The Iran nuclear deal has a direct effect on Poland's shale gas exploration and production projects. Combined with political détente, the Iranian gas reserves are highly attractive to international oil and gas companies.
In 2011, Poland saw a public frenzy as the U.S. Energy Information Agency published its estimates of Poland's shale gas resources. Prospects for independence from the supply of the expensive Russian gas and for becoming a “second Norway” emerged.
Unconventional gas exploration and appraisal concessions were quickly awarded to Polish and U.S. companies, small British firms and subsequently some of them passed to global European companies – the French Total and Italian ENI. Several tens of wells have been drilled over the past three years, but they did not bring about the expected results. At the same time geopolitical changes opened before oil and gas exploration companies operating in Poland new more attractive prospects in seemingly remote locations. Iran, holding the world's largest natural gas reserves, is one of such locations (1).
Economy and politics
In June 2013 Hassan Rouhani, a politician generally believed to be a moderate, was elected as president of Iran. After eight years of Mahmud Ahmadinedjad's controversial presidency, Iran struggled with crisis at inflation rates in the order of 40% and GDP falling by more than 1% in 2012 and 2013. According to observers from the West, this was primarily due to the sanctions imposed on Iran by the international community which included limits on sales of Iranian oil and gas on international markets. Soon thereafter, oil exports fell from 2.5 Mbbl to 1 Mbbl per day, with adverse effects on government revenues (2).
The cabinet of the newly elected president defined the lifting of the sanctions on Iran, hindering the growth of the economy, as the priority of the government. The determination soon yielded the expected results – in November, Iran signed an interim agreement on the Iranian nuclear program with the so-called 5+1 countries (standing UN Security Council members + Germany) in Geneva. The agreement was made for a term of 6 months during which both parties are to negotiate terms and conditions of a permanent agreement. Moreover, Iran agreed to discontinue its nuclear program and dispose of some of its enriched uranium. In response to Iran's compliance with these conditions, western countries were to lift some of the sanctions and release Iranian funds deposited in European banks.
Iran's efforts to attract the investors
The Iranian government was not satisfied with that success. A couple of days later Oil Minister Bijan Namdar Zanganeh has announced in an interview that he met several representatives of international oil and gs companies to talk on their potential projects in Iran. He named seven companies: BP, ExxonMobil, ConocoPhillips, Shell, Eni, Total and Statoil. More meetings were held in the next 3 months and the contacts were intensified to such a degree that the White House felt compelled to remind that only some of the sanctions were lifted, while those on capital investment in Iran are still in effect.
Oil Minister Bijan Zanganeh was instrumental to the reestablishment of these contacts. He returned to the government after an absence of eight years (from 2005 to 2013), during the tenure of Mahmud Ahmadinejad who felt Zaganeh's services were no longer needed, as he considered him as a member of the corrupted petroleum industry clique. Nevertheless, moderate politicians still regarded him as an extremely efficient manager with extensive experience in government administration wherein he has held various ministerial posts since the 1980's.
Iranian political scene experts agree that Zanganeh was the man behind bringing in a number of western investors, including the aforementioned Eni and Total companies, to Iran in the 1990's. The companies entered into buyback contracts whereby they were responsible for oil and gas exploration and building production infrastructure on reservoir discovery. All risks were borne by the investor. Once project completed and production launched, the facilities were taken over by NIOC (National Iranian Oil Company), whilst the foreign company was entitled to a refund of the expenditure incurred and a remuneration in kind (crude oil or natural gas), as agreed in advance.
This buyback formula was first introduced in the 1990's and Bijan Zanganeh is among those credited with its invention. It was devised in an attempt to attract foreign companies to Iran, bringing in their capital and know-how, while ensuring compliance with the Constitution of the Islamic Republic of Iran. In line with the Constitution, adopted following the revolution in 1979, all industries have been nationalized, all oil and gas fields in Iran became State property with a ban on granting any licenses for extraction of mineral resources to foreign companies.
Accordingly, the buyback approach appeared as a reasonable compromise between the demand for foreign investment and basic tenets of the Islamic Republic of Iran. Although its attractiveness to the European investors may have been problematic, Total, followed by Eni, Shell and Statoil have engaged for almost a decade in various Iranian projects. In 2010, however, they had to withdraw as new economic sanctions had been imposed on Iran. Paolo Scaroni, Eni CEO, raised billion dollar worth claims against Iran on previously implemented projects (3).
In February 2014, the Iranian Oil Ministry announced that the government decided to cancel the buyback scheme, considering it an insufficient incentive for international companies. According to new contracts, a foreign company is to be granted a share in oil or gas production in exchange for expenditures incurred on field development. Moreover, the contracts will bear lower risks: in the event of a failure to discover oil or gas reservoirs, the company may continue exploration in other locations under the same contract. The term of the contract has been extended to 20-25 years, i.e. twice the term under the previous scheme.
