Iran's oil and gas potential
THE IRANIAN GOVERNMENT HAS SET AMBITIOUS TARGETS FOR RAISING THE COUNTRY'S OIL AND GAS PRODUCTION
KATY SMITH, DOUGLAS-WESTWOOD, FAVERSHAM, KENT, UK
IRAN'S OIL AND GAS SECTOR has been significantly impacted by the introduction and tightening of international sanctions in recent years. The signing of the Joint Comprehensive Plan of Action (JCPOA) in July 2015, and the subsequent lifting of the sanctions this past Jan. 16 represents a significant step forward in terms of normalizing the country's relations with the global community. It also provides significant upside potential for Iran's oil and gas sector, both in terms of upstream drilling and production and oilfield services, and the maintenance and development of downstream infrastructure.
In anticipation of its re-entry into the global market, Iran has produced a list of 50 oil and gas projects, worth an estimated US$185 billion, that it intends to develop. These projects will be introduced at a planned conference in London in February 2016 and will be auctioned to secure much-needed foreign investment in the country's petroleum sector. The projects listed for auction include the North Pars, Golshan, and Ferdowsi gas field developments, and a number of international oil companies, including BP, Shell, and ENI, have expressed interest in re-entering the market. The Iranian government has also set ambitious targets for raising the country's oil and gas production.
Despite these positive developments, limitations remain which are likely to restrict Iran's ability to increase its output in the short-term. Despite the lifting of international sanctions related to Iran's nuclear program, bilateral US sanctions relating to terrorism and human rights abuses remain in place. This has created uncertainty surrounding the re-entry of US companies into the Iranian market, relative to their European peers. It may also make foreign banks cautious regarding the processing of Iranian payments, due to concerns about the financial reprisals of breaching remaining sanctions.
Iran's success in securing the necessary investment for its oil and gas sector will also be dependent on the structure of the new Iranian Petroleum Contract. Although the new structure addresses many of the limitations with the previous buy-back structure, allowing companies to enter into a contract for up to 25 years as part of a joint risk venture with a national oil company, more specific details on the terms of the contract are still required.
A downside risk would also remain in the post-sanctions environment, given that under the terms of the JCPOA, Iran's nuclear-related activities will be subjected to a monitoring period of 15 years. Therefore, there is the potential for sanctions to be re-introduced, should Iran fail to meet its commitments.
On this basis, Douglas-Westwood has taken a relatively conservative approach in its outlook for production and drilling activity in Iran. Key projects such as the development of the North and South Azadegan and Yadavaran are expected to contribute to a steady rise in onshore oil production, with output forecast to reach just over 3 million barrels of oil per day.
Onshore gas production is forecast to reach just under 2 million barrels of oil equivalent per day by 2021. The development of Iran's giant South Pars field will contribute to a significant rise in offshore natural gas production over the next 6 years, with output expected to reach just under 4 MMboe/d by 2021. Additional condensate production from the development will also contribute to a rise in offshore oil production, which is forecast to reach just under 1.3 MMbbl/d by 2020, declining marginally to 1.2 MMbbl/d in 2021.
FORECAST INCREASE IN DRILLING ACTIVITY
Despite being relatively conservative in its outlook for Iranian drilling and production, DW nevertheless expects a rise in both onshore and offshore wells drilled over 2015-2019 to contribute to growth in oilfield services expenditure and demand for rigs. The total number of onshore wells drilled, including exploration wells, is forecast to rise at a 4% CAGR through to 2019. Subsequently, demand for onshore rigs is forecast to rise over the next 4 years, with the total active fleet size expected to rise at a 6% CAGR from 73 units in 2015 to 91 units in 2019.
The total onshore drilling rig population is forecast to reach 130 units in 2019. DW expects to see a significant increase in the number of contracted offshore rigs, driven by a resurgence in offshore drilling activity. Key projects contributing to this rise in demand will include the South Pars and Forouzan development projects, with additional output also expected from fields such as the Lavan and Abouzar. Overall, DW expects the total number of contracted offshore rigs to increase at a 22% CAGR over 2015-2019, reaching 30 units by 2019.
