One of the three key priorities for Iran – along with completing all of the phases on its supergiant South Pars natural gas field and expanding its value-added petrochemicals sector – is to increase the crude oil production and exports from its West Karoun cluster of giant oil fields. The West Karoun fields together contain at least 67 billion barrels of oil in place and, with an average recovery rate currently of only around 4.5 per cent (compared to over 50 percent at similar oil fields in Saudi Arabia), the potential to dramatically increase Iran’s crude oil revenues is enormous. With China remaining a willing buyer for all crude oil that Iran wants to sell it, Tehran last week announced a swathe of initiatives aimed at completing the production-transportation-export chain for West Karoun oil flows.
To begin with, the first phase of the oil-transfer chain of the West Karoun oilfields - with a daily delivery capacity 460,000 barrels per day (bpd) of heavy crude oil and 254,000 bpd of light crude oil to export terminals was officially launched. The starting point of the transmission route is the West Karoun pumping station, the middle point is the Omidieh pumping station, and the Bahregan and Jask terminals mark the end stage of this transmission chain. With the development of Phase 2 of this project, which is currently underway, capacity will be created to transfer more than one million barrels of crude oil from the West Karoun oilfields cluster to export terminals.
At around the same time as this, the process for manufacturing the 42-inch gate valves compatible with sour fluids that are to be used in the pipeline to transfer crude oil from Goreh, in the Shoaybiyeh-ye Gharbi Rural District of Khuzestan Province, to the port of Jask, in the Hormozgan province on the Gulf of Oman, is now underway. According to a comment last week from the chief executive officer of the Petroleum Engineering and Development Company (PEDEC), Touraj Dehghani, 83 42-inch valves relating to the gate, control and emergency shut-off functions in the pipeline project are now being made domestically to ensure no delays occur due to ongoing U.S. sanctions. The Goreh-Jask pipeline overall includes the construction of a main pipeline of approximately 1,000 kilometres in length, involving the corollary construction of six smaller pipelines, five pump houses, three stations for receiving and sending pipeline pigs, 10 power stations, 400 kilometres of transmission lines, three single point moorings, subsea pipelines, and a stilling basin.
Once in Jask, the oil will be stored in one of the 20 storage tanks each capable of storing 500,000 barrels of oil, in the first phase (totalling 10 million barrels) for later loading on to very large crude carriers (VLCCs) headed from the Gulf of Oman, into the Arabian Sea and then on to the Indian Ocean. The second phase will see an expansion to an overall storage capacity of 30 million barrels, a senior oil and gas industry source who works closely with Iran’s Petroleum Ministry spoken to by OilPrice.com last week. These VLCCs will be accommodated in shipping facilities costing around US$200 million in the first phase, although the plans are to expand capacity to allow for further regular shipping of various oil-adjunct and petrochemical products in particular demand in Asia.
In addition, according to a recent comment from Hossein Azimi, director of the Pars Oil and Gas Company (POGC) that oversees developments at Iran’s supergiant non-associated natural gas field, South Pars, a single point mooring (SPM) loading system with a capacity of 7,000 square metres per hour of loading capacity recently arrived in Assaluyeh that would augment gas condensate loading capacity of the field. This SPM will allow for the handling of liquid cargo, such as petroleum products, for tanker ships. “There will be a few more of these installed in the south, in the Gulf of Oman, in the coming months, as they are very useful in areas where a dedicated facility for loading or unloading liquid cargo is not available,” the Iran source told OilPrice.com. These SPMs will operate in a similar manner to those of Iran’s neighbour, Iraq, in that they will be located many kilometres away from the onshore facilities, connected to them by a series of sub-sea pipelines, and able to handle the biggest of VLCCs.
This 42-inch pipeline is absolutely crucial to Iran’s ability to continue to circumvent U.S.-led sanctions against it and to expand its already considerable customer base in Asia, particularly China. “The logistical model Iran has at present is not sustainable in the current circumstances, with around 90 per cent of all of its oil for export currently loaded at Kharg Island – with most of the remaining loads going through terminals on Lavan and Sirri - making it an obvious and easy target for the U.S. and its proxies to cripple Iran’s oil sector and therefore its economy,” the source told OilPrice.com last week.
“Even before U.S. sanctions were re-imposed in [May] 2018, the Kharg terminal was not ideal for use by tankers as the narrowness of the Strait of Hormuz means that they have to travel extremely slowly through it, meaning that the transit cost increases, there are delays in revenue streams, and they are easy targets for even simple attacks,” he said. “Conversely, Iran wants to be able to use the threat – or reality – of closing the Strait of Hormuz for political reasons without also completing destroying its own oil exports revenue stream,” he added. This is why, he underlined, the Goreh-Jask pipeline is likely to be completed well before the official deadline of by the end of this Iranian calendar year that ends on 20 March 2021.
In order to maximise the initial impact of this new export route on Iran’s highly-pressed finances, Iran wants to increase the collective output from the main West Karoun oil fields - North Azadegan, South Azadegan, North Yaran, South Yaran, and Yadavaran – by at least 500,000 bpd. This increased output figure was part of China’s agreed obligations under the 25-year deal agreed between Iran and China last year, and updated recently to include a major military element, as exclusively revealed by OilPrice.com.
Although public outcry in Iran following the revelations of the 25-year deal forced China to publically throttle back on its headline development of various West Karoun fields – most notably, perhaps, Sinopec and China National Petroleum Corporation (CNPC) from North Azadegan and Yadavaran - the reality is that China is just as involved as ever but using the cover of separate standalone contracts for specific work. This operational template was most recently used to disguise China’s involvement in South Azadegan and Yaran (North and South) in the West Karoun oilfields cluster.
It is also the template being used in a number of the 13 projects announced last week aimed at adding over 185,000 bpd to Iran’s oil production capacity by the end of 2022. Although these project deals were signed, on the face of it, with domestic Iranian companies, the 13 projects were part of a wider package proposed back in 2016 to increase production capacity by at least 280,000 bpd from 33 fields. The proposal came after the visit of Iran’s Foreign Minister, Mohammad Zarif, to his China counterpart, Wang Li, during which both sides signed the original 25-year road map for the China-Iran comprehensive strategic partnership. The smaller and larger package of deals together will comprise at least 165 new wells being drilled across these fields and the repair of at least 71 existing ones, with essentially unlimited Chinese funding available and multiple Chinese firms working across the projects on the aforementioned standalone contract-by-contract basis, according to the Iran source.
Effecting an increase of 500,000 bpd from West Karoun’s oilfields should not prove difficult for China. Together, the major fields in the cluster are currently producing around 350,000-375,000 bpd but this is based on the extraordinarily low recovery rate of around 4.0-4.5 per cent at pay in the fields. This compares to an average recovery rate of at least 50 per cent in similar Saudi Arabian fields, with realistic plans there to raise this to at least 70% within the next couple of years. “Given that the average lifting cost per barrel of crude oil in Iran – a proxy for ease of extraction - is almost exactly the same as in Saudi Arabia, there is no reason why the recovery rates should not be almost exactly the same as well,” said the Iran source.
“In fact, before the U.S. withdrew from the JCPOA [Joint Comprehensive Plan of Action] in [May] 2018, a number of international oil firms looking to become involved in Iran provided detailed and realistic plans to the Petroleum Ministry of how they could increase the average recovery rate in the West Karoun fields to at least 12.5 per cent within the first 12 months, then 20 per cent the year after, and then up to 50 per cent over the following five years at most,” he concluded.
