Iran's bid to lure oil investment succeeding despite U.S. sanctions

A drilling rig operated by Total is shown working in the Sirri A and E area in the Persian Gulf off Iran. Total is leading a flurry of revived interest in foreign investment in Iran's petroleum sector. Photo courtesy of Total.

• Iran's oil production [60,760 bytes]
• Iran:July 1998 presentation buy back projects [111,627 bytes]

Iran continues to mark success with its efforts to attract foreign investment to its petroleum sector, despite the continuing specter of U.S. economic sanctions targeting such investments.

An apparent backdown by the U.S. government on imposing sanctions on non-U.S. companies investing in Iran has spawned a flurry of bidding for Iranian petroleum projects, and many more non-U.S. companies are openly expressing interest in following suit. At the same time, there is a movement afoot in the U.S. Congress to end or render toothless such unilateral economic sanctions (see Newsletter).

Iran's latest call for bids for investment, in July 1998, for about 40 upstream projects and a single downstream one-revamping the Abadan refinery-has met with success, Oil Minister Bijan Namdar Zanganeh told a group of journalists visiting Iran late last year.

The minister claimed there had been about 100 offers, out of which about 20 candidates have been retained and are in the process of being sorted out. The candidates would be chosen on the basis of "economic attractiveness of the offer and good proposals from good companies," the minister said in late December 1998, adding that final decisions would be made "within the next 2-3 months."

The number of offers is in marked contrast with a November 1995 call for offshore projects, which attracted only two offers. Of those two, only one-the South Pars gas field development backed by a consortium led by France's Total-is being implemented.

The other offer-a plan by a combine of Canada's Bow Valley Energy Ltd. and Indonesia's Barkie Minarak Petroleum to develop Iran's offshore Balal oil field-suffered a setback when the Indonesian partner pulled out, leaving Bow Valley to search for another partner.

At the time of the 1995 bid round, companies were deterred from bidding because of the U.S. Iran-Libya Sanctions Act (ILSA), which imposes economic sanctions on firms investing more than $40 million in Iran's oil and gas sectors-later reduced to $20 million.

Latest developments

Among the latest developments involving foreign investment in Iran's petroleum sector:

• Iran late last month was to begin accepting bids for the next two development phases of South Pars gas field (OGJ, Mar. 22, 1999, Newsletter). Phase 1 is under way by Iranian firm Petro Pars, and the Total group project comprises the second and third phases. Russia's Gazprom already has said it will participate in the latest tender round.
• Units of France's Elf Aquitaine and Italy's Agip SpA recently signed a 10-year, $540 million buy-back contract with National Iranian Oil Co. (NIOC) for redevelopment of giant Dorood oil field in the Persian Gulf off Iran (OGJ, Mar. 8, 1999, p. 31). That elicited criticism and the promise of an investigation by the U.S. State Department into whether the deal violates ILSA (OGJ, Mar. 8, 1998, Newsletter).
• Bow Valley found its new partner in London's Premier Oil plc, when the two firms signed an agreement last month with Iran to develop Balal oil field (OGJ, Mar. 1, 1999, Newsletter). The $200 million project entails drilling 10 wells in the next 2 years to tap 105 million bbl of oil reserves, with production of 40,000 b/d to start up in late 2000. Again, the U.S. State Department warned that the companies could face sanctions. Canada's federal government replied that it would oppose any sanctions against Canadian firms, and Bow Valley responded that it should be treated the same as others operating in Iran, apparently citing the Total group's waiver.
• Norway's Saga Petroleum AS reportedly received two permits to produce oil in Iran and expects to make a decision as to its next step in the first half of this year (OGJ, Feb. 8, 1999, Newsletter). Saga early this year requested permission to begin negotiating with Iran for participation in the Dehl Uran and Cheshmeh-Khosh fields (OGJ, Jan. 18, 1999, Newsletter).
• Canadian firm Tracer Petroleum started the process of incorporating a new init, Tracer Petroleum International (TPI), in Bermuda for the purpose of pursuing oil and gas opportunities in Iran (OGJ, Jan. 25, 1999, Newsletter).
• Iran's National Petrochemical Co. appointed Kleinwort Benson Ltd., London, to advise it on its plans to offer investment opportunities to foreign companies in existing and planned petrochemical plants (OGJ, Jan. 18, 1999, p. 29).

EU efforts

The latest spate of bids seem to be a follow-up of the successful counterattack by the European Union governments on U.S. sanctions that sought to include non-U.S. firms. This was followed by a waiver granted Total and partners on the South Pars project by President Clinton to avoid a clash between the U.S. and EU.

While it is not clear which non-U.S. companies will, accordingly, escape ILSA sanctions, it is readily apparent that the Total group waiver has lifted the inhibitions of oil companies attracted to Iran's large oil and gas reserves and low development costs in a recently low-cost oil price climate.

According to the minister, these development costs hover around $1.50/ bbl. Total estimates operating costs in Iran at $2-4/bbl.

In a surprising admission, Iran's Deputy Oil Minister for International Affairs, S.M. Hosseini, said, "We are also discussing (projects) with American companies." Mobil and ARCO have repeatedly expressed interest in entering Iran, should sanctions fall (OGJ, Mar. 15, 1999, Newsletter).

In Iran's latest comment on the sanctions, Tehran last month challenged the U.S. government to allow U.S. firms to do business in Iran's petroleum sector and to end sanctions against the nation. Shortly after the Elf-Agip Dorood contract was signed, Iranian Foreign Minister Kamal Kharazi was quoted by Iran's official IRNA news agency as saying, "It's time that the United States revised its policy and attitude and opened the way for U.S. companies to take part in oil and gas devleopment projects in Iran."

