Iran Clarifies Oil, Gas Investment Priorities amid Deepening Funding Shortage

Narrowing it Down

Deputy Oil Minister Ebrahim Rad-Afzoon earlier this week told Iran’s Mehr news agency that 362 oil and gas projects had been made a priority, as the government sought to make sure that progress was achieved at least in some parts of the industry. Investment in Iranian upstream and downstream projects, especially over the last eighteen months, has been spread too thin, leaving many schemes almost at a standstill or at a pace far below their schedules' requirement. Rad-Afzoon was also quoted by Mehr as saying the collective value of the prioritised projects stood at about 2.435 trillion rials (US$246.7 million). However, this makes little sense and is likely to be a media misunderstanding, given that US$2 billion alone have been allocated to develop the prioritised South Pars upstream phases 15-16.

Rad-Afzoon also told Mehr that the highest priorities of those on the list were in the upstream sector. He singled out the development of the giant South Pars field’s Phases 12 and 15-18, the Hengam, Resalat, Forouzan, Zara, Changouleh, Darkhovin, and Kish fields, as well as the building of gas sweetening capacity for South Pars phases 6-8.

The news comes alongside reports of a US$2-billion allocation to the development of South Pars phases 15-16. The two phases aim to produce 1.76 bcf/d of sales gas, 1 million t/y each of liquid petroleum gas (LPG) and ethane, and around 75,000 b/d of condensates and 400 tonnes per day of sulphur—a somewhat lower figure than earlier targets estimated by Western oil and gas companies. The government was reported to have allocated US$500 million to the project out of the country’s foreign-exchange fund, with US$1 billion coming out of the Oil Ministry’s internal project budget and the remaining US$500 million being funded by a consortium of domestic banks.

The plan looks very similar to several of the government's other project-funding exercises over the past 18 months or so. Nonetheless, the framework still remains untested and is built on shaky assumptions, especially in light of Iran's deepening need to finance a host of increasingly underfunded ambitious industrial and infrastructural projects throughout the country (launched to build support for the government in mainly the Islamic Republic’s rural parts) and the increasing financial strain in funding growing fuel import needs and high subsidies. The government has attempted to launch programmes to scrap the onerous fuel and electricity subsidies schemes, but political instability and opposition from within the regime’s conservative factions might well force the government to back-track completely—casting all its future investment commitments into doubt.

Between a Rock and a Hard Place

Iran is fighting to slow and reverse a growing decline rate at its mature oilfields, most of which have been producing since between the 1920s and 1950s. It is simultaneously struggling to bring a small number of relatively significant recently discovered fields into production. Arresting decline—which is believed to be in the vicinity of 5-6% per year—requires increasingly modern and advanced enhanced oil recovery (EOR) technologies, which for a few years now Iran has found virtually impossible to import. The few oil and gas companies and oil service specialists that have such capabilities largely refrain from dealing with Iran under the current set of international and U.S. sanctions, and the high cost of importing and developing such technologies is also a deterrent.

Instead, Iran has increasingly come to depend on applying older methods to increase recovery at some of its mature fields, often placing a massive call on its gas reserves for injection into oil reservoirs—at a time when it has been unable to produce enough gas to feed its domestic and industrial demand in winter's peak consumption periods. Oil production is prioritised at virtually all times, especially since gas export schemes have also often foundered on Iran’s political and economical isolation, creating situations where hugely expensive long-range sour gas pipelines have been built to inject massive amounts of gas in exchange for relatively meagre oil output increases—the Aghajari project being a prime example (see Iran: 24 April 2009: Petrovietnam Commences Danan Block Work, Aghajari Gas Injection Project Nears Completion in Iran). More advanced techniques and methods would have made the venture far more efficient, but the availability and means have obviously been lacking.

In the meantime, Iran is also failing to develop its gas production quickly enough. It is likely that this year it will only be able to avert the shortages seen in previous years as a result of its recent completion of a new gas import pipeline from Turkmenistan (see Iran: 6 January 2010: Another Victory for Diversification as Turkmenistan Opens New Gas Pipeline to Iran). The growing need for gas imports comes at a time when plans by Iran’s government to address the huge costs of fuel subsidies in the face of continued reliance on imports of refined products seem to be failing in the face of domestic political attacks (see Iran: 4 January 2010: Iran Struggles with Subsidy Reform in Preparation for Further U.S. Action). The prolonged unrealistic push to finance LNG export schemes—mainly from the South Pars field—when international sanctions make the import of LNG technology impossible has drained Iran of the capital and time needed to supply the domestic market, explaining partly why today there is a shortage of sweetening facilities that would enable Iran to inject some of the gas production it has developed into its domestic gas grid.

Importantly, the prioritisation of upstream projects might result in expansion plans for Iran's refining capacity falling even further behind. Iran has been hoping to reach refined fuels self-sufficiency by 2013–14, but there are many reasons to doubt the feasibility of this target (see Iran: 18 November 2009: Iran Reports Large Boost to Gasoline Output Capacity as Fuel Sanctions are Feared). Iran’s inability to import contemporary technologies is causing inefficiencies and problems in this sector too. The amount of heavy oil Iran refines into gasoline (petrol) and diesel would need to be radically increased to achieve optimal economic efficiencies, but this it is largely unable to do with the technologies at its disposal domestically.

Outlook and Implications