The expected increase in drilling activity will contribute to rising oilfield services expenditure in Iran. Growth in the markets for key service lines in the coming years will also be driven by inflationary pressures, resulting in rising prices. The introduction of sanctions has had a significant impact on the markets for service lines such as Logging-While-Drilling and Measurement-While Drilling (LWD & MWD), which rely on technology previously supplied by large international companies. The re-entry of Western companies is likely to have a considerable impact on the competitive landscape for these markets. For example, in the case of LWD & MWD, Iran has been able to obtain some equipment from China to counter the impact of the sanctions. However, only a limited number of companies have been able to supply high-quality equipment under the sanctions environment. Therefore, competition is likely to increase should Western firms re-enter the market.
DW expects total onshore and offshore oilfield services expenditure to rise at CAGRs of 10% and 8% respectively over 2015-2019. Rig and crew services will continue to dominate both onshore and offshore oilfield services expenditure over the next four years. Demand for coiled tubing services is expected to see the strongest growth within the onshore sector with expenditure forecast to rise at a 16% CAGR over 2015-2019. Within the offshore sector, expenditure on directional drilling services, drill bits and drilling fluids is forecast to rise significantly, with each of these markets expected to grow at a 21% CAGR through to 2019.
Offshore, DW expects to see a 25% rise in fixed platform installations in Iran in 2016, with projects such as South Pars and Forouzan expected to contribute to new installations and drive growth in capital expenditure over 2015-2019. Capital expenditure on equipment, including both for new platforms and retrofit activity, is forecast to rise at a 9% CAGR through to 2019. Iran has been focusing in recent years on developing the technology required to construct offshore platforms indigenously.
Within the midstream sector, Iran witnessed rapid growth in onshore pipeline installations over the 2010-2013 period, driven mainly by the South Pars project. However, Iran's share of the total Middle East installations is expected to decline from 27% over 2010-2014 to 18% over 2015-2019. This is predominantly due to growth anticipated in construction projects in Saudi Arabia and other countries within the Middle East, as well as the fact that several major projects within Iran have been completed within the past 5 years.
Key planned projects include the IGAT IX-Europe gas export line, consisting of a 1,869km gas pipeline from Assalouyeh in Southern Iran to the border with Turkey, designed to facilitate the transportation of gas to Northern Iran and Western Europe. A further key project is the Rafsanjan pipeline, designed to transport refined petroleum products from the Persian Gulf Star Refinery to Sirjan and Rafsanjan in order to supply Central and Northern Iran.
CAPACITY OF DOWNSTREAM FACILITIES TO RISE
Securing international investment will be important for implementing the much-needed upgrades and repairs to Iran's downstream assets. The international sanctions have limited Iran's access to imports of refined products, with the result being increased domestic refining capacity. DW expects the country's cumulative refining capacity to reach just under 3.5 MMboe/d by 2019.
Three major ongoing construction projects are the Siraf Refinery, Persian Gulf Star Refinery, and the Anahita project. The cumulative capacity for Iran's gas treatment facilities is also expected to rise significantly over the next 4 years, reaching just under 7 MMboe/d by 2019. Given that Iran's gas processing sector is fairly well established, DW expects a large proportion of capital expenditure within this sector over 2015-2019 to be attributed to the retrofit market. In addition to the South Pars facilities, the main gas processing centers in Iran are the Fair Jam, Parsian, and Bisboland facilities.
Iran is the largest producer of petrochemicals in the Middle East, and has over 280 operational petrochemical facilities. A total of 67 projects have been approved under the fifth Five-Year Development Plan. Should all of them be implemented by 2019, the total cumulative capacity of the country could exceed 120 million tonnes of oil equivalent (mtoe) per annum. The majority of Iran's liquefied natural gas projects have been stalled or suspended due to the international sanctions. Iran LNG is currently the only project under construction, and consists of 2 LNG trains, each with a capacity of 5.4 mtoe per annum. The facility is expected to be completed in 2019.
ABOUT THE AUTHOR
Since joining Douglas-Westwood, Katy Smith has worked on the quarterly World Drilling & Production Market Forecast and World Oilfield Services Market Forecast reports, as well as completing detailed research for advisory projects. She is also the author of the Iran Oil & Gas Market Forecast 2015-2019 report. Katy is a graduate of the University of Kent, where she completed a Bachelor of Laws in English and French Law and a Master of Arts in International Relations.