Sinopec offers to fund Yadavaran development

11 February 2019
05 January 2019, Week 05, Issue 710

China’s Sinopec has offered to fund the further development of Iran’s Yadavaran oilfield, but the offer is both conditional and controversial. Simon Watkins reports

What: Current lead developer Sinopec has offered US$3.75 billion to drive the exploitation of the southern Iranian field.

Why: The EIA estimates recoverable reserves at 3.2 billion barrels of oil and 76.5 bcm of gas, but Iran thinks the figures could be much more.

What Next: The deal is without doubt attractive to Iran, but the political implications of the investment mean plain sailing is unlikely.

NewsBase Intelligence (NBI) understands that incumbent Sinopec has offered the National Iranian Oil Co. (NIOC) up to US$3.75 billion to finance the next stage of development of its Yadavaran oilfield. All is not quite as it seems, though, with the offer subject to other factors.

On the face of it, Sinopec should be enthused at the prospect of developing the Yadavaran site further.

Located in the southwestern province of Khuzestan and one of the oilfields of the ultra resource-rich West Karoun oil region, initial studies put Yadavaran’s oil capacity at 17 billion barrels. The US EIA has estimated recoverable reserves at 3.2 billion barrels of oil and 76.5 bcm of gas. Yadavaran is comprised of two former fields, Koushk (discovered in 2000) and Hosseinieh (discovered in 2002).

Later Iranian studies based on further exploration suggest the field actually holds a total of 34 billion barrels of oil, making it one of the largest under-developed oilfields in the world.

Rocky road

Sinopec took the lead developer role at Yadavaran in 2008, and based only on the initial studies, it Sinopec committed to a US$2 billion investment in the field to increase production from the initial 25,000 bpd to the current 120,000 bpd.

Progress, though, has not been linear, with Sinopec receiving a warning from the NIOC at the end of 2013 that its rate of progress had been too slow.

NIOC said that if Sinopec did not engineer a rapid increase in production then it would be removed from the development, just as China National Petroleum Corp. (CNPC) had been from Phase 11 of the South Pars gas field, and in 2014 from the contract for the South Azadegan oilfield.

Part of the reason for Iran’s initially aggressive approach (in 2013) to the Chinese was that Tehran was wary of losing out in the exploitation of resources in the fields it shares with neighbouring Iraq, which includes Yadavaran, known on the Iraqi side as Sinbad.

Tehran’s insistence in 2015 on China upping its game came from the confidence of knowing that it would have official access to a worldwide range of IOCs and technology and equipment suppliers, given the ratification that year of the nuclear deal that would roll back sanctions on Iran.

Progress

Whatever the rationale, Sinopec complied with the warning, reaching the official first phase target of 85,000 bpd in 2016 and then the second phase target of 100,000 bpd in 2018.

The third phase target remains 300,000 bpd by the end of 2021, with a further NIOC target being 400,000 bpd by the end of 2025, although this is not yet in Sinopec’s contract.

“Chinese technology and equipment has improved in the past year or two, although from a poor start, so the restraints on further realistic production increases are no longer in place,” Mahmood Khaghani, former NIOC director-general and director for Caspian Sea Oil and Gas Affairs at the Ministry of Petroleum, told NBI.

Conditions

That being said, Sinopec’s offer is not as unconditional as it looks. “The trade war with the US is hurting China and it wants a resolution as soon as possible, and part of this is building up its leverage in negotiations with Washington and this Yadavaran statement is part of that,” a senior Iranian source told NBI.

“It’s one thing China quietly continuing to get around the new US sanctions in the amounts of [Iranian] oil its taking, but it’s quite another for it to overtly more than double its investment in one of Iran’s key oilfields in one go,” he added.

“The timing of this is critical as well in that within the next couple of months the US will decide on whether to extend the current waivers on oil imports from Iran to countries like China, and Sinopec is China’s largest refiner, so there is a trade-off there as well,” he underlined.

Depending on how the US reacts to China’s ‘Iran-leverage’, it may equally be likely that China does in fact go ahead with its expanded investment in – and development of – Yadavaran.

Legally it has the right to do so. The US sanctions are not backed by the UN, and secondly, even if they were, the original development deal was signed in 2007, whilst the US withdrawal from the JCPOA occurred only last year.

“If the US doesn’t demand that the new Yadavaran investment is taken off the table in exchange for something China really wants, then it’s highly likely that China will go ahead with the new Yadavaran development and also broaden its footprint across all of the West Karoun fields as and when Iran needs it,” the source said.

Urgency

Iran is likely to need China in this context sooner rather than later, as Russia has in recent weeks been pulling back from its position – alongside China – as one of Iran’s two stalwart supporters.

The deal Russia struck with Iran giving Moscow significant control over Iran’s oil and gas resources –revealed by NBI last year – is now being rowed back on whilst the US decides whether/when to intensify its sanctions on Russia.

“There are two sets of new sanctions that are due to come into play on Russia this year – the second range of CBW [‘Chemical and Biological Weapons Control and Warfare Elimination act of 1991’] and DASKAA [‘Defending American Security from Kremlin Aggression Act of 2018’] – so Russia is treading carefully on other sensitive issues with the US,” Oleg Kouzmin, director of research for Russia and the CIS for Renaissance Capital, told NBI.

Iran, for its part, is determined not to lose out to neighbouring Iraq on pushing ahead with the development either of Yadavaran or any of its major fields in the West Karoun region, along with South Azadegan, North Azadegan, South Yaran, and North Yaran.

These fields together are estimated to contain at least 67 billion barrels of oil in place (OIP), with an average recovery rate of just 5-6%. “Therefore, for every 1% increase in the rate of recovery that can be achieved, the recoverable reserves figure would increase by 670 million barrels, or around US$34 billion in revenues with oil at US$50 a barrel,” the source said.

With the right developers, an increase in the recovery rate across the site to at least 25% over a 20-year contract period could be expected to add US$838 billion in revenues for Iran.

Iran is currently in talks with China about possible further investments in West Karoun. The level of confidence in Tehran over a positive outcome is high enough for NIOC subsidiary, Petroleum Engineering and Development Co. (PEDEC) to be working on the assumption of Chinese involvement in an integrated system for the transfer of light and heavy crude oil from the West Karoun fields.

The plan involves the construction of a 400-km extension to complement a completed 300-km pipeline and then the building out of related pumping stations that would feed into enhanced storage and export dispersal facilities in the Kharg Island export terminal.

The first 300-km stretch of the pipeline is already delivering around 100,000 bpd of heavy crude oil from the West Karoun fields to key export points, including the Bahregan export terminal. The second part of the pipeline is due to come on stream in 2021, according to the Iran source.

“By 2021 to 2023, there will be the two pipeline sections connected to two pumping stations, one in the Ab Teimour area on the Ahvaz-Khorramshahr highway and the other in the already established Omidiye. Around 300,000 bpd of heavy crude oil and just over 250,000 bpd of light crude oil will be carried from the first pumping station to the second,” he said.

“From there, the heavy crude oil would go to Bahregan terminal and the light crude oil would be delivered to the National Iranian South Oil Co., via the Ahvaz booster station, before being piped to the Kharg terminal,” he concluded.

Iran could certainly benefit from the Yadavaran boost, and at the moment Tehran needs friends, and is likely to forgive its previous misgivings about China’s continued involvement in its upstream sector.

Edited by

Ian Simm

Editor

Any questions? Please get in touch