Drilling operations of the first well of the game-changing but highly-controversial Phase 11 of Iran’s super-giant South Pars non-associated natural gas field officially began last week.
Significant gas recovery from the enormous resource will commence in the second half of the next Iranian calendar year that begins on 21 March 2021. The long-stalled Phase 11 development supposedly saw the withdrawal of all Chinese involvement in October 2019. In reality, though, China is still intimately involved in its development and is looking to further scale up its activities following the inauguration of Joe Biden as U.S. President on 20 January. Along with completing the crucial Goreh-Jask pipeline oil export route by the end of the current Iranian calendar year (ending on 20 March 2021), building out its value-added petrochemicals production to at least 100 million metric tons per year by 2022, and ramping up production from its hugely oil-rich West Karoun cluster of oil fields to at least 1 million barrels per day (bpd) within the next two years, optimising the natural gas production from its South Pars gas field is a top priority for Iran. With an estimated 14.2 trillion cubic metres (Tcm) of gas reserves in place plus 18 billion barrels of gas condensate, South Pars already accounts for around 40 per cent of Iran’s total estimated 33.8 tcm of gas reserves – mostly located in the southern Fars, Bushehr, and Hormozgan regions – and about 80 per cent of its gas production.
The 3,700-square kilometre (sq.km) South Pars sector of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Dome) is also critical to Iran’s overall strategy to sustain natural gas production across the country of at least 1 billion cubic metres per day (Bcm/d), with Phase 11’s target production capacity being 57 million cubic metres per day (mcm/d), and to its corollary plans to become a world-leader in the liquefied natural gas (LNG) market.
Given the size and scope of Phase 11, it became a focal point of U.S. attention in the aftermath of its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and during the active re-imposition of sanctions toward the end of that year. “The pressure that the U.S. put on [French oil giant] Total [which at the time of its withdrawal in the middle of 2018 from Phase 11 held a 50.1 per cent stake in the US$4.8 billion project and had already invested around US$1 billion] was enormous,” a senior Iranian oil and gas industry source told OilPrice.com. “Its ruthless handling of Total was designed by the U.S. to show the E.U. [European Union] – which was trying to find a way to ignore the new U.S, sanctions – that, regardless of the E.U.’s efforts to avoid going along with the new U.S. restrictions on Iran, it had better do so, or else,” he added.
“On the eve of the signing of the next wave of financing for SP11, the U.S. Treasury Department telephoned senior bankers at the bank that was organising the money and told them that if the financing went ahead then the U.S. would instigate a full historic investigation of all of the bank’s dealings since 1979 to every country that had been blacklisted by the U.S., and it told the French government the same thing,” he underlined.
“The U.S. Treasury also said that all French companies would not win any major contracts with U.S. companies whilst Total stayed in Iran, but if Total withdrew then the U.S. would make a similar projects available to it to compensate,” he told OilPrice.com.
At that point, China National Petroleum Corporation (CNPC) automatically took over Total’s stake (of 50.1 per cent) in Phase 11 to add to its existing 30 per cent stake (with the remaining 19.9 per cent held by Iran’s Petropars) and was all set to continue with the development of the site, given the enormously beneficial terms that it was offered by China. Specifically, OilPrice.com understands, Iran’s Petroleum Ministry offered the Chinese a 15 per cent discount for nine years on the value of all gas it recovers, with this being the value of the gas as applied to CNPC’s cost/return formula against the open market valuation, with the net present value of the entire South Pars site at that time being US$116 billion (now it is US$135 billion, as exclusively revealed recently by OilPrice.com). Following this, CNPC said that, as a specific adjunct to SP11, it was prepared to use its ‘special’ banking unit - the Bank of Kunlun - as a funding and clearing vehicle if and when it took over the full operations of Phase 11 in line with its new 80 per cent+ stake. The Bank of Kunlun had – and still has - considerable operational experience in this regard, as it was used to settle tens of billions of dollars worth of oil imports during the United Nations’ sanctions against Tehran between 2012 and 2015. Most of the bank’s settlements during that time were in euros and Chinese renminbi and in 2012 it was sanctioned by the U.S. Treasury for conducting business with Iran. As the U.S. ramped up pressure on China in the Trade War, however – especially looking to increase sanctions on its most important technology companies, including Huawei – and with China already locked into the new supercharged 25-year deal with Iran, Beijing made a policy decision to take a lower public profile on project work on Iran’s high-profile oil and gas fields wherever possible.
Top of this list was Phase 11 of South Pars, so CNPC publically withdrew from the project in October 2019, having supposedly suspended further investment in it in December 2018. In reality, though, China’s activities on Phase 11 – and elsewhere in Iran and Iraq – did not cease but merely changed appearance into a less high-profile and therefore less U.S.-sanctionable form. “It was one thing for China to quietly ignore all sanctions that the U.S. had imposed on importing Iranian oil and gas, but it was quite another thing for it to blatantly put its major state companies on the ground in Iran at that point in the [President Donald] Trump administration when tensions were so high,” said the Iranian oil and gas industry source.
”At that time these included the U.S.’s sanctioning of China over its [alleged] human rights violations against Muslim minorities in the Xinjiang region, and the extension of U.S. sanctions against Huawei over cyber-espionage and technology theft concerns,” he added.
Consequently, China switched to developing Iran’s oil and gas fields – including the South Azadegan, North Yaran, and South Yaran oil fields, and the South Pars gas site – by engaging in a series of ‘contract-only’ projects, such as drilling-only, field maintenance-only, parts replacement-only, storage-only, technology-only, and so on.
“Most of these are being done through seemingly smaller firms that are less well-known than the big state players that attract little or no publicity but, as all companies in China are part of the state and are legally bound to work towards what they are told to do by the Communist Party, it doesn’t make any difference to the eventual outcome,” said the Iran source.
Neatly closing the circle on continued China involvement – through technology and financing right now – in Phase 11 is that Petropars is also the partner for the various Chinese ‘contract-only’ projects going on in South Azadegan.
As it now stands, then, according to comments last week from Reza Dehghan, the National Iranian Oil Company’s deputy chief executive officer for engineering, 40 such ‘contract-only’ work projects have been defined for the implementation of Phase 11’s drilling operations, following the installation recently of the first jacket near the zero-point of the border with Qatar.
“In total, the development plan of Phase 11 has 24 wells, two platforms and a gas flow pipeline to the coast, and the second platform will be installed in another location,” he said.
To this end, the Islamic Revolutionary Guard Corps-associated MAPNA Group has re-deployed an major offshore rig (MD-1) from the Soroush oil field to Phase 11 tasked with drilling 12 appraisal and later development wells in two stages. Stage one will comprise the drilling and completion of five appraisal-development wells, the installation of the SPD11B platform, and the initial production of 14 mcm/d of gas. Stage two will see another seven wells drilled and completed, in parallel with the initial production, which will increase the total rich gas recovery from the platform to 28 mcm/d before a further round of drilling in the third phase will enable full production of 57 mcm/d. According to Dehghan:
“The project was originally supposed to be financed by a foreign investor [but given] the existing conditions, the National Iranian Oil Company will tap internal instruments and resources like sale of participation bonds.”
As exclusively highlighted by OilPrice.com, these will include new sukuk offerings and, more importantly, new bond structures to be sold via China.