APICORP: Iranian output targets achievable but uncertain

Achievement of ambitious production targets set by the Iranian government is possible but far from certain, according to Arab Petroleum Investments Corp. (APICORP), Dammam.

The government says the country will increase production, now about 2.8 million b/d, by 500,000 within 6 months of the lifting of international sanctions and boost the increase to 1 million b/d within a year. Within 3 years, Iranian output might exceed 4 million b/d, according to the government.

Sanctions relief can occur in December or early next year under the agreement Iran reached on its nuclear program with international negotiators last July.

Ministry preparing

In a research note, APICORP points out that the petroleum ministry has been preparing for a production recovery with a program for optimizing surface facilities and working over wells. National Iranian Oil Co. conducted a major refurbishment and debottlenecking program on its surface facilities during 2012-14, which APICORP says might have increased capacity at key points but is "unlikely to have been comprehensive given the sanctions restrictions."

The government's production plans assume shutdowns related to sanctions haven't hurt capacity of major oil fields. They also assume work, possibly involving international oil companies (IOCs), can be expedited at large fields under development in the southwest near the Iraqi border.

The assumptions might be too optimistic. APICORP notes the uncertainty of conditions of surface equipment, field production units, and flowlines and of the main export system. Sanctions have limited Iran's access to spare parts for pumps, compressors, and valves, and locally made replacements haven't always performed as well as original parts.

The speed with which Iran can import and install equipment after sanctions are lifted will be crucial to speed of recovery in oil production, APICORP notes.

The government hopes for the prompt return of IOCs to manage new enhanced oil recovery projects in mature fields.

"While preparation for this has been considerable," APICORP says, "technical and commercial hold-ups are likely to mean the fruits of IOC involvement will not be significant until the end of the decade."

Inventory withdrawals

Before production and exports can increase appreciably, moreover, Iran will need to sell oil from inventory to accommodate logistical requirements. Onshore storage capacity is limited, and tankers needed for a resumption of exports are now used for storage.

APICORP says oil in floating storage exceeded 40 million bbl in mid-2015. A release over 6 months implies a drawdown rate of 220,000 b/d. But much of the oil stored in tankers is thought to be condensate, the marketing of which would be more difficult than that of crude.

Mature fields

As storage becomes available, APICORP says, NIOC probably will increase production from mature onshore fields operated by National Iran South Oil Co. Those fields represented 75% of Iranian capacity of 3.7 million b/d before sanctions but have decline rates variously estimated at 6-12%.

Ahwaz field, Iran's largest, will be a focus of the restart effort. Its output is expected to rebound to the presanctionlevel of 800,000 b/d 18 months after sanctions are lifted. Ahwaz produced an estimated 560,000 b/d in mid-2015 and is a target of long-term EOR plans.

Another old field targeted for EOR is Agha Jari, which had capacity before sanctions of 120,000 b/d but recently has been producing at one-fourth that rate. An increase in Agha Jari production is believed possible with increased injection of gas from offshore South Pars field.

Production from other mature onshore fields is unlikely to increase without EOR, probably involving IOCs, APICORP says.

New onshore fields

Iran's best potential for production growth lies in new onshore fields constituting a group called West Kuran in Khuzestan Province of southwestern Iran. Those fields, such as Azadegan near the Iraqi border, produce 75,000 b/d now but are targeted for 500,000 b/d more over the next 2-3 years.

According to APICORP, Azadegan South is on early production at about 50,000 but scheduled for phased development to capacity of 280,000 b/d. Early production from development of a northern Azadegan extension has been delayed. Production was to have been increased from an initial target of 75,000 b/d to 300,000 b/d by 2020.

Another new field in the area, Yadavaran, "is another candidate for IOC investment," APICORP says, programmed for a plateau rate of 300,000 b/d by 2020. Current production is about 20,000 b/d.

Three development phases are envisioned for Darquain field, from which production might reach 230,000 b/d.

Another West Kuran field, Yaran, is producing about 5,000 b/d with an initial development target of 90,000 b/d.

APICORP expects Iranian production increases in 2016-18 to be limited to 200,000-250,000 because of project delays and contract cancellations.

Offshore fields, IOCs

Because decline rates are high in Iran's offshore fields, the main goal for them will be stabilization. An increase in output from South Pars field will partly compensate, but the increment is mostly condensate.

Major offshore fields and their mid-2015 production rates, according to APICORP, are Abuzar, 100,000 b/d; Doroud, 120,000 b/d; Soroush, 35,000 b/d; Sirri, 60,000 b/d; Nowruz, 20,000 b/d; Salman, 45,000 b/d; and Foroozan, 25,000 b/d.

The total of those rates is 275,000 b/d below total capacity of the fields prior to sanctions.

APICORP says "the big push in Iranian productive capacity" awaits return of IOCs.

"This could prove to be a lengthy process, and significant challenges face the IOCs," it adds. Design of the new upstream contract, now expected to be published early next year, will be crucial.

"But upstream investment will be challenged by Iran's general weak business environment," APICORP says. "New entrants will have to tolerate headwinds around regulation and dispute arbitration, both of which suffer from a lack of transparency."

Shape of recovery

On balance, APICORP expects the post-sanction recovery in Iranian oil supply to begin with storage releases, followed in the next 12 months by 300,000 b/d in new production from major mature fields led by Ahwaz.

"This should deliver an aggregate 400,000 b/d of new supply by the end of 2016," the firm says.

The new West Karun fields will add about 150,000 b/d by yearend 2016, bringing the total gross increase to 555,000 b/d. Natural declines will lower the net gain to 400,000 b/d.

In 2017, production gains from new projects will add 300,000 b/d in APICORP's low case.

"Beyond the end of 2017, across-the-board improvement of NIOC's access to equipment, technology, and capital post-sanctions will also be a driver, as will fresh involvement of IOCs under the new upstream contract," APICORP says.