January 2017, Vol. 244, No. 1

General

Iran’s Strategic Course Back onto Global Stage

With the lifting of nuclear-related sanctions last January, Iran is slowly getting the wheels of its economy moving again, according to a study by engineering, services organization Lloyd’s Register.

Contributing about 25% of the government’s budget 2016, the oil and gas sector remains a major source for revenue and employment and has an undeniable role in the reemergence of the Islamic Republic. Having played a diminished role in global oil markets during what has been a grueling sanctions environment, Iran’s fortunes are changing and its oil machine is reawakening.

Since last January, Iran has made rapid gains, boosting crude exports to 2.3 MMbpd from 1.3 MMbpd a year earlier, returning market share lost and providing valuable additional revenues at a time of slumped oil prices, Lloyd’s study said. The flows should continue as further crude shipments head to European ports.

Overall production is 3.5 MMbpd and aims to reach 5.7 MMbpd by 2020. Progress is impressive, but to move to the next level, state oil and gas companies and their subsidiaries must pursue best practice across their operations as they re-enter a highly competitive market. The goal is to focus on streamlining operations and seek efficiencies to boost output further. This will require attention to training, adopting international standards to further competency and the harnessing of knowledge to develop enhanced oil recovery (EOR) methods in partnership with outside parties.

The Iranian Petroleum Contract (IPC), once implemented, will lead Iran in revitalizing its oil and gas industries by attracting international involvement in the 18 exploration blocks and 52 oil and gas field development projects to be tendered shortly. Designed to replace the Buyback agreements, the contract will form the basis of Iran’s oil-production market, adding investment, expertise and knowledge transfer.

Work began on the IPC soon after President Hassan Rouhani took office. In contrast to Buyback 1 agreements, this contract has a mechanism rewarding operators with higher fees for greater risk for both onshore and offshore fields. The framework of the IPC contract faces some resistance among conservatives concerned whether it is in line with the constitution that forbids ownership of national resources.

Executives and managers who attended a seminar hosted by Lloyd’s Register in Tehran which focused on maximizing operational efficiency for enhanced oil recovery showed frustration the IPC hadn’t yet been introduced. Views reflected Iran’s unique situation, the considerable burdens it has faced in recent years, the resourcefulness of technicians and engineers and the need for major investment to update infrastructure, particularly pipelines. Clearly, the difficulties aren’t yet over. But engagement with entities overseeing its significant oil and gas reserves is progressing.

Surveying the Scene

For Iranian and non-Iranian energy officials and engineers, the potential is all too clear. Iran kept its oil sector functioning throughout major challenges, including the Iran-Iraq war in the 1980s – culminating in severe damage to its oil infrastructure – and sanctions imposed post-2011 – when crude exports were more than halved. The infrastructure is in need of major modernization if it is to reach its full potential.

That is the attraction for outside parties who can offer a wide variety of technology, expertise and knowledge in oil and gas exploration, production and transportation. For Iranians at home, the hope is that foreign investment will breathe new life into their creaking economy and offer a more prosperous future.

Armed with many top-class engineers, vast oil reserves, the second-largest gas reserves in the world and a hard-fought nuclear agreement, Iran can regain its place in the international community. These early days are ones of transition. It is not idealism that guides the way forward but realism. Iranian oil executives and senior managers are well aware of limitations, whether bureaucratic, political or financial, but agree progress is being made.

An audience survey at the seminar showed 51% of respondents believed plant equipment and operational processes were “adequate” and could still get the job done while 27% said these were outdated. In another question, 43% recognized equipment across the oil industry needed to be replaced, while 57% opted for equipment upgrade, arguably in recognition of the limited investment capacity available.

A consensus (92%) agreed on the need for aligning operational standards to an international level, especially among upstream technicians and engineers to further competency and ultimately boost production. Further training and certification is recognized as a key barometer in controlling equipment failure downtime. Yet, with such a difficult financial environment, skepticism remains as when enhanced training will be available.

