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Will China, Russia Defy U.S. Sanctions To Fund Iranian Oil Projects?

Given the greater willingness of two of Iran’s long-time allies, China and Russia, to defy the U.S.’s re-imposed sanctions against the Islamic Republic – in China’s case because of the ongoing trade war and in Russia’s because of its own sanctions problems with Washington – Tehran is putting together development packages for three fields, involving one or both of these supporters. “Aside from having their own political agendas against the U.S., both China and Russia have two of the only five Permanent Member seats [the others being the U.S., the U.K., and France] on the United Nations Security Council, so the importance of their support is multi-layered,” Mehrdad Emadi, head of risk analysis and energy derivatives markets consultancy, Betamatrix, in London, told OilPrice.com.

At the top of the list of these oil and gas sites is the Abadan oil field find announced recently, Iran’s first oil discovery in the south-western Abadan region. Aside from stating that the oil was ‘found at a depth of 3,570 metres in an exploratory well and is very light and sweet’, Iran’s Petroleum Minister, Bijan Zanganeh, has not revealed any further details. OilPrice.com, though, can shed further details on the find that although very close to the Iraqi border, is not a shared field. At this early stage of exploration, the National Iranian Oil Company (NIOC) believes that there are at least 1 billion barrels of recoverable crude oil reserves on the site, and possibly substantially more. There is also a very significant amount of associated gas as well.

Crude oil production is due to hit the 50,000 barrels per day (bpd) level within the next 18 months, based on the standard recovery rate of Iranian oil wells in the West Karoun region of 5 percent. Serious enhanced oil recovery (EOR) techniques will not be used for the foreseeable future, as it would cause considerable disruption to the city of Abadan itself but, even without it, Iran’s Petroleum Ministry believes that production can be increased with relative ease to around 140,000 bpd within 24 months, with the right partners. From that point there is a lot of scope for further increases in output, based on higher reserves and/or an increase in the rate of recovery.

This fits in neatly with the NIOC’s mandate from the Petroleum Ministry to increase the average recovery rate across the nearby West Karoun oil fields from 5 percent to at least 25 percent, a figure more in line with the rates in similar fields in the Middle East. In this context, the ease of recovering oil in Iran is on a par with that of neighbouring Iraq and Saudi Arabia, at US$1-2 per barrel lifting cost excluding capital expenditure and US$4-6 per barrel including capital expenditure. A twenty five percent recovery rate is eminently achievable, given that state-owned oil giant, Saudi Aramco, announced plans at the end of last year to increase the average recovery rate of its reserves to 70 percent from the current 50 percent.

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At least during the first phase of development, the associated gas will just be flared, although the plan is to monetise this as well after the first phase has been completed, particularly with the Abadan refinery on the doorstep. Even before the Abadan oil and gas discovery was announced, the China Petroleum & Chemical Corporation (Sinopec) and the National Iranian Oil Engineering & Construction Company (NIOEC) were making progress on the US$1.06 billion upgrade of the 420,000+ bpd capacity Abadan refinery, Iran’s oldest and largest.

Despite the re-imposed sanctions, these plans remain ongoing, with Sinopec contracted to build a new 210,000 bpd crude distillation unit (CDU) to replace three distillation units with a combined 250,000 bpd that were built more than 70 years ago. The second-phase development of the Abadan refinery began roughly 18 months ago and is due to be finished in four years, according to comment from the Abadan Refining Company’s managing director, Ali-Akbar Mirghaderi. Once completed, Abadan’s overall capacity will actually decline slightly – to 360,000 bpd - but will improve the quality of all products refined to at least a Euro-5 diesel standard. To compensate as well, the production of higher-value products will increase in the place of lower-value products like fuel oil.

A similar development model is also being negotiated between NIOC and Chinese firms for the Ahvaz-Bangestan oil field, which currently is home to only 26 down-hole pumps actively extracting oil. The upside for a foreign developer, with both China and Russia interested, is enormous, not just because of the extremely low current recovery rate but also because so far, only 1.2 billion barrels of oil has been recovered from this field, which still contains around 37 billion barrels of recoverable oil, according to independent agency figures. Russia was involved in the field as long ago as 2006 when the PetroIran Development Company (PEDCO) pulled out of the development contract it had agreed just a year earlier.

At that point, negotiations began with Pars Tat, a joint enterprise between the Mostazafan Foundation (an entity allegedly linked to Iran’s Islamic Revolutionary Guard Corps, IRGC)   and a number of Russian entities. Russian interest has been rekindled, however, with the release of the results of a field-wide study showing that with even minor additions to the drilling equipment in place (which has to be horizontal, given its proximity to the city of Ahvaz) production could easily be increased from the current 180,000 bpd or so to over 230,000 bpd, according to NIOC projections. Indeed, aside from the small number of drills in place, the reservoir does have three production units on site, with a rated capacity of 275,000 bpd and three desalting units with a rated capacity of 220,000 bpd. The current recovery rate, although higher than many of the nearby sites, at around 10 percent, is still way below comparable sites in neighbouring oil states.

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Transfer of technology – that would later be indigenised by Iran - would be specified in any development contracts for these fields, as has been the norm since the initial agreement of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in 2015, including that for the Ferdowsi oil field in the Persian Gulf. This field – located west of the South Pars gas field, 190 kilometres from the port of Bushehr, and 88 kilometres from the coastline - is estimated to be not just the largest field with heavy crude oil in Iran but also in the Middle East as a whole, holding about 37 billion barrels of heavy crude oil.

The latest technology is required to recover this heavy and ultra-heavy crude oil in the fractured carbonated reservoirs and significant gas reserves projected in the Dalan and Kangan layers. The current oil production projections are for around 10,000 bpd in the first phase, rising to at least 300,000 bpd at the end of phase three. To this end, negotiations with a range of Chinese and Russian oil firms are ongoing on the basis that full development of the Ferdowsi field would need five to seven years, OilPrice.com understands.

By Simon Watkins for Oilprice.com

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