Oil & Gas Journal: Consultant: US pressure disrupts development of Iran's South Azadegan field: “Royal Dutch/Shell Group declined an offer from the third partner, Inpex Corp., to join that consortium.” (ShellNews.net)

Sam Fletcher

Senior Writer

Posted 15 Sept 04

HOUSTON, Sept. 14 -- Foreign companies being wooed by Iran to help the Persian Gulf nation develop its vast oil and gas resources are balking amid US pressure and concerns over fiscal terms.

Under pressure from the US government, Tomen Corp., "now controlled by Toyota [Motor Corp.]," already has pulled out of the Japanese consortium that was awarded the development of Iran's supergiant South Azadegan field, and Japan Petroleum Exploration Co. (Japex) "is thinking of pulling out, too," said officials at Fesharaki Associates Consulting & Technical Services Inc. (FACTS Inc.), Honolulu, in a recent report.

Royal Dutch/Shell Group declined an offer from the third partner, Inpex Corp., to join that consortium. "Other companies are now being courted, particularly Statoil [ASA]," FACTS reported. "Total [SA], Statoil, [OAO Lukoil], ONGC [India's state-owned Oil & Natural Gas Corp.], and Chinese companies seem interested in northern Azadegan [field]."

However, the report said, "Many international oil companies may not find the rate-of-return attractive enough under the revised buyback system, although Azadegan is seen to have similar terms to Darkhoin [oil field in Iran], which is a relaxed version of the revised buyback system."

Buyback contract

Under the buyback contract, an interested foreign contractor, operating through an Iranian affiliate, enters into a contract with state-owned National Iranian Oil Co. (NIOC). The contractor develops the field, and NIOC repays costs that comprise capital expenditure, operating expenditure, and accrued bank charges. Additionally, the contractor receives a previously agreed remuneration fee, normally by way of an entitlement to an amount of produced hydrocarbon.

In February, Japan and Iran signed a basic development agreement for South Azadegan field, with the project to be led by a Japanese consortium of Inpex, Tomen, and Japex (OGJ Online, Mar. 25, 2004). Naftiran Intertrade Co. Ltd. (NICO)—which earlier split supergiant Azadegan field into north and south projects—was given 30% of South Azadegan.

Under terms of the contract, both Inpex and NICO would become contractors to NIOC to develop the field. The two sides are reported to have agreed to invest a total of $2 billion, with the Inpex group contributing 75% and NICO 25%. NICO is now the largest private upstream company in Iran and owns Petropars Ltd. and PetroIran Development Co.

Development is to be implemented in two phases, targeting production at 150,000 b/d in Phase 1 and 260,000 b/d in Phase 2. Initial production of 50,000 b/d is expected within 40 months, rising to 150,000 b/d after 52 months and 260,000 b/d in 8 years. The contract stipulates the drilling of 36 wells in Phase 1 and 39 more in Phase 2, along with construction and installation of oil and natural gas production facilities, laying oil and gas pipelines for export, and injection of both water and gas to maintain pressure in Azadegan field. Japanese participants in the oil consortium initially planned to set up a project firm with a capitalization of 10-30 billion yen. Japan Oil, Gas & Metals National Corp., an independent administrative agency, was to contribute 49% of the capital, and Inpex, Tomen, and Japex the remaining 51%.

The field, some 80 km west of Ahvaz in Khuzestan Province near the Iraqi border, is believed to be Iran's largest onshore project since the 1979 Islamic revolution. Iranian officials estimate Azadegan contains 35-45 billion bbl of OOIP, with 5-6 billion bbl considered recoverable. It would require substantial investment to develop.

Meanwhile, one more round of bid submission has been requested for Ahwaz Bangestan oil field. "BP [PLC] has submitted its bid, and Total will submit shortly," FACTS reported. "This is a one-horse race, as BP, despite its best intentions, is unlikely to be able to actually take on any project in Iran, due to severe US opposition and its vulnerability to the displeasure of the US administration."

It said, "The new areas of Kushk and Hosseinieh have generated serious interest, and big players—Shell, Total, Petronas, Repsol [YPF SA], Sinopec, and ONGC—have bought the [bid information] packages."

Special requirements

FACTS noted, "Surprisingly, companies like Petronas were asked to bring in a Western partner. It seems that some of the nonmajors are being asked to bring in partners. Even more surprisingly, Repsol, too, was asked to join with a Western partner.

"Moreover, NIOC has added a condition: The winner must agree to buy 5 million tonnes of LNG from National Iranian Gas Export Co. (NIGEC). It is not specified at what price, what terms, and from what upstream South Pars project the LNG will come from." FACTS concluded, "It makes no sense to link the upstream project and LNG together, as the linkage will only delay the projects and cloud the economic viability of each project independently."

It also observed, "Iran's offer of 16 blocks of exploration acreage, where the companies who have successfully found oil are now able to get development contracts without open bidding, has generated some mild interest, but it does not seem to bring in the larger international companies." 

Contact Sam Fletcher at samf@ogjonline.com