Attendees felt strongly that the IPC would be the harbinger of longer-term strategy and commitment through the introduction of capital expenditure on longer term projects that will help to protect assets while extending Iran’s capacity to provide energy to its own population and elsewhere.

But the big question remains when? In recent months several major IOCs have announced memoranda of understanding over prospective developments, important indications progress is being made, though the pace of activity remains slow.

While creases in the IPC are ironed out, there is no shortage of attention needed on Iran’s aging brownfield sites which have served so well in recent decades but which are now in need of applications to improve recovery rates that have sunk substantially through reservoir depletion. With investment tight, it was acknowledged that investing in such applications today will pay greater dividends than any large-scale investment on greenfield sites.

In gas terms, Iran uses 34 Bcm of natural gas a year to re-inject into oilfields to prevent pressure drops and maintain recovery rates, an amount that will continue to rise as depletion rates rise. The country has ever larger domestic needs to meet while hoping to become a major gas exporter. Despite this, the increasing use of gas for oil field reinjection had the broad backing of Iranian executives and managers in an indication it can continue to boost gas production. Now producing 700 MMcm/d of natural gas, Tehran plans to push that to 1.2 Bcm by 2020, extending the provision of natural gas for industrial and domestic use.

With Iran’s EOR applications lagging behind other regional oil producers, there is a growing emphasis to develop and apply methods in partnership with outside providers. The Ministry of Petroleum has signed MoUs with companies to work together on EOR methods. Despite significant heavy oil production in Iran, the majority view was that the latest heavy oil recovery technology was not a priority for the state oil companies and subsidiaries to secure.

EOR methods will become pervasive in Iran and the key issue is developing methods that optimize efficiency on specific reservoir structures. That takes ample research, knowledge and collaboration. Though obstacles remain, Iran is moving in the right direction and clearly sees a crucial opportunity to break away from conventional thinking and innovate for its own benefit and that of the wider oil industry.

Valuing Competency

While investment in infrastructure projects and expertise, along with the efficient and strategic use of EOR techniques will help achieve Iran’s short-term oil production targets, what is not emphasized is the role needed to improve competence, enhance standards and the clear benefits of certifications These play a part in helping drive efficiencies and feed into meeting increased output targets.

As Iran reopens its doors, there is ever greater need for state oil and gas companies and their subsidiaries to increase training and competence levels to globally recognized standards for joint collaborations. Without standardized competency, managers may struggle to define clear goals for operational teams with the net result that partnerships and other collaborative efforts may be hampered, if not jeopardized.

Iran will inevitably benefit from increased training and awareness, competency assessment and certification to help staff across a wide range of operations work more efficiently. Instilling international standardization will attract external partners back to the country. By not addressing these issues operations can be interrupted by equipment and systems failures. Performance is affected by a lack of competence or experience of personnel. Whatever the interruption, such setbacks often result in non-productive time affect efficiency and output. This needs to be addressed, especially in oil and gas where downtime or non-productive levels are much greater than in other sectors.

First is obtaining the right people across the board in a company, from top management to entry level. Talented individuals create the conditions for better performance. The oil and gas industry is enabled by costly infrastructure and huge investment, but this is nothing compared to the paramount importance of those who operate it. Without skilled staff little can be achieved.The Middle East lags behind other regions in international standardization. The International Organization of Standardization reports over 1 million certificates were issued in 2014, only 13,000 of them in this region where there is a tendency to regard international standards and certification as a luxury, not a priority.

From Iran’s perspective, until recently such applications came second to maintaining oil production and exports in the face of sanctions. Authorities had to take on greater risk but circumstances are changing and with sanctions relief, external providers can now offer their assistance in fostering a culture of best practice.

Improving training and competency fosters safer, more efficient systems and greater output that will help Iran to meet its ambitious targets. We are still in a period of engagement and there remain many considerations for external companies to take into account before working in Iran. And it is not a question of telling Iranian companies what they should be doing.

