Thursday, December 29, 2011

IRAN, a natural gas giant...

In recent days and weeks, Iran has found itself in the news on a fairly regular basis, particularly now that it appears that they are ramping up their nuclear program and messing with the British Embassy. Iran is often overlooked as an energy producing nation, while most people are aware that Iran is a member of OPEC, they are not aware of the significance of Iran's oil and natural gas reserves. Hopefully this posting will put Iran's place in the energy world into context.

Let's open with some background information on the country. Iran is located along the north shore of the Persian Gulf, a very strategically important geographic location since the country is in partial control of the entry to the Gulf of Oman, the narrowest part of the access and egress from the Persian Gulf. Iran is not an Arab county, the majority of Iran's population of 77,891,000 people are Persian. Iran has a very young population; the median age of both males and females is only 26.8 years compared to 36.9 years in the United States. Iran's economy relies heavily on the oil and natural sector which provides the majority of government revenues. Iran suffers from one of the world's highest unemployment rates (139th out of 199 countries) with 13.2 percent unemployment in 2010. Surprisingly, Iran's government is one of the most fiscally responsible in the world, in 2010, Iran's government ran a budget surplus that reached 6 percent of GDP (11th place in the world) and public debt is only 16.3 percent of GDP, enviable by any standard.

Now let's look at Iran's main industry, oil and gas. Iran is one of the world's leading producers of both natural gas and oil; it is OPEC's second largest oil producer and exporter after Saudi Arabia and, in 2010, was the world's third largest exporter of oil after Saudi Arabia and Russia. Here is a map showing Iran's main oil and gas fields and pipeline infrastructure. Note that the vast majority of the country’s producing oil and gas fields are located along the Persian Gulf. Note the huge South Pars/North Dome gas field (in red); this is the world's largest natural gas field shared by Iran and Qatar:

In this posting, I’m going to focus on Iran’s natural gas reserves. Let’s start out by taking a look at the world's top natural gas reserve holders:

As I mentioned earlier, Iran and Qatar jointly own the North Dome Field and South Pars Field, a wonder of the natural gas world. Here's a more detailed map of the fields:

The combined field was discovered in 1990 by the National Iranian Oil Company (NIOC), the second largest oil company in the world after Saudi Aramco. It covers an area of 9700 square kilometres of which 3700 kilometres are situated in Iranian territory. The field is part of the north-trending Qatar Arch with most of the gas trapped in Permian-Triassic formations. The total reserves for the field are estimated to be around 2000 trillion cubic feet (TCF) and it contains an additional 50 billion barrels of condensate. With in-place reserves of 360 billion barrels of oil equivalent, the field is larger than the world's largest oil field, Ghawar (170 billion barrels of oil-in-place) located in Saudi Arabia. It is anticipated that the gas recovery factor is about 70 percent resulting in total recoverable gas reserves of 1260 TCF. Using a 70 percent recovery factor results in the combined field containing 19 percent of the world's total gas reserves. Interestingly enough, the fields also contain the world's largest reserves of helium totalling 10 billion cubic metres or about 25 percent of the world's total helium reserves.

Let's look at Iran's share of this elephant. Iran owns 500 TCF of gas-in-place and approximately 360 TCF of recoverable gas. This is 36 percent of Iran's total gas reserves and 5.6 percent of the world's entire proven gas reserves. Let's step away from Iran for a moment to put these massive reserves into perspective. Here is the data showing the changes in proved natural gas reserves since the 1920's for the United States from the U.S. Energy Information Administration:

Iran's proven natural gas reserves in this one field alone are nearly twice that of the entire United States.

Iran's South Pars field also contains about 18 billion barrels of condensate-in-place with an estimated recovery factor of 50 percent. The gas produced is quite rich in liquids, yielding approximately 40 barrels of condensate per million cubic feet of gas. Wells are extremely productive with an average well producing 100 MMcf/day. Production began in July 2003 at a total rate of 1 BCF per day plus 40,000 barrels of gas condensates. Development of the field is taking place in 29 phases; Iran has signed development agreements with TotalFinaElf, Gazprom, Petronas, Agip, Statoil, Shell, Spain's Repsol, India Oil Corporation and China's Sinopec and CNPC among others. As I will detail below, sanctions by foreign governments have caused many of the aforementioned companies to abandon their development agreements with Iran. Here is a chart showing the phases, partnerships and current production levels along with Iran’s future plans for development:

The current political issues in Iran have impacted development of the South Pars field. Here is the latest press release from NIOC outlining their plans for future development, noting the use of Iranian contractors and the end of control over projects by foreign contractors:

"Iran plans to reach the maximum level of gas production from the South Pars Oil Field, a year before the end of Fifth development plan, he added. “All eight remaining phases of South Pars were entrusted to Iranian contractors and the foreign contractors have no longer any control over South Pars projects, the official stated. 
Although Tehran is trying to rely on Iranian contractors but it has no plan to discharge foreign companies because they can strengthen Iran’s national development plan, Suri expressed. Tehran plans to be self-sufficient in the oil industry, furthermore, Iran has a program to export technical services, he added. “The today mission of Pars Oil and Gas Company is to maintain the current 250- million cubic meter production. It plans to develop the North Pars, Golshan and Ferdowsi oil fields as a second priority. 
The Fifth Development Plan sets guidelines for the socio-economic development of Iran. The plan is part of 'Vision 2025', a strategy for long-term sustainable growth. Under the plan, following annual approval of the government’s budget, the Central Bank of Iran will forward a detailed monetary and credit policy to the Money and Credit Council (MCC) for approval. Thereafter, major elements of these policies will be incorporated into the five-year economic development plan. South Pars is the biggest gas field in the world, shared by Iran and Qatar. The South Pars field is the name of northern part of the joint located in Iranian waters and the North Dome is the name of southern part, located in Qatari waters. South Pars field was discovered in 1990.” (my bold)

In 2009, the National Iranian Oil Company announced that China National Petroleum Company signed a $4.7 billion contract to develop Phase 11 (out of 29 total phases) of development of the South Pars field. CNPC replaced Total as a partner; Total had signed a memorandum of agreement to develop the field in 2004, however, those nasty international sanctions interfered with Total's ability to develop the field. Iran had become increasingly concerned that a portion of their natural gas reserves were being competitively drained by Qatar.

