Gholamreza Manouchehri is a quite well-known figure to local and international E&P companies. Being the Deputy Manager of the National Iranian Oil Company (NIOC) for Development and Engineering, he is in charge of all the development plans for Oil and Gas fields in Iran and an influential manager in IPC negotiations. What follows is an exclusive interview with Drilling Magazine on the latest updates of Iran upstream petroleum industry.
How do you evaluate the new Iranian Petroleum Contracts (IPCs)? In your opinion, regarding to the signing and execution of these contracts, what will we face during this year?
A series of preliminary work such as the signings of Memorandums of Understandings (MoUs), studies, and meetings between companies have been carried out so far. Working groups between the respected companies responsible for the reservoir studies and us have been established and many of the fields have been studied. Work has been done on preparing the content of the contracts as well. At the moment, 10 contractual, legal, technical and economical working groups have been established. 10-11 local companies are being active. A number of fields are either close to being offered in tenders, are currently being negotiated, or will be addressed in the future. Overall, a sequence of activities is moving forward and the foundations of the activities, to some extent, already have been established. The contract for Phase 11 of South Pars will be the first to be realized.
We will continuously move forward on this track. From the international companies’ points of view, however, a return to sanctions is the largest concern possible. It seems that we need a national dialogue that can bring together the respected proponents and opponents, MPs, and regulators. It is obvious that we are not advanced in the field development. We should follow our national interests and seek the conditions that will enable our development. We also need to determine what field developments and contract models benefit our country’s national interests. This subject has been mostly resolved within the country; however, it is better to continue these compelling activities.
A number of controversies and disagreements with regards to these contracts still remain. For instance, one believe emphasizes that we should preserve our resources for future generations. However, this believe in the modern era is not acceptable and is considered to be an excuse to cover our inabilities in developing and producing our fields. These issues must be resolved. We need to first determine at what level our capabilities stand at, and then take the next necessary steps forward. During these national debates, it must be determined how should these contracts be arranged, how well can the contracts guarantee our national interests, how capable are we in financing these projects, what are the best ways to develop Iranian companies, etc..
In recent years, the oil industry has faced a number of uncertainties. What are the country’s best interests in this area? The logic behind many of these believes; violate the original objectives of national interests. These issues must be brought into the spotlight. In order to reach our deserved place within this industry, we must first arrive at this national consensus.
Is it possible to sign any other contract other than Phase 11 of South Pars in 2017?
Yes, it is possible that a number of other fields to enter contracts negotiations phases. In addition to Phase 11 South Pars offshore, South Pars Oil Layer (SPOL) contract negotiations may also reach a conclusion.
It seems that most companies are interested in developing green fields. In your opinion, what are the reasons behind it?
I do not believe such a tendency exists. Everything is in accordance with our planning and our first objective is to increase the recovery factors of both green and brown fields. For instance, Azadegan field is no longer a green field and our goal is to increase its recovery factor from 5.5 % to 20 %. This is our objective for other fields as well. As another example, in the South Pars Oil Layer (SPOL) where EOR and IOR methods have been implemented from the beginning, a lack of implementing these methods would decrease the production within 6 months.
Fortunately, production from South Pars Oil Layer (SPOL) has been started with the rate of around 25,000 barrels per day. The aim of these contracts is to increase the recovery factor of reservoirs. For sure, reservoir production will be meaningful at the end of contract. For example, if our goal is to reach 20 % of recovery factor, this will achieve at the end of contract. Therefore, we have no choice but making long-term contracts; as EOR techniques must be implemented continuously during the contract.
As you mentioned Azadegan field, what is the new production scenario for the first phase of South Azadegan? What is the estimation of total oil production from Azadegan fields?
The first phase of North Azadegan produces 85,000 barrels of oil per day. Current production of South Azadegan is around 70,000 barrels per day. Total production of around 300,000 barrels per day had been considered for the whole field. However, our new production target is about 600,000 barrels per day for the whole field. If we continue activities in this field, we will reach to our ideal target of cumulative total production at the end of the contract period, although, this is not the end of the reservoir’s life and it will continue production at least for twenty years more.
As you know, the international crude oil price is down nowadays. Without considering IPC, what are the NIOC plans for low oil price era?
