Iran is embarking on a US$70 billion investment programme of measures to attempt to halt a dramatic decline in output from its crucial South Pars gas field. A failure to do so will result in the loss of 40 percent of the country’s petrol output from the Persian Gulf Star gas condensate refinery, and the addition of up to US$12 billion a year of petrochemical costs, according to Iranian Gas Institute forecasts. “South Pars’ gas output provides nearly 80 percent of the our [Iran’s] total gas production, so it is vital to all segments of business and society that this does not drop significantly,” a senior energy industry source who works closely with Islamic Republic’s Petroleum Ministry exclusively told OilPrice.com last week.
In broad terms, the South Pars site spans 3,700 square kilometres and holds an estimated 14.2 trillion cubic metres (tcm) of gas reserves plus 18 billion barrels of gas condensate. In addition to generating 78 percent of the country’s gas production, it also accounts for around 40 percent of Iran’s total estimated 33.8 tcm of gas reserves (mostly located in the southern Fars, Bushehr, and Hormozgan regions). Crucially in the current context as well is that it is one part of the two that constitute the world’s biggest gas reservoir by far, with 51 tcm of reserves. The other part is Qatar’s 6,000 square kilometre North Dome (or ‘North Field’), which is the foundation stone of its world-leading liquefied natural gas (LNG) exporter status. Related: Libyan Central Bank Kidnapping Highlights Oil Wealth Rivalry
Iran split South Pars into 24 phases for development, with broad production targets ranging from around 28 million cubic metres per day (mcm/d) to about 57 mcm/d – the latter being a target for the perennially controversial Phase 11. After the Joint Comprehensive Plan of Action (‘JCPOA’, or colloquially ‘the nuclear deal’) had been implemented on 16 January 2016, France’s then-Total renewed its 2009 commitment to develop the Phase, which had been dropped in 2012 as the E.U. ramped up 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 the China National Petroleum Corporation and a 19.9% holding by Petropars, a wholly owned subsidiary of the National Iranian Oil Company. Total quickly invested around US$1 billion in the Phase and made progress on the site, until in May 2018 came the withdrawal by the U.S. from the JCPOA, as analysed in full in my new book on the new global oil market order. Given the size and scope of Phase 11, it became a focal point of Washington’s attention in the aftermath of the withdrawal, and it put the French under extreme pressure to pull out of the project. Under the terms of the contract, CNPC then took charge and little progress has been made since then.
This provides a microcosm of what has happened to Iran’s oil and gas sector since then. The key problem in the substitution of leading Western oil and gas firms with Chinese ones has been that the latter lack the latest technology available to the former. The same is now true of Russian oil and gas firms which have been denied much of the same technology through various sanctions since it invaded Ukraine’s Crimea region in 2014. According to assessments from Iran’s own National Development Fund, the country’s gas production will fall by at least 25 percent within the next 10 years due to falling pressure in the fields, with South Pars seeing a 30 percent decline.
To attempt to redress this, March saw Iran’s Petroleum Ministry agree to a US$20 billion programme with various local firms to build 28 massive platforms to boost pressure on the South Pars site. However, little progress has been made on these, as neither the domestic companies nor their Chinese and Russian backers have the required technology and know-how. The latest programme to be announced by the Petroleum Ministry – the drilling of 35 new wells across the South Pars site – appears geared towards maximising production from the field while it still can, rather than addressing the fundamental causes of the reduction in pressure and attempting to slow them down. Indeed, according to official Petroleum Ministry statements, the new drilling is intended to boost output over the site by 35 million mcm/d 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 one,” the Iran source told OilPrice.com last week. “But another part has been the many clumsy attempts by local contractors at optimising extraction over the years with no thought of the longer-term consequences,” he added. “There are multiple examples of the wrong areas being drilled, which has weakened the surrounding structures, so drilling 35 new wells having done this is only likely to make situation worse,” he said.
Given this, Iran is looking to China to increase its pressure on Qatar to take a more cooperative approach to developing the two halves of the supergiant gas reservoir, the source added. “Qatar had a moratorium on gas production from its own North Dome field from 2005 to 2017, during which time it often accused Iran of drilling activity that reduced pressure on this side, and asked China to intervene on its behalf with Iran, which it did,” the source told OilPrice.com. “At that stage in early 2017, the two sides [Qatar and Iran] sat down and agreed to work together to ensure the sustainability of the site, so Iran wants the same assurance now from Qatar,” he added.
This is even more urgent on Iran’s side, as Qatar is now embarked on its own drive to dramatically increase its production from the North Dome. The Emirate’s expansion program will see six major new developments in the North Field East (NFE) and North Field South (NFS) to 2029. Four new ‘trains’ (production facilities) – each with 8 million metric tonnes per annum (mtpa) – will be built on the NFE site, and two (with the same production capacity) in the NFS site, totalling 48 million mtpa of new LNG production. At the end of February, QatarEnergy announced another set of projects – focused on its North Field West (NFW) – that will increase its LNG output from the current 77 million mtpa to 142 million mtpa before the end of this decade. This compares to the 404 million mtpa of LNG traded globally in 2023 and to industry estimates that this figure will reach around 625-685 million mtpa in 2040.
The problem for Iran in all of this is that although Qatar is famously diplomatic in its dealings with both the East and the West, pressure from the U.S. and its allies on steering the Emirate into their sphere of influence have intensified since Russia invaded Ukraine on 24 February 2022. Prior to that, it had spent the previous year busily signing huge long-term LNG contracts with China, as also analysed in full in my new book on the new global oil market order. With extraordinary prescience – or something – Beijing knew ahead of time that some major global event would results in LNG becoming the world’s emergency energy source very soon. Consequently, the competition between the U.S. and its allies and China and its partners for upcoming long-term LNG contracts from Qatar has been extreme. It is likely to remain so, with oil and gas major Shell forecasting that global demand for LNG is projected to increase by more than 50 percent by 2040, even without any new major conflict (such as in Taiwan) in the next few years.
By Simon Watkins for Oilprice.com
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