IHS Customer Logins

Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.

Top Sites

Same-Day Analysis

Shell, Repsol Finally Evicted from Iran's Persian LNG Project

Published: 6/7/2010
Subscribe | Archives
Iran has officially awarded the upstream development of the South Pars gas field's Phases 13-14 to a national consortium including Revolutionary Guards affiliates, evicting Shell and Repsol from their lead involvement in the long-stalled integrated Persian LNG project.

IHS Global Insight Perspective

 

Significance

After many deadlines and ultimata, Oil Minister Masoud Mir-Kazemi has ordered a halt to negotiations with Shell and Repsol over their development of the Persian LNG project, awarding the upstream development—the only part Iran has the technology to pursue—to an all-Iranian consortium.

Implications

The integrated Persian LNG project has been virtually stalled since 2007 amid international sanctions and isolation, making it impossible for Shell and Repsol to invest, or to import the needed liquefaction technology. Iran will have to abandon more and more of its gas export hopes, especially LNG, and instead bring gas onstream to meet spiralling domestic demand.

Outlook

Shell and Repsol's fate was to be expected, with the companies having strung out Iranian hopes over a much longer period than France's Total (which lost its Pars LNG project last year after many warnings) in the hope of an improvement in the international situation, though this has continued to deteriorate.

Out, at Last

Iran's Mehr news agency reported yesterday that Oil Minister Masoud Mir-Kazemi has ordered an end to talks with Shell and Repsol about their development of the upstream Phases 13-14 at the South Pars field. The decision came after multiple one and two-week ultimata to the companies about committing financially to the project had been missed. It was accompanied by news that an Iranian consortium had been awarded the two upstream phases. (see Iran: 10 May 2010: Shell, Repsol Given Two-Week Ultimatum as Iran Moves to Speed South Pars Development and Iran: 28 April 2010: Eni Starts Handover of Darkhovin Field as Shell and Repsol Given LNG Ultimatum by Iran). This is equivalent to three standard South Pars phases, since Phase 13 has, from the beginning, encompassed twice the normal reservoir size

The decision seems to put an effective end to Shell and Repsol's opportunity to develop the 14-million-tonnes/year (t/y) integrated upstream and downstream Persian LNG project. Nevertheless—as in Total's case on the Pars LNG project—they might formally retain a stake in the downstream venture, as Iran does not have the wherewithal to build a liquefaction plant itself without experienced help and imported technology and would like to keep the future opportunity at least vaguely alive (see Iran: 10 July 2008: Total Abandons Pursuit of Pars LNG Project in Iran But Leaves Door Ajar and Iran: 4 June 2009: Total Displaced by CNPC on Upstream Phase of Iran's Giant Pars LNG Project). In effect, however, the project has been killed, as the financial viability for foreign investors to pursue just the downstream liquefaction and not be involved in the gas development and production in Iran is questionable at best, while the decoupling of the integrated upstream phases from the downstream LNG venture also means that there now will be complete uncertainty about the source of the feedstock. In any case, Shell and Repsol—as Total earlier—have been completely unable to commit the necessary billions of dollars of investments under the current sets of unilateral U.S. and multilateral UN sanctions against Iran, or to bring the advanced liquefaction technology into the Islamic Republic, without risking heavy penalties for their U.S. subsidiaries, operations, and assets.

Shell and Repsol initially agreed to take on the Persian LNG venture in 2004. The original aim was to finalise contracts and final investment decisions (FIDs) by 2006 and bring the project onstream by 2012–13—later pushed officially to 2014—before it became evident that no physical progress was being made. The explanation of why Shell and Repsol have not been evicted earlier is twofold. Firstly, the companies have been carrying out ongoing studies and surveys of the project, making some credible progress—unlike other companies in Iran in recent years—while being careful to keep the value of the work done below the US$20-million threshold mandated by U.S. sanctions against Iran. Secondly, the companies have been Iran's only remaining link with a credible chance of obtaining liquefaction technology, which is a (relatively) new field, still dominated by the small group of supermajors and a handful of large-scale engineering and oil service giants. The Chinese companies investing in Iran in the last few years—although in most cases also refraining from committing financially out of fear of damaging their operations elsewhere—have not, for instance, mastered the LNG technology themselves and could not therefore bring it to Iran for many years.

