cloud the economic viability of each project independently.”

It also observed, “Iran’s offer of 16 blocks of exploration acreage, where the companies who have successfully found oil are now able to get development contracts without open bidding, has generated some mild interest, but it does not seem to bring in the larger international companies.”

Contact Sam Fletcher at [email protected]