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Iran's 3-Part Plan To Outsmart Sanctions

Simon Watkins

Iran’s priority in continuing to optimise its oil industry exports despite ongoing U.S. sanctions is to push the pace of development firstly of the multiple fields that constitute the West Karoun area and secondly of the fields it shares with Iraq. A corollary third priority is to ensure that it build-outs export routes for its oil that do not have to go through the ultra-politically-sensitive Strait of Hormuz. Last week saw movement on all three priorities.

The first of these saw the rollout of new materiel in the North Yaran oil field, including new submersible pumping equipment and other related down-hole installations. Although the North (and South Yaran) fields are currently being developed without the assistance of major foreign oil firms, the past few months in particular have seen not just the installation of new technology and equipment to enhance oil flows but also six new wells began production.

Before adverse local reaction in Iran to the idea of China securing a stranglehold over Iran’s oil sector recently gained momentum, North Yaran was to have been part of the Iran Petroleum Ministry’s broader idea that one developer for both Yaran fields made good sense from a logistical and financial perspective.

“It would create one integrated development across South and North Yaran that would have oil reserves of at least two billion barrels, possibly more, so it wouldn’t just be a cost-centre operation being done in order to get into the bigger fields of Yadavaran and potentially Abadan,” a senior oil industry figure who works closely with Iran Petroleum Ministry told OilPrice.com last week.

South Yaran, according to the Petroleum Engineering and Development Company’s (PEDEC) director of development at the field, Homayoon Kazemeini, has seen output increase from just over 10,000 barrels per day (bpd) to a current average of around 15,000 bpd, although there are spikes of 20,000 bpd, according to the Iran source.

The original plan for South Yaran involved drilling 30 wells that would allow for up to 60,000 bpd of oil to be recovered on a recovery rate of 13.5%. However, Kazemeini recently cited drilling data pointing to the possibility that the Fahlyan layer of South Yaran had no production capacity, so the target was reduced to 25,000 bpd, with 21,000 bpd expected from the Sarvak layer and 4,000 bpd from the Gadvan layer.

Earlier this year, though, the target was raised to 30,000 bpd, as more is expected from the Sarvak layer, the Iran source told OilPrice.com. “It may be possible to take out double that amount or even more if a major foreign oil company was involved and this was an idea being discussed with China, as part of an overall deal that includes the other West Karoun fields of Yadavaran and the new discovery in Abadan to add to its activities in North Azadegan,” said the source. Certainly, there would appear to be more potential on the site, as the Iraqis are currently recovering around 200,000 bpd from its side of the South Yaran field.

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These plans that are gradually being rolled out are key to the overall strategy of increasing the recovery rate from the West Karoun fields from the current 5% (compared to Saudi Arabia’s 50 per cent, although it is looking at raise this to 70 per cent). “For every one per cent increase, the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in revenues with oil even at US$50 a barrel,” the Iran source underlined.

For the Azar oil field - located in Mehran on the border with Iraq and shared with its Badra field - meanwhile, PEDEC’s chief executive officer, Touraj Dehghani, last week stated that its first phase development will be complete by the end of the current Iran calendar year (ends on 20 March 2020), producing at least 65,000 bpd of crude oil. He added that around 18 wells were almost ready for production in the field which would start production once processing units became operational.

The determination of Iran to optimise its output of this field that it shares with Iraq – the other key ones are Dehloran (Iraq side, Abu Ghurab), Naft-Shahr (Khorramshahr), Azadegan (Majnoon) -  has been fortified by new studies that have sharply revised up its in-place oil reserves, from around 2.5 billion barrels to at least 4 billion barrels. This is no easy task, though, as Azar is the most challenging of all the principal prospects in the Anaran bloc – which also includes Changuleh and Dehloran - due to its surface stony ground and condensed reservoir rock, according to recent statements from Iran’s Oil Industries Engineering and Construction (OIEC).

Once the Azar field area had been cleared of residual mines from the 1980-1988 Iran-Iraq war, it took an average of 500 days for each well to be drilled, according to OIEC, leading to a long lead time before initial production was commenced on 14 March 2015 at 15,000 bpd, with eight wells completed at that time.

The turnaround time for wells to be drilled has now been more than halved – and production doubled - with the utilisation of acid stimulation of wells, and horizontal and directional drilling, together with other technology and processes to which Iran gained access after the implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear accord on 16 January 2016.

As it stands, then, 13 wells have so far been drilled and four drilling rigs are operating, in Azar. The plan, though, is to increase this output to 60,000 bpd after the first train of processing installations in the field are in place, which is estimated to occur within the next few months. After the second train is in place, and at least 18 wells have been completed, then production is anticipated to rise to the 65,000 bpd figure.

Overlooked by many is a third phase development plan that will raise output to at least 100,000 bpd, although this will require the involvement of an international oil company (IOC), the Iran source told OilPrice.com last week.

Concomitant with planned production increases, Iran is moving forward with plans to make the Bandar-e-Jask oil export terminal in the Oman Sea fully operational by the end of 2021. This will allow Iran to export oil for the first time through the Gulf of Oman, as an alternative to the oil terminal on Kharg Island, which necessitates tankers passing through the strategically-important and highly politically-sensitive Strait of Hormuz.

The Strait is the world’s most important oil transit chokepoint – and the key transit route from the Arabian Gulf to the Indian Ocean and the Far East - with roughly 35% of all seaborne oil and about a third of global liquefied natural gas supplies passing through it, according to the EIA. Moreover, around 90% of all of Iran’s oil for export is currently loaded at Kharg Island (the remainder loads through terminal on Lavan and Sirri), making it a prime target to cripple the Islamic Republic’s economy.

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Even before the new U.S. sanctions were imposed at the end of last year, the Kharg terminal was not ideal for use by tankers as the narrowness of the Strait of Hormuz means that they have to go slowly through it. With the new U.S. sanctions in place, and the hair-trigger character of U.S. President, Donald Trump, to factor in, the threat of military action closing the Strait of Hormuz has been elevated again. Iran itself has also repeatedly threatened to block the Strait of Hormuz when faced with sanctions on its oil exports and possible military action by the US.

According to the plans reiterated last week by Iran’s Petroleum Minister, Bijan Zanganeh, a US$1.8 billion 1,000 kilometre oil pipeline will connect Guriyeh in the Shoaybiyeh-ye Gharbi Rural District, in Khuzestan Province (south-west Iran), to Jask County, in Hormozgan Province (south Iran).

Also to be constructed in Jask will be 20 storage tanks initially each capable of storing 500,000 barrels of oil, and related shipping facilities, at a cost of around US$200 million. Overall, the intention is for Jask to have the capacity to store up to 30 million barrels and export one million barrels per day of crude oil. “Very handy to move oil under the radar to Asia in general and to China in particular,” concluded the Iran source.

By Simon Watkins for Oilprice.com

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