Iran's gas reserves and the gas market
Iran holds the world's fourth biggest proves oil reserves and its proven gas reserves are the largest in the world. With reserves in the order of 33.6 Tcm, Iran is slightly ahead of Russia and Qatar (32.9 and 25 Tcm, respectively). These figures are based on British Petroleum (BP) classification and include reserves that are technically and economically viable. According to a different classification based on the criterion of technically recoverable resources (used in former USSR republics), Russia is the top country with proven reserves of 47.8 Tcm, followed by Iran and Qatar with figures as per BP classification.
Offshore Persian Gulf gas fields are the largest in Iran, including South Pars, the biggest of them. Together with its geological extension in Qatar's territorial waters (North Field), South Pars is believed to be the world's largest gas field, with estimated resources of 10 to 14 Tcm (in the Iranian part only). The field development plan called for 24 stages to be completed in 20 years. Production was launched in 2002 at a rate of approx. 10 Bcm per year and reached a level of over 100 Bcm in 2013. According to estimates, stages 12, 15 and 16 are to be complete in the next three years, but it will take much longer to complete the subsequent stages. This chronically delayed project is plagued by technical problems.
North Pars is Iran's second largest gas field with reserves of 1.3-1.4 Tcm. China National Offshore Oil Corporation (CNOOC) planned to develop the field but abandoned the project after 5 years (in 2012), along with a plan to build a liquefied natural gas (LNG) plant. The failure was due to the inability to find a partner capable of providing the necessary technology covered by the sanctions.
Recently, the Iranian NIOC Company announced discovery of the Kish offshore gas field in the Persian Gulf. Its estimated resources of 1.3 Tcm are the third largest in Iran. In 2007, Iran and Oman reached an agreement on the transport of produced gas to the latter country. So far, the parties to the agreement failed to resolve a number of problems and today it is believed that the project will not be prepared before 2017.
It may seem that considering its huge resources Iran is naturally predestined to be the world leader of natural gas exports, but is not the case. With a gas production of approx. 154 Bcm Iran was the third largest worldwide in 2012. However, Iran ranked as low as 27th among gas exporting countries.
On the other hand, domestic consumption of approx. 150 Bcm was almost equal to Iran's total gas consumption, as in the late 1980's Iranian officials and policies called for an increase in the share of gas in national energy mix with expansion of gas infrastructure and subsidies. As result, the share of gas in the total energy consumption increased from 15% 9n 1980 to 60% in 2012. Oil was mainly scheduled for export for both logistic (ease of transport) and financial reasons.
Significant volumes of natural gas are used in enhanced oil recovery (EOR) projects. In 2011, 35 Bcm of gas were pumped into the ground and NIOC plans to increase these volumes markedly in the years to come.
As already mentioned above, Iran ranks low in the third ten of world's top gas exporter countries. Nowadays, Iran sells that commodity to three countries: Turkey, Armenia and Azerbaijan. Only in the case of Turkey the volumes are noticeable: 7.5 Bcm as of 2012, while the latter two republics in the Caucasus combined received as little as 1 Bcm the same year. The gas was flowing in reverse direction from Turkmenistan and Azerbaijan: in 2012 imported respectively 9 Bcm and approx. 0.5 Bcm from these countries (4).
Iran plans to expand considerably its export capacities in the near future with such projects as a pipeline across the Persian Gulf to Oman with a planned ultimate capacity of 8 Bcm per year.
Gas transmission pipelines to Iraq and Pakistan, both with similar capacities in the order of 7-9 Bcm, are under construction. The latter one has been in practice completed on the Iranian side, but significant delays have been reported from the Pakistani side. Purportedly, funding shortages prevented timely completion of the project, but experts do not exclude pressures from the U.S.A. that attempt to control Iranian initiatives in this sector.
Polish shale gas versus Iranian gas
Iran, the country that boasts the largest proven gas reserves, became net gas importer in the past few years. Following the imposition of economic sanctions, the planned production development projects suffered delays caused either by withdrawal of investors or unavailability of funds or technology. Facing these challenges, the new government decided to reverse that adverse trend by encouraging international companies to investing in Iran. Invitations addressed to seven international companies testify to the commitment of the Iranian government (5). Four of them hold or have held in the past natural gas exploration and appraisal concessions in Poland. Total of France and U.S.-based ExxonMobil have already withdrawn from Poland. ConocoPhillips holds three prospective concessions in Pomerania (Damnica, Lębork and Karwia), while Eni holds one (probably less prospective) concession near Elbląg.
Worth of noting at this point are several aspects that, following the political changes and new openings in a country like Iran, may represent a potential threat (as a competitive project) to the development of Polish shale gas resources.
In investment terms, shale gas undertakings account for a small fraction of all upstream projects portfolios held by large European and U.S. companies, also comparing with their offshore projects. Moreover, these companies have not pioneered the development of technologies for cost-effective shale gas production, so that their efforts can be compared to main group chasing rather than leading the group.
