The world’s largest gas reservoir is at a tipping point

Iran is embarking on a $70 billion investment program to try to stem a dramatic drop in output from its crucial South Pars gas field. Failure to do so will result in the loss of 40 percent of the country’s gasoline production from the Persian Gulf Star gas condensate refinery and the addition of up to $12 billion a year in petrochemical costs, according to forecasts from the Iranian Gas Institute. “South Pars gas production provides almost 80% of (Iran’s) total gas production, so it is vital for all segments of business and society that it does not drop significantly,” a senior energy industry source who works closely with Islamic Republic. The Petroleum Ministry exclusively said OilPrice.com last week.

In broad terms, the South Pars site covers 3,700 square kilometers and holds approximately 14.2 trillion cubic meters (tcm) of gas reserves plus 18 billion barrels of gas condensate. In addition to generating 78 percent of the country’s gas production, it also accounts for about 40 percent of Iran’s total estimated 33.8 tcm of gas reserves (mostly located in the southern regions of Fars, Bushehr and Hormozgan). Essential and in the current context is that it is part of the two that constitute by far the largest gas reservoir in the world, with 51 tcm of reserves. The other is Qatar’s 6,000 square kilometer North Dome (or “North Field”), which is the cornerstone of its status as the world’s leading exporter of liquefied natural gas (LNG). Related: Libyan central bank hijack highlights oil rivalry

Iran has divided South Pars into 24 phases for development, with broad production targets ranging from about 28 million cubic meters per day (mcm/d) to about 57 mcm/d – the latter a target for the controversial stage 11. After the Joint Comprehensive Plan of Action (“JCPOA”, or colloquially “nuclear deal”) was implemented on January 16, 2016, France then Total renewed its 2009 commitment to develop the phase, which had been dropped in 2012 as the EU stepped up sanctions. against Iran. The French oil and gas giant held a 50.1 percent stake in the Phase 11 project, ahead of China National Petroleum Corporation’s 30 percent stake and a 19.9 percent stake in Petropars, a wholly owned subsidiary of the National Petroleum Corporation. Iranian oil. Total quickly invested about $1 billion in the phase and made progress on the site until May 2018 saw the US withdrawal from the JCPOA, as fully discussed in my new book on the new global oil market order. Given the size and scope of Phase 11, it became a focal point of Washington’s attention after the withdrawal and put the French under extreme pressure to withdraw from the project. Under the terms of the contract, CNPC then took over and little progress has been made since then.

This provides a microcosm of what has happened to Iran’s oil and gas sector since then. The key problem in replacing leading Western oil and gas firms with Chinese ones has been that the latter lack the latest technology available to the former. The same is true for Russian oil and gas firms that have been denied much of the same technology through various sanctions since they invaded Ukraine’s Crimea region in 2014. According to assessments by Iran’s National Development Fund, gas production of the country will drop by at least 25 percent over the next 10 years due to reduced pressure in the fields, with South Pars seeing a 30 percent drop.

To try to remedy this, in March Iran’s Oil Ministry agreed to a $20 billion program with various local firms to build 28 massive rigs to increase pressure on the South Pars site. However, little progress has been made on these, as neither domestic companies nor their Chinese and Russian backers have the necessary technology and know-how. The latest program to be announced by the Petroleum Ministry – the drilling of 35 new wells at the South Pars site – appears geared towards maximizing production from the field as much as possible, rather than addressing the root causes of the pressure drop and trying to slow them. Indeed, according to official statements from the Ministry of Petroleum, the new well is intended to increase production from the site by 35 million mcm/d over the next three years. “Part of the problem is the geology of the site, with a natural drift to the Qatari side in more places than the Iranian side,” the Iranian source told OilPrice.com last week. “But another part has been the many clumsy attempts by local contractors to optimize extraction over the years without thinking about the long-term consequences,” he added. “There are several examples of areas being drilled incorrectly, which has weakened the surrounding structures, so drilling 35 new wells after they’ve done that is likely to make it worse,” he said.

With that in mind, Iran is looking to China to increase its pressure on Qatar to take a more cooperative approach to developing the two halves of the supergiant gas reservoir, the source added. “Qatar had a moratorium on gas production from its own North Dome field from 2005 to 2017, during which it often accused Iran of drilling activities that eased pressure on that side and called on China to intervene on its behalf with Iran , which he did. “, the source told OilPrice.com. “At that stage, in early 2017, the two sides (Qatar and Iran) sat down and agreed to work together to ensure the sustainability of the site, so Iran now wants the same assurance from Qatar,” he added.

This is all the more urgent on Iran’s part as Qatar is now embarked on its own drive to dramatically increase its output from the North Dome. Emirates’ expansion program will see six major new developments in the North Field East (NFE) and North Field South (NFS) by 2029. Four new “trains” (production facilities) – each with 8 million metric tons per year ( mtpa) – will be built at the NFE site and two (with the same production capacity) at the NFS site, totaling 48 million mtpa of new LNG production. In late February, QatarEnergy announced another set of projects – focused on the North Field West (NFW) – that will increase its LNG production from the current 77 million mtpa to 142 million mtpa before the end of this decade. This compares with 404 million mtpa of LNG traded globally in 2023 and industry estimates that this figure will reach around 625-685 million mtpa in 2040.

Iran’s problem in all this is that while Qatar is famously diplomatic in its dealings with both East and West, pressure from the US and its allies to bring the emirate into their sphere of influence has intensified since Russia invaded Ukraine on 24. February 2022. Before that, he spent the previous year busy signing huge long-term LNG contracts with China, as fully analyzed in my new book on the new world oil market order. With extraordinary foresight – or something like that – Beijing knew in advance that a major global event would result in LNG becoming the world’s emergency energy source very soon. As a result, competition between the US and its allies and China and its partners for future long-term LNG contracts from Qatar has been fierce. It is likely to remain so, with major oil and gas company Shell forecasting that global LNG demand will increase by more than 50% by 2040, even without any major new conflicts (such as in Taiwan) in the next few years.

By Simon Watkins for Oilprice.com

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