IHS Global Insight Perspective | |
Significance | CNPC has said drilling might start as early as March following Iran's approval of its development plan for Phase 11 on the giant South Pars gas field—a project CNPC secured from the clutches of Total as the French company was unable to proceed in the face of Iran's financial and political isolation. |
Implications | CNPC's activity comes at a time when virtually all other Iranian projects led by foreign companies are close to or at a standstill given the spectre of even tighter financial sanctions and the international political pressure on companies to abstain from Iranian investments. Indeed, CNPC's boasts about its development plan approval might be something of a test balloon to assess political support from its home government—in similar fashion to reports today that Malaysia's Petronas has again engaged in gasoline (petrol) sales to Iran. |
Outlook | Iranian statements over the past week have been highly belligerent and the recent extended diplomatic effort to find a solution to the nuclear impasse has petered out into nothing, so the chance of CNPC actually moving ahead with large-scale investment looks questionable in the grand geopolitical scheme of things. |
South Pars Acceleration?
"The real work will start as soon as the Chinese New Year holiday ends", an official close to the international operations of CNPC was quoted by Reuters as saying, with the news agency also reporting that the company has bolstered its oil and gas operations staff based in Iran to about 60. CNPC has been in the frame for Phase-11 development for well over a year, but secured the US$4.7-billion deal officially last June, when France's Total—long the operator of an integrated upstream and downstream development of Iran's Pars LNG venture, drawing 1.8 bcf/d of gas from Phase 11—lost its upstream spot to the Chinese state company (see Iran: 4 June 2009: Total Displaced by CNPC on Upstream Phase of Iran's Giant Pars LNG Project and Iran: 12 October 2009: Total Accepts CNPC's Involvement in Pars LNG Talks amid Iranian Gas Growth Desperation). Total's continued involvement in the downstream LNG segment of the venture has been up in the air since then, but Iran seems to have decided to not move ahead in any case with the liquefaction part in light of rampant domestic gas demand growth and a failure, owing to international sanctions, to source and import LNG technology. Indeed, this was one of the reasons Total was unable to move forward with investment on the integrated Pars LNG project with its partner Petronas. The situation on Iran's other large foreign company-led LNG project, Persian LNG, is similar—Shell and Repsol have stalled on their final investment decision for several years to avoid political pressure from their home governments and the United States.
Export Projects Standstill
Iran is increasingly desperate to bring gas onto its domestic market and pre-empt shortages (a potential cause for further political unrest) and to lower its reliance on imported gas from Turkmenistan, and last year finally seemed to accept the scrappage of the Pars LNG project—at least unofficially—in favour of using its gas domestically (see Iran: 29 September 2009: Oil Minister Flags Imminent Gas and Funding Shortage in Iran and Iran: 24 September 2009: Iran Sees 40% Rise in Winter-Season Gas Imports from Turkmenistan). Another reason for developing Phase 11 soon is that it is located on the maritime border with Qatar—with which Iran shares the giant South Pars/North Field gas reservoir—and Iran fears that successful and rapid development of the Qatari side might result in reservoir migration. With Total unable to commit to even starting upstream development, the French supermajor was made an example of as a way of getting other companies to pay up, and CNPC was brought in. It is still unclear whether Total's partner Petronas remains on the project; initial statements from all sides suggested that this was the case, but Petronas has also indicated that political pressure and sanctions from the West might be too high a price to pay.
Iran itself has struggled to bring South Pars phases onstream, running heavy delays and cost overruns on most of its projects and achieving sub-par results when it comes to production capacity due to the low quality of materials and machinery. Iran has also suffered severe financing problems, leading not only to upstream problems but also to severe delays in constructing integrated treatment facilities for the somewhat sour gas when it comes onshore. Officially, all Iran's LNG export projects are under way, although Pars LNG and Persian LNG are clearly at a standstill, while the country still remains unsuccessful in sourcing any liquefaction technology independently for the nationally pursued Iran LNG venture.
Sanctions Tightening
Meanwhile, sanctions against Iran look increasingly likely to tighten, as the extended effort to reach a diplomatic solution to the nuclear impasse over its atomic programme has failed to yield any tangible results (see Iran: 8 February 2010: Iran Moves to Produce Higher Enriched Nuclear Fuel, Heightening Tensions with West). The U.S. administration under President Barack Obama gave Iran half a year in which to engage in seeking a diplomatic solution and a framework for compromise at the start of its tenure about a year ago—a period which, mainly at Russian and Chinese insistence, was extended through the latter part of 2009 (see United States: 19 November 2009: Iran Effectively Rejects Nuclear Deal, U.S. Warns of Consequences). The failure of the Iranian administration under President Mahmoud Ahmadinejad to engage in talks and show a genuine will to find common ground during this term now appears to have swayed Russia into the Western camp's view that tightened sanctions are the only alternative—with China in recent days signalling that it would abstain from using its veto against tougher sanctions in the UN Security Council. That would pave the way for harsher measures facing Iran which, while unlikely to be radical, would further undermine the Islamic Republic's already constrained ability to import the large-scale and advanced technologies increasingly needed by its energy industry just to supply the domestic market effectively in the long term, and would make it even harder for oil companies dealing with Iran to access the world markets at the same time.
Test Balloons?
CNPC's loud proclamation that work and investment is going ahead in Iran might perhaps be seen from this perspective, provoking reaction in China and abroad and providing a rough idea of how tough the opposition might be. It is also likely to function as a lobbying venture within the Chinese body politic, clarifying the government's choices between supporting an overseas energy venture by a state company—normally a priority for China—and acting according to broader geopolitical considerations.
A similar thing might potentially be said about Petronas's decision to sell gasoline (petrol) to Iran, reported today. Petronas has bought a cargo of 35,000 tonnes of gasoline from Indian refiner Reliance and sold it to Iran for delivery in its Bandar Abbas port during February, according to Dow Jones. India's Reliance backed out of trade with Iran during the past year after its Iran business started interfering with its business interests in the United States, and now claims to have a clause in its sale contracts prohibiting Iran deliveries of its refined products. Petronas might, however, have bought the Reliance fuel from a third-party trader—showing why Iranian fuel imports in theory can be complicated and made more expensive by sanctions, but can nevertheless hardly be stopped without an outright embargo. Petronas's Iran deal may be opportunistic, securing a premium just before sanctions are tightened, but it might also sound out the level of opposition within the Malaysian government to its continued dealings with Iran.
Outlook and Implications
Iran's oil and gas industry is now moving further ahead with the two objectives of maintaining oil output and bringing more gas onstream for domestic consumption—despite continued rhetoric about Iranian gas export projects. Increasing volumes of gas are used in reinjection projects at Iranian oilfields which, by international standards, are relatively ineffective and overuse gas. This is mainly because of Iran's problems in sourcing advanced enhanced oil recovery (EOR) techniques from the West, as well as—ironically, given the amount of gas that otherwise could have been monetised elsewhere—because of its financial constraints. Tightened sanctions are therefore unlikely to make Iranian investment attractive for CNPC, especially as the notion of Iranian gas exports to China becomes increasingly remote. Iranian investment terms are in themselves highly restrictive, so CNPC investment solely for the sake of a profit rests on uncertain grounds. Hence, the recent CNPC and Petronas movements and announcements with regard to Iran might be designed to test the waters, with actual upstream development work still looking relatively unlikely if international sanctions are indeed tightened over the coming weeks.