He also contends that U.S. firms face no obstacle to doing business in Iran's oil sector and said that U.S. policy is hurting U.S. firms.

U.S. petroleum firms also have become increasingly strident in their denunciations of the sanctions policy.

Iran has the world's fourth largest oil reserves and second largest gas reserves, conservatively estimated at, respectively, 93 billion bbl and 21 trillion cu m.

But the government is badly in need both of foreign investments and new technology to develop these reserves. Gas projects take priority, the minister said, specifying that, in 5 years, gas production capacity is targeted to reach 300 billion cu m/year. This incremental gas output will be targeted toward enhanced recovery in declining onshore oil fields, for local consumption in an effort to back out oil consumption, and for exports.

Buy-back contracts

For the first time since the Islamic Revolution, the July 1998 list of projects contains 15 onshore fields for development (see table, p. 32). There are also eight exploration projects that might have difficulty finding candidates, because of the insistence of the oil minister on maintaining the buy-back contract system.

The Iranian government does not allow production-sharing arrangements. The buy-back system was introduced in 1995 and has been improved to attract foreign investors.

Under this system, the foreign oil company makes the investment to bring the field into production, then hands it over to NIOC. It recoups its investment plus an agreed rate of return through the oil or gas production from the field.

When Total signed the Sirri development contract in 1995, covering the Sirri oil fields complex in the Persian Gulf off Iran, a second contract provided that it could sell to nearby Dubai the associated gas produced in addition to the oil lifted under the contract.

The later South Pars contract includes a clause whereby Total and partners can be paid in output from other buy-back projects, if South Pars production falls short of the agreed return on investment.

The minister did not make it clear how a buy-back contract could be made attractive for exploration projects in the event no oil or gas was found. He merely pointed out that Syria had used the same system with Conoco Inc., and that it was also applied in Kuwait. "Any suggestion from contractors," the minister said, "can be considered. But it doesn't mean it can be accepted."

Exploration potential

The minister insisted that Iran would maintain all its projects, despite falling oil prices, contending that revenues from foreign investments are needed mainly to develop new fields. One of Iran's goals is to find as much new oil as Iran produces.

But aging reservoirs and poor maintenance since the revolution have reduced output from onshore fields, which currently account for about 85% of production. Iran's quota within the Organization of Petroleum Exporting Countries is 3.6 million b/d, but its production has fallen short of the quota on a number of occasions in the recent past (see chart, this page).

One especially attractive region for finding new oil fields is Iran's Caspian Sea territory, currently the subject of dispute.

Asked to comment regarding Azerbaijan's dispute over the area covered by an exploration contract Iran recently signed with Royal Dutch/Shell and London independent Lasmo plc in the Caspian Sea, Hosseini said that, until a new agreement is signed on the status of the Caspian Sea by its five littoral countries, Iran considers valid two agreements signed with the former U.S.S.R. in 1921 and 1940, at a time when there was no thought of oil there. They divide the Caspian Sea in two parts, one for the then-Soviet Union and one for Iran.

The minister added, "It would be better for all countries (bordering the Caspian) to sign as soon as possible a new legal regime. But before this happens, the two agreements prevail"-a position that hardly makes this knotty problem any easier to solve.

Total's goals

Leading the rush into Iran and among the keenest bidders in Iran's latest round of upstream projects is Total, which is banking on the track record so far achieved in that country to gain the tracts it is now eyeing.

These are the offshore Sirri C and D oil fields, midway between the Sirri A and E fields Total has just brought on stream in the Persian Gulf, and the onshore Abteymour and Mansouri giant fields in the Ahwaz region, north of Abadan.

As the first contributor to the opening of Iran's upstream since the Islamic revolution, Total is also in the early stages of developing, at a cost of $2 billion, the South Pars offshore gas field with Russia's Gazprom and Malaysia's Petronas as partners. Signed after ILSA, the consortium nevertheless obtained a waiver from the U.S. government.

Total's forthcoming merger with Belgium's Petrofina (see Newsletter) gives it greater exposure in the U.S. and thus greater exposure to sanctions. But this has not deterred the French group from bidding for new acreage in Iran. Christophe de Margerie, vice-president of Total Middle East, believes the firm has demonstrated its ability "to properly assess and manage risks."

Iran is a major part of Total's Middle East strategy, the link between its other significant Middle East productions and the Caspian Sea.

Moreover, it fits in with Total's other portfolio key criteria: large upstream projects, low-cost reserves, and areas set to increase their share of world oil supplies in the years ahead.

Undeterred by the buy-back contract system in Iran, de Margerie says it is characteristic of countries reopening their upstream sectors to foreign oil companies. The scenario is the same in Iraq and Kuwait, he pointed out: "These countries have a long history of oil development and their own national oil companies, as well as thousands of capable engineers. They don't think anyone can do better."

With this outlook, de Margerie views his group's role not merely as NIOC's contractor, simply providing finance, construction, and start-up of installations and then handing over Sirri A and E to NIOC Offshore after commissioning and start-up of each facility. He sees it as a way of demonstrating Total's technology and know-how (3D seismic interpretation, latest geological and reservoir models, full horizontal-well development schemes, computerized control systems, fiber optics) to gain a solid foothold in the country in view of better things to come.

For even though Iran is one of the oldest world oil producers and has very competent engineers who used to be employed in countries other than their own, 20 years of being out of touch has left them on the wayside with regard to the fast-developing new upstream technologies. They are having to relearn the job-and Total and other non-U.S. companies are standing at the ready to help, in hopes of securing attractive opportunities down the road.