Iran Reshuffles South Pars Development, Delays Shell/Repsol LNG Project to Salvage Momentum

Buying Time

Following a week of rumours that Shell and Repsol-YPF were withdrawing from the vast Persian LNG venture in Iran, scheduled to bring two 8-million-t/y-capacity trains onstream by 2014, a deal has emerged allowing the companies to remain in Iran, but postpone their involvement significantly. The two companies will disengage the Persian LNG venture from at least one of the connected upstream phases, leaving development of Phase 13 to another contractor, but will retain an option to sign up for development of two later phases of a combined size similar to Phase 13. According to various media reports, Phases 20 and 21 are being discussed.

Shell and Repsol's Persian LNG scheme has been completely stalled for well over a year—in a similar situation to Total and Petronas's Pars LNG scheme—amid increasing U.S. and European Union (EU) political pressure and the threat of unilateral U.S. sanctions and hardened United Nations (UN) sanctions over Iran's controversial nuclear programme. With Phases 6-8 being currently being finalised—albeit running a two-year delay—and Phases 9 and 10 under development by Iranian companies, the spotlight has increasingly been directed onto the Total-led upstream development of Phase 11 integrated with Pars LNG, the Iranian-developed Iran LNG venture drawing its gas from Phase 12, and the Phase 13-14 Persian LNG scheme led by Shell and Repsol. With all the LNG schemes' downstream components appearing firmly stuck given the inability of IOCs, engineering companies and technology suppliers to enter into billion-dollar deals in the current situation, IOCs have stalled on their final investment commitments.

Swapping Phase 13 for Phases 20-21 will allow operators Shell and Repsol to escape the ultimatum posed by Iran in October last year, giving the companies—-including the Total and Petronas partnership—until June to reach and commit to a final investment and cost agreement with Pars Oil & Gas Company (POGC), a National Iranian Oil Company (NIOC) subsidiary in charge of the overall development of the vast South Pars field. The rescheduling to Phases 20-21 means that much of Persian LNG will not be developed for another decade, giving the company increased respite, especially if it also swaps Phase 14, or if POGC agrees to delay that development to synchronise the company's schedules.

Iran's Geological Stress

POGC and NIOC have come under increasing pressure to start development of Phase 13, given its geographical location on the maritime border with Qatar, and that section of the common South Pars/North Field reservoir's propensity to allow for gas migration to the Qatari side, where production has successfully has been ramped up to record levels in the past years. The Iranians have long feared that massive-scale production on the Qatari side of the reservoir would cause gas to migrate towards the Gulf emirate unless production was balanced, although any evidence of this actually occurring has been highly inconclusive. Nevertheless, Iranian fears have exacerbated the pressure being put on the Shell-Repsol partnership by POGC to get development going.

Shell and Repsol's ability to offload the phase onto POGC and swap it for a much less controversial slice of the field is therefore likely viewed by the IOCs as a major victory. The price Shell and Repsol paid was, according to reports in Upstream, to hand over their reservoir and engineering studies to POGC, as well as to provide technical assistance in the future development of the phase—a price that surely would be viewed as not too high given its continued Iranian foothold.

Total Soldiers On?

Meanwhile, the Total and Petronas Pars LNG partnership reconfirmed as late as yesterday its commitment to the development of the integrated gas export project, drawing its feedstock gas from Phase 11. Acknowledging that it would be difficult for the company to commit under the current international circumstances—not least due to the pressure from the French government—Total's chief executive, Christophe de Margerie, told Reuters that "in the short term, it will be difficult to find a win-win situation. We have told them we are interested in the long term."

With work on its development at a virtual standstill for at least a year, Total has also been unable to agree with its Iranian counterparts on the costs associated with the development, given the massive global cost increases in the industry in recent years. Total has estimated costs coming in at around US$11 billion for the development, though the original estimate was less than half that amount. This is not unlike the Persian LNG project, where Shell and Repsol estimates recently have come in between US$14 billion and US$16 billion. Both projects' estimates have not been well received by the Iranians, leading to further delays and friction.

Nevertheless, it is not unthinkable that Total would seek a similar postponement of its project, towards the end of the overall South Pars development. Its Phase 11 lacks the geological and strategic urgency ascribed to Phase 13 by POGC, which might allow just a simple rescheduling of the project timewise. Total's alternatives are otherwise undesirable. Investment will not be possible for it at this point, as that would risk not only falling foul of U.S. unilateral sanctions, involving heavy fines for its U.S assets and subsidiaries, but also political problems with the French government. Continued stalling tactics, however, might prompt the POGC and NIOC to make an example out of Total, cutting its interest in the project, or even stripping it of the contract altogether. Hence, pursuing a rescheduling deal similar to Shell and Repsol will be in its better interest, and it will be benefited by Iran's desperate need for partnering with companies that have experience of large-scale LNG developments.

Slow but Moving

South Pars Phases 6-8 are now finally scheduled to come onstream gradually, starting in July, at levels of around 400 mmcf/d. The upstream part of the phases, which have been delayed for around two years due to profound problems with the Iranian contractors, have been developed by Norway's StatoilHydro and will reach a production capacity of 1.3 bcf/d in late 2008 or early 2009. StatoilHydro has managed to install a sustainable production level of 300 mmcf/d more from each phase than Iranian contractors have achieved, demonstrating the country's lack of advanced technology and know-how even at the upstream phases.

Outlook and Implications

With the added production capacity from Phases 6-8 being piped to the domestic market in time for the 2008-09 peak electricity and heating demand winter season in Iran, it will alleviate domestic pressure. What Iran will do with the later phases, however, is a growing question. With its gas export schemes stalled and now postponed, Iran will need to again look at its options. By default the "domestic supplies first" faction in Iran's politics seems to have got its way, but the domestic market will only be able to use so much and Phase 13 might become considered for an export pipeline scheme to the United Arab Emirates or Oman. What Iran also wants to do with Phase 19, which together with Phases 20 and 21 was thought to be earmarked for the Iran-Pakistan-India (IPI) pipeline should it go ahead, only adds to the questions.

Speculation that Total might lose its place to Russian and Chinese companies, less vulnerable to unilateral U.S. sanctions, has again been ignited, although Iran's desperate need for liquefaction technology know-how and experience to get its projects going indicates this will not be the case. Few IOCs and NOCs have in-house knowledge of these technologies and Russian, Chinese, or Indian companies would, to an even higher degree, be dependent on U.S., European, and Japanese engineering and technology companies—which currently all appear to be as reluctant as the majors to commit to Iranian projects.