Lack of data casts doubt on Iranian reserves hike

Mansour Kashfi

Bijan Namdar Zanganeh, Iran's minister of petroleum, recently announced that the Islamic Republic, with 132 billion bbl of oil, is the world's No. 2 nation in oil reserves after Saudi Arabia. His announcement appeared July 4 in RIA Novosti and the next day in the Bahrain Tribune.

Reserves enhancements such as this are not new. They usually come from petroleum officials of members of the Organization of Petroleum Exporting Countries. In the past, OPEC nations have inflated reserves to boost production quotas and, in some instances, in order to improve their standings with financial institutions. The international oil industry has good reason to suspect that similar motivations are at work in Iran's latest reserves disclosure.

The Iranian oil industry's ability to attract technology and investment has suffered from the Iran-Libya Sanctions Act (ILSA) of 1996 and further alienation of Iran by the US, particularly in light of the Sept. 11, 2001, terrorist attacks. With few exceptions, international oil companies have lost interest in Iran, and American oil companies are prohibited from investing in the country. Iran's efforts to secure the billions of dollars in capital and foreign investment that it needs for its oil and gas industries therefore have failed.

To encourage investment, Zanganeh frequently announces discoveries and prolific oil and gas fields waiting to be negotiated and raises reserves estimates without any supportive technological data or geological backup.

Past assessments

Zanganeh's pronouncements should be examined in light of the unstable foundation on which the concept of "recoverable reserves" rests in Iran. Indeed, no such concept existed in the Middle East before the formation of OPEC in 1960 and the ability that developed over the next decade of member countries to control their production and oil prices.

National Iranian Oil Co. (NIOC) carried out its first official, in-depth study of Iranian reserves in the 1960s. These evaluations were initially based on reliable geologic and engineering data that NIOC gathered from affiliated oil companies as well as data from producing fields and wells documented by the Iranian Oil Consortium, a group of eight international oil companies operating in Iran after nationalization of the oil industry in 1951. However, the assessment was of oil in place rather than recoverable oil.

It was only after dissolution of the Iranian Oil Consortium and termination of Iranian exploration and production companies in 1973 that a more detailed and reliable evaluation was conducted. It came in 1974-75 in response to a formal request by the Iranian government to restructure the oil industry. NIOC performed the evaluation, assisted by Oil Services Co. of Iran, a group of international oil companies working under contract.

The result was announced as 62 billion bbl of proved reserves, deemed recoverable by technologies available in 1975, as well as 20 billion bbl of probable reserves, primarily in the Persian Gulf. Iran's oil-producing infrastructure has developed little since then. It suffered greatly from the 1980-88 war with Iraq and even now remains impaired by the damage inflicted during the conflict. Furthermore, a number of giant Iranian oil reservoirs have sustained permanent damage from overproduction and the lack of application of enhanced recovery technology.

It is widely recognized that Iranian oil production is waning. NIOC officials must concentrate on damage control and management of the production decline. The latest contraction of Iranian production and exports appears to have been triggered by technical constraints in the operation and aging giant fields. The lack of maintenance and the maturation of Iranian oil fields have reduced production capacity by more than 200,000 b/d/year. Moreover, NIOC has been forced to cut back and shut in some wells due to rapid pressure drops and rising water cuts. This has occurred in the giant fields of the Zagros belt—such as Gachsaran, Agha Jari, Marun, Ahwaz, and Parsi—that collectively account for about two thirds of Iran's productive capacity. Production platforms in the Persian Gulf, refineries in southwestern Iran, and major pipelines also sustained considerable damage during the war with Iraq.

Need for capital

At the end of the conflict the need for capital for repairs and rebuilding of the oil industry was urgent. But efforts by Iranian authorities to secure loans from the World Bank, International Monetary Fund, and private investors for the most part failed. Meanwhile, the Islamic Republic of Iran in late 1989 abruptly increased its proved oil reserves by 50% to 92 billion bbl. Certainly, this kind of reserves enhancement with no evidence of improved recovery schemes or field performance reviews and no proper descriptions of any new find was economically and politically motivated. It had no basis in reservoir characteristics that could be attributed to technical factors or in field-by-field reserves and production decline data available for external review.

Although the Islamic Republic has produced more than 20 billion bbl of oil within the past 15 years, the 92 billion bbl of Iranian oil reserves remained intact until early July, Zanganeh upgraded the estimate to 132 billion bbl. The oil minister announced the 40-billion-bbl increase without offering proper descriptions of the newly discovered fields, such as detailed locations, geological characteristics, depth of reservoirs, approximate size of the fields, number of the appraisal wells, and so forth. Further, no substantial find has been reported by any reliable non-Iranian sources during this period.

With so little information available, how and why should the international oil industry believe in Iran's oil reserves and its future production capacity? The outside world needs evidence. There is no database in NIOC and no reports have been delivered to the US Security and Exchange Commission or any other professional organization that could be available to the public scrutiny. Credibility of the discoveries and of the 132 billion bbl of proved reserves is subject to doubt. International oil companies and investors should treat the information with caution.

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