Producers commencing Iranian E&P work under buyback formula

Sept. 1, 2000
LNG gaining momentum, but competition looms

Shell is leading an $800 million project to re-develop and boost production from the Nowrooz and Soroush fields in the Persian Gulf. According to Shell Development Iran's Chief Executive Robert Weener, negotiations are in progress to upgrade NIOC's jackup Shahid Rajaie for service on Nowrooz. Upgrade work will likely be handled by a yard in Iran. Weener was speaking at the recent Iranian Oil, Gas & Petrochemicals Forum in London, organized by IBC Global Conferences. - Status of current and potential buyback offshore projects in Iran (source: IIES, Tehran).

After drilling on Nowrooz is completed, the rig could be available for use in international waters. Technical aspects of the development were not discussed, although Weener did allude to environmental problems caused by earlier activity, which had led to significant pollution of surrounding waters. Onshore, the nearby marshlands of the Khuzestan area are ranked in the World Wildlife Fund's top 200 World Nature sites.

Under the buyback system, Shell serves as a contractor to NIOC, with its investment being paid, along with an undisclosed remuneration, once production is realized. Under the first development phase, production at Nowrooz should rise rapidly to 60,000 b/d by fall 2001, rising to 90,000 b/d by fall 2003. Soroush output should approach 100,000 b/d by late 2001.

TotalFinaElf has involvement in four offshore buyback projects. The first related to the Sirri A and E fields development. Here, the company is in the process of handing facilities operation over to NIOC, said Michel Hourcard, VP Middle East, Iran Area Manager. "We have demonstrated that it is possible to operate and transfer under the terms of the buyback scheme," he said.

"We had a tough job explaining to the finance community what a buyback was," he admitted. "And Sirri A and E were not easy to develop." Sirri E required one central drilling and production platform and three wellhead platforms. The field is currently producing 100,000 b/d of oil and 100 MMcf/d of gas, with 160,000 b/d of water injection. TotalFinaElf is also discussing with NIOC exports of some of the gas to Dubai from Sirri Island.

On Sirri A, there are two platforms producing 15,000-20,000 b/d of oil. Reservoir permeability there is lower, so, in turn, is recovery. But the 50% recovery rate is pretty good, he claimed.

The next project secured was South Pars stages 2 and 3, which involves piping wet gas produced through two wellheads direct to a treatment plant at Assaluyeh. "These are very light platforms in terms of topsides," Hourcard said, and will output 2 bcf/d and 40,000 b/d of condensate. Last year, the development wells were delineated, the platforms were installed, and drilling should now be underway, using a rig mobilized from Sirri E. The subsea export lines are also in place.

Buyback projects

Location of buyback schemes involving TotalFinaElf.
Click here to enlarge image

Dorood, signed in March 1999, was Iran's first enhanced oil recovery buyback project. The field is technically offshore, although in fact it lies below Kharg Island. Here Total-FinaElf and its partners are working to increase reserve recovery by 1.5 billion bbl, and to lift production to 220,000 b/d, using water and gas injection. Finally, the company is also a partner on Balal, discovered by Arco in 1967, where preparations are under way for a new platform.

Hourcard admitted that buyback schemes were "limited in length." Like others, TotalFinaElf was interested in longer-term partnerships in Iran of 10-20 years duration, with involvement also in downstream operations. However, there was no indication from the Iranian speakers at the conference of any impending changes. Seyed Gholamhossein Hassantash, President of the International Institute of Energy Studies in Tehran, said:

"Iran has designed buyback contract models to break with the past and open an appropriate basis along the following characteristics, such as:

  • Preserving sovereignty on hydrocarbon reserves
  • Attracting necessary funds to develop these oil and gas resources
  • Transparent definition of bilateral ties instead of entering risky arrangements
  • Outright production and income from the very first day of production
  • Technology transfer.

"On the other side, companies' expectations in attaining a satisfactory rate of return, long-term access to crude oil via long-term contracts and crude oil sales under international conditions are realized under this formula.

"The topic I find useful to touch on concerns the stance taken by some experts in financial affairs in which they have clearly favored production sharing contracts. Although in production sharing schemes certain exploration risk coverage guarantees for the field owners have been stipulated, it has to be said that the foreign partner has accepted the burden of the risks for a better rate of return. The said experts also have certain criticism of buyback schemes such as fixed rate of return and rigidity. These points are of course arguable, but it must not be forgotten that buy back contracts have reduced the risk of investors to the minimum."

Raising production

Hassantash added that buyback and other field developments should allow Iran to raise its oil production capability within OPEC-accepted limits to around 6 million b/d by 2010. This year, her added, the government was seeking further investments by foreign oil companies totaling $3 billion, relating to 25 NIOC projects, three by the National Iranian Gas Company and three for downstream purposes. He estimated that between 2000-2013, $18 billion would be needed for Iranian gas field developments, $4 billion for gas injection into oil fields, and $850 million for gas storage.

Frahad Rahimi, Buyback Project Manager at the Ministry of Petroleum, said that domestic gas consumption in Iran was set to rise from 190 MMcm/d last year to 334 MMcm/d in 2006. Gas injected for enhanced oil recovery was forecast to climb over the same period from 87 Mmcm/d to 202 MMcm/d.

Rahimi said that Iran was also looking to export surplus gas to Armenia, Azerbaijan, Pakistan, and India. NIOC has started feasibility studies for longer-distance schemes to Europe and the Far East. He also suggested that Turkmenistan, which wants to send supplies to Turkey via the Caspian, might be better advised to route it through northern Iran's existing infrastructure. This region is already importing around 5 MMcm/d from Turkmenistan.

Export schemes

One of the proposed Iranian export schemes would entail building a liquefaction plant at Assaluyeh exporting 3-6 million tons per year of South Pars gas, most likely to India. There could be a 4.5 million tons/yr train if a larger market developed, said Edward Walshe, Senior VP, LNG at BG International.

At least three 100,000 cu meter LNG tanks would be needed at Assaluyeh, he advised, also producing LPG condensate. Other requirements would include a water depth at the terminal of 13-14 meters for LNG carriers, and the establishment of a Free Trade Zone to compete on cost and import duties with other facilities such as Atlantic LNG in Trinidad.

Unlike its neighbor Qatar, which has extensive LNG infrastructure, Iran will have to start from scratch, he pointed out, which will put it at a cost disadvantage. Also, Iran could face increasing competition for the Indian market from other emerging schemes in Oman, Yemen, Australia, and the Timor Sea Zone of Co-operation.