China is also active in two exploration projects with NIOC as shown on these charts:

It's interesting to see that NIOC also partnered with Russian, Brazilian, Vietnamese, Italian and Spanish oil companies for various exploration projects throughout Iran.

Where is all of this natural gas going? Iran’s domestic demand for natural gas has risen by 550 percent over the past two decades with consumption keeping pace with production increases. Here is a graph showing the growth in both natural gas consumption and production:

In 2010, Iran produced roughly 6 TCF of marketed natural gas and consumed an estimated 5.1 TCF. Of the 7.7 TCF of gross natural gas produced, 1.2 TCF was reinjected into oil reservoirs as part of Iran’s plan to increase crude oil production through the use of enhanced oil recovery (EOR) techniques. Even with the massive and growing output from South Pars, it is unlikely that Iran will increase its exports of natural gas. In fact, despite having the world’s second largest natural gas reserves, Iran imported about 0.7 BCF/day of natural gas from Turkmenistan to satisfy demand in the northern part of the country.

As an aside, in January 2011, Iran's Petroleum Minister announced the discovery of a new onshore natural gas field located in southeastern Iran near Assaluyeh in Bushehr province. The field contains recoverable gas reserves of 7.4 TCF and an additional 7.7 million barrels of condensate in place.

One can readily see from this posting that Iran is sitting on a very strategic resource. The combination of huge reserves of both oil and natural gas may well make Iran a very, very tempting target for military intervention in the future. In this case, however, the issue is complicated by the presence of both Chinese and Russian economic interests in Iran’s natural resource base....

First casualty of another war in the Middle East will be economic recovery in U.S. and Europe.

Iran has threatened that it will retaliate against the Obama administration's proposed new economic sanctions on Iran's oil exports by blocking the flow of oil from the Persian Gulf. "If sanctions are adopted against Iranian oil," said Iran's Vice President Mohammad Reza Rahimi, "not a drop of oil will pass through the Strait of Hormuz," the narrow waterway at the mouth of the Persian Gulf, which one-fifth of the world's oil supply passes through daily.

To drive the point home, Iran has started a 10-day naval exercise in the Persian Gulf to show off how it could use small speedboats and a barrage of missiles to combat America's naval armada. And the U.S. Navy has responded, in the words of a spokeswoman: "Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated."

This is a significant escalation of tension between the United States and Iran, and the start of a more dangerous phase in the West's attempt to curtail Iran's nuclear program.

The new sanctions are a response to last month's alarming report on Iran's nuclear intentions by the United Nations nuclear watchdog agency, the International Atomic Energy Association. The Obama administration has ruled out military strikes to stop Iran's nuclear program in favor of tougher sanctions, which, once signed by the president, and if fully implemented, would sharply reduce Iran's oil revenue. The administration sees this added pressure on Iran's fragile economy as an effective alternative to military strikes.

If Iran's reaction is any indication, the administration is correct in its estimation. Sanctioning Iran's oil industry will cripple Iran's economy, and that in turn will threaten the stability of the clerical regime. It is for this reason that Iran is treating the proposed new sanctions as an act of war, and is issuing threats of its own to dissuade the United States from going through with the new sanctions.

The administration's strategy is based on the assumption that cutting Iran out of the oil market will not substantially impact world oil supply and prices. Saudi Arabia can step up production to cover the loss of Iran's export of 2 million barrels a day.

But it is not clear whether Saudi Arabia actually would increase production to compensate for the loss of Iranian oil. Iran has clearly started a charm offensive with Riyadh to influence the Saudi decision. Iran's intelligence minister recently visited Riyadh to reduce tensions between the two countries in the wake of the alleged Iranian plot to assassinate the Saudi ambassador to Washington, and the Iranian Navy has claimed that it rescued a Saudi ship from pirates.

In facing off against the U.S. and its European allies, Iran thinks it holds economic cards of its own and is announcing loud and clear that if push comes to shove, it intends to use them.

Iran notes that Western economies are under stress and predicts they could not afford higher oil prices. Even the threat of disruption in oil supply would send energy prices spiraling sky high, and that would plunge the already struggling economies of the United States and Europe into deeper recession. Iran is hoping to change the conversation in Western capitals from how tightly to squeeze Iran to what could be the cost of doing so.

Nor would economic woes caused by conflict in the Persian Gulf remain limited to the West. Persian Gulf exports already account for 60% of Asia's energy consumption. Economies from India to China would be impacted by a Persian Gulf oil cutoff and higher energy prices. Iran is in effect threatening global economic crisis.

Those advocating new sanctions on Iran's oil industry have said little about the potential cost to the global economy. The cutoff would also hurt Gulf Cooperation Council countries and could drag them into a conflict with Iran they have thus far avoided. Iran hopes its saber-rattling will persuade Asia's economic powerhouses and Persian Gulf emirates to pressure Washington to back away from the new sanctions.

War between the U.S. and Iran may very well start, not if and when Washington decides to strike against Iran's nuclear facilities, but because sanctions designed as the alternative to military action end up hastening its advent. That might prove to be the least desired outcome, for no better reason than the possibility that the first casualty of another war in the Middle East might very well be economic recovery in U.S. and Europe....

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