Iranian engineers best know their reservoirs and is why the oil and gas companies must explain their requirements in detail. This will enable external partners to share their experience and bring best value. Ultimately, when partnerships are developed and teams work together, when expertise is offered and knowledge is shared, the wider world will see just how much progress can be made and how quickly.

The IPC will provide impetus for improving competence and benchmarking standards. With dozens of exploration blocks and developments on offer, international standards and competency certification are key in building joint comprehensive management systems for project development. In turn, that will help Iran rehabilitate its energy industry and regain its place in international markets. Many agree Iran’s oil and gas reservoir structures are among the world’s finest and that it is possible it can transform those markets with the right choices.

Inevitably, there is no shortage of excitement about Iran’s future prospects among international oil companies (IOCs) and other external operators keen to offer their services. Whether development projects are greenfield or brownfield, the priority s to optimize production so that operations aren’t just producing efficiently today and tomorrow, but throughout the lifespan of every reservoir.

Iran’s need for optimization is abundantly clear. The average recovery rate from Iranian reservoirs is estimated below 25%, in part due to carbonate-fractured reservoirs, which pose challenges to recovery. Add the fact that its aging fields have natural decline rates of between 8-11%, according to the U.S. Energy Information Administration (EIA), and major revenues are lost. Iranian officials have said a 1% rise in the recovery rate of reservoirs will generate $700 billion in additional revenues over the lifetime of reservoirs.

In the starkest argument for optimization, Iran’s oil reserves are estimated at 650 billion barrels but only 150 billion barrels are regarded as recoverable. But what if Iran could extract a further 200 billion barrels of those reserves? It’s a big request, but some believe it can be done if the right EOR and improved oil recovery (IOR) techniques are applied. Iran’s state oil and gas companies are only too aware of this. Since 2009, Iran has been injecting natural gas into the Aghajari oil field in southwest Iran to enhance crude recovery. There have been precious few other EOR applications launched since, one of the many effects of the sanctions. Since 2013, research teams are working to develop a wide range of oil recovery methods.

Renewed emphasis on research and strategic thinking will provide the solutions that Iranian energy officials need to develop policies and secure oil reserves as a long-term asset. Officials regularly talk about their concerns of rising depletion rates and their duty to protect natural resources for the future. This is realistic thinking. Future prosperity in part rests on the effective stewardship of Iran’s oil and gas resources.

The IPC has been developed to address the shortfalls, especially in relation to joint development with IOCs. Iran’s Buyback agreements have not been very popular. Coupled with onerous financial responsibilities, external partners were forced to drive production as fast as they could to make their investments worthwhile, a pattern that has contributed to inefficient long-term output and recovery rate depletion.

The IPC is set to offer a longer-term contract of 20 years with possible extensions. This is what Iran needs to develop its natural resources in the most sustainable way. IOCs will feel more comfortable about putting in place longer-term investment plans and about sharing and transferring knowledge.

As a key step toward achieving sustainable production, Iran must embrace best practices to ensure that efficiencies are enhanced and losses are minimized. At the core of best practice is independence of thought and not simply relying on partnerships with IOCs. Technical partnerships with other service operators will provide Iran with better understanding on the latest developments in the industry and avoid over-reliance on any single external partner.

Knowledge partnerships with academic institutions are key. Iranian state companies already have strong links with its leading universities. In optimizing production, knowledge is paramount and Iran has no limits on that score, possessing an incredible richness in highly qualified and experienced engineers and geo-scientists. .

Inevitably difficulties will arise in the years to come but considerable progress has already been made. Over the last three years, solid ground has been laid. Iran is already winning back international oil market share and boosting natural gas production, helping it reshape the regional energy map and again become a major international player.

To build on this, it will want to show it can create efficient new infrastructure systems and projects in tandem with outside expertise, innovation and technology to exploit its resources in the most sustainable way possible for decades to come.

Editor’s note: This article was prepared before 2016 U.S. presidential election.