International companies suddenly became interested in unconventional projects over recent years, taking concessions for exploration of these resources and acquiring companies that are in possession of necessary technologies.
Currently, Total is involved in unconventional gas projects implemented in Argentina, Algeria (tight gas), China and U.S.A. (by acquiring shares in a Barnett Shale project (6)). Moreover, Total is exploring for shale gas in Denmark and the U.K. According to statistical data, gas production in Algeria and China is expected to be respectively in the order of 0.07 and 0.05 Mboe/d (million barrels of oil equivalent per day), while the total output of that company was 2.3 Mboe/d in 2013.
Eni's involvement in that sector is even less prominent. The company is exploring for unconventional gas (and oil) in China and Texas.
Accordingly, the two companies make their first steps into shale gas production sector. For the time being, Total's efforts are more advanced, as development of unconventional resources is one of its four key strategic upstream objectives (7).
In Poland, Total and Eni adopted a fairly conservative approach by acquiring two and three concessions, respectively (two of the latter ones have already expired). It seems that their strategy assumed observation of developments in Poland in anticipation of a potential breakthrough. With time and a lack of spectacular discoveries, they moved their attention elsewhere, including Iran.
A comparison of the resources held by the two countries is another aspect that makes it difficult for Poland to compete with Iran. In order to give a better image of the potential volumes and perspectives considered by upstream companies it would be enough to compare gas reserves of South Pars field alone (10 to 14 Tcm) with initial conservative estimates of Polish shale gas resources, as made by Polish Geological Institute – National Research Institute (0.346 – 0.767 Tcm). It should be emphasized that the figures for “our” gas are those of technically recoverable resources, while the Iranian estimates are for economically viable reserves.
Furthermore, one should keep in mind the key difference between (mostly offshore) conventional gas reservoirs in Iran and shale gas resources in Poland. Even considering a huge progress in shale gas and oil production, the former ones are generally more appealing to potential investors due to their better accessibility. In terms of geology, Iranian conditions are undeniably better than those prevailing in Poland.
Moreover, previous experience from completed projects may have an effect on operations by these companies. Big European companies, like Shell, Total and Eni, have invested in Iran since 1950's. The Islamic revolution ousted them but they reappeared there as soon as the atmosphere for upstream project has improved. This aspect makes Iran their natural choice for project location. Their Polish experience in that matter is meagre.
This article is intended to highlight potential threats to the Polish shale gas program from changes that are underway in Iran. Obviously, this is not a zero-one case that would result in a massive exodus of upstream companies from Poland. Moreover, in spite of encouraging feedback from negotiations on the Iranian nuclear program, there is still long way to the agreement so Teheran declarations are a matter of wishful thinking.
Importantly, the companies that recipients of messages from Teheran represent in Poland a small minority of shale gas exploration companies. Most exploration/appraisal concessions are held by U.S. and U.K.-based companies, as well as by Polish companies with a high State Treasury's share. This is an additional protection against their leaving.
Geography and geopolitics are additional strengths of Poland. In terms of geopolitics, Poland is a country much more stable than the Middle East. Furthermore, a shorter path from the field to potential customers is vital.
This does not mean that potential shale resources will fund themselves a path to the surface. It will take years to complete the process that requires huge funds. The case of Iran clearly demonstrates that international environment is highly variable with new threats and opportunities emerging at any moment. Therefore, competitors may appear in previously unexpected locations to take over the funds that have been committed to our country.
This should be always kept in mind.
27.05.2014
author: Przemysław Lesiński - an independent economic and political analyst for Middle East and Central Asia. Graduated from Management and Iranian Studies Faculties, Warsaw University. Holds extensive previous experience from operations in that region, including Afghanistan and Iran
Footnotes:
- According to BP Statistical Review 2013 – Iran's natural gas reserves were 33.6 Tcm as of 2012; Russia's reserves – second largest in the world – were estimated at 32.9 Tcm
- Some countries were partly exempted from the obligation to impose sanctions on Iran (e.g. India for oil supply and Turkey for gas imports from Iran). Interestingly, the embargo prompted establishment of companies specialized in bypassing the ban. For example, Iranian millionaire Babak Zandjani, ten years ago the driver of Central Bank manager, made a fortune on such deals. Today Zandjani is in jail
- Unlike ENI, Shell and BP owe Iran over USD 2 billion for unpaid oil deliveries. These companies blame the sanctions that prevent transfers to the accounts of Iranian banks
- Iran supplies gas through a pipeline to Nakhichevan, an Azeri exclave
- The government addressed its invitation to contract negotiation to: British Petroleum, ExxonMobil, ConocoPhillips, Shell, Eni, Total and Statoil
- Geological formation in Texas
- Other projects are: Deepwater Offshore, natural gas liquefaction, heavy oil production and tar sand oil extraction