The Iranian Alternative

In Shell's and Repsol's absence, the upstream phases from the Persian LNG venture have been awarded to the Khatam ol-Osea consortium, consisting of notorious Revolutionary Guard affiliate Khatam al-Anbiya, OIEC, Sadra, ISOICO, IDRO, and NIDC, according to Mehr (see Iran: 4 June 2010: Revolutionary Guard Affiliates Advance Positions at Iran's South Pars Gas Field). The upstream phases contract is, according to Iranian media, now valued at US$5 billion. This sounds quite low given earlier Shell and Repsol calculations, but this number only pertains to the development of the offshore gas production capacity, an integrated onshore processing capability, and a connecting subsea pipeline.

The award of the project to Iranian companies is likely to result, finally, in progress on production capacity development, given that the financing of the project can be solved. The result is however likely to fall short of what the original plans have called for, as well as suffering further delays, given the previous track record of Iranian-developed South Pars phases—which have involved one or several of the partners in this latest consortium. Iranian companies have constantly, due to their technological and financial shortcomings and the heavy brain-drain Iran has suffered over the past decades, missed the production capacity and project schedule targets, while the phases developed by foreign players have been able to bring production capacities onstream that overshoot initial plans by sometimes as much as 30%.

Outlook and Implications

Ending the Exports Dream

The eviction of Shell and Repsol from Persian LNG's upstream phases effectively puts an end—a semi-official one at least—to Iran's aspirations to develop into a large global gas exporter. Its political isolation has virtually stopped all progress on its pipeline export plans, and with Pars LNG and Persian LNG now both being decoupled from their gas feedstock and indefinitely shelved, there will be no progress on the LNG front either. Officially Iran is still making efforts on the indigenously developed Iran LNG venture, but given the country's inability to buy the liquefaction technology from anyone, that project has for a long time been regarded as its most impossible. Indeed, some years ago reports started to suggest that by 2006 Iran was already preparing a nearby treatment plant to be able to one day receive the dedicated gas and sweeten it for injection into the domestic pipeline system instead.

With international isolation looking very unlikely to ease any time soon, Iran is instead now bracing itself for tougher sanctions. The lack of foreign investment is furthermore putting an additional strain on the country, as its maturing oil industry suffers large decline rates, forcing it to bring increasing amounts of new oil production onstream in order just to replace declines at its oldest fields. Over the long term Iran's oil exports are its safest source of income and the last source of export revenue likely to be sanctioned, making it most rational to invest heavily in protecting the oil output, especially as the LNG technology in any case remains out of its reach as long as sanctions remain (see Iran: 21 May 2010: Oil Minister Warns of Falling Iranian Oil Production Capacity and Iran: 13 May 2010: Minister Warns of End-of-Year Gas Shortage in Iran Despite Increased Imports).

At the same time, high domestic power subsidies have created one of the world's most wasteful consumption patterns, with domestic gas demand spiralling. This, together with Iran's almost desperate use of outdated gas reservoir injection techniques at large-scale projects to keep pressure up at its oilfields has started eating seriously into the gas volumes it should have been exporting, throwing its future gas export ability into question as it continues to suffer domestic gas shortages. Platts reported yesterday that Iran's government this year has allocated US$16 billion from the state's National Energy Fund for 31 prioritised energy projects across the country, in line with the Islamic Republic's increased focus on a small amount of key strategic upstream and downstream projects, as IHS Global Insight has reported. That capital expenditure was, according to the Oil Ministry, going to be divided into US$13.6 billion for oil and gas projects and US$2.4 billion for refinery projects, but is still massively short of the US$25 billion per year previously stated by the oil minister as necessary just to keep core ongoing oil gas and refining projects going, showing the meltdown towards which Iran's hydrocarbon sector is slowly moving.

Related Articles

  • Iran: 15 October 2008: Iran's Energy Policy Rethink: Pipeline Strategy Revisited, LNG Questioned, Officials Reshuffled
  • Iran: 6 May 2008: Outlook for Iran's LNG Export Schemes Becomes Increasingly Gloomy
  • Iran: 2 November 2007: Iran Braces for Tougher Sanctions; Faces LNG and Reinjection Dilemmas
  • Iran: 20 September 2007: Reinjection, Pipelines and LNG: The Difficult Choices Facing Iran's Gas Export Programme
  • Iran: 17 September 2004: Shell Inks LNG Framework Agreement with Iran
Subscribe | Archives
Filter Sort