The international effect of low oil price was to stop the expensive oil production (for example deep sea oil production). However, Americans have been able to extract shale oil even by considering the fact that we are in the low oil price era. Currently, shale rigs are increasing and there is a claim that they are able to continue working with the oil price as low as 35 $ per barrel. This is not good news for the conventional oil industry. This high capability of shale oil production is shocking and has made the entire world wondering. However, there are two sorts of ideas about this subject. For instance, natural gas price in America has decreased to 2.5 $ per each million BTU, while there had been a time which it decreased to 1 $. This situation is not desirable for a company like ExxonMobil which is a partner of Qatar gas resources. Even though this company is American, this issue is not really predictable. On the other hand, this has been said that these resources are limited, but by technology development, they would be able to discover deeper zones. This capability of shale oil recovery, management system, and financing is only available in America and this may be annoying for others.
After all, fortunately, our oil resources are low cost to produce. Even recoveries, which we are talking about, are reasonably low cost as well. As an example, the final production cost for our green reservoirs is about 7$ per barrel, and even by implementing more advanced production technologies, it would be as high as 10 $ per barrel. Iran, Iraq, and Gulf of Mexico (to some extend) can mostly produce low cost oil in the world. Yet, in our new contracts, a cost stop has been considered that the production company cannot receive more than of a defined percentage of oil production income. This percentage is defined to be 50% and 75% for the oil and gas fields, respectively. The cost recovery period would be around 10 years. However, if there would be new investments, the recovery period could extend. Anyway, these contracts are still attractive for foreign companies, although there are discussions about Farzad-B and South Pars Oil Layers (SPOL) fields.
The problem we are facing in the oil industry is management. It seems that it has been forgotten that the oil industry deal with difficulties in the world and also the low oil price era may also has been finished in our country as well. Therefore, it is really hard for us to continue. The reason for 5 billion $ NIOC’s debt to National Development Fund of Iran (NDFI) is due to the fund shortage of NIOC. This fund shortage is because of the low 14.5% share of NIOC from oil sales income. Today, NIOC’s share is just enough for oil production and fields maintenance. In the past, Iranian fields were produced by their own natural reservoir pressure, while, it is not going to be the same in the future. To continue production, we have to work harder, and utilize modern technologies and skilled man power.
We need to hire experienced foreign engineers and also train our young engineers. Cost of oil production increases therefore we need to be more intelligent about it. As you know we had reached to produce 6.5 million barrels of oil per day before the Iranian revolution (1979) and we were competing with Saudi Arabia. But, the ratio of production to reserves of Saudi Arabia is higher than our ratio nowadays and other countries like Russia and United State of America also have much higher ratios than ours. This shows that we have only been able to produce from the reservoirs under natural depletion. Compared to past, our current oil production has decreased from 6.5 to 4 million barrels.
If we want to use our natural resources in better way and complete our oil chain, we should allocate larger share of oil and gas revenue to the oil industry. We need to renovate all the rusty structures. After that, we need to increase the recovery factor and define EOR projects. A new era of production in oil fields using high technology is needed; unfortunately we have isolated ourselves with building walls around ourselves. We need to perceive the new situation. Our oil industry has a big potential as oil production, oil industry chain and also oil & gas petrochemical industry inside the country. This potential exists in our oil industry and it can hire our professional human work resources. We can flourish this industry and increase the country’s economic growth as well and we need to benefit from it before oil loses its efficiency and attraction. According to the world energy consumption statistics, the share by fuel is: oil 25%, gas 25%, coal 25% and new energy resources 25%. New Energy resources find their ways in the world and solar energy competes with oil in the electricity production. In addition, there have also been some new limitations in the hydrocarbons consumption. Considering all above challenges, we have to take a really big step in the oil & gas industry.
There is a large gap between Iranian E&P companies and international ones, especially in financing. What are your plans to develop and empower local E&P companies?
Our main problem is NIOC’s lack of technical development compared to international oil and gas companies. Our local oil and gas companies are still implementing standards and algorithms belong to before the revolution and the consortium period.
The E&P companies can take our oil industry out of the exclusive hands of a singular company. If there is a chance for them to develop, they can cover a number of weaknesses, hire young and elite human resources, work mutually and learn from foreign companies. However, most of these companies are semi-governmental, and their policies may change with management change and so they may not be able to follow a consistent policy for a long period of time. Nevertheless, these companies are going to work along foreign companies that they have to transfer new technologies. As an example, Petropars Co. with the promotions of previous experience of working with international companies could finish different phases of South Pars and get promoted to a strong company.
Conclusively, it is possible that a number of companies grow in our engineering section. Sanctions are really irritating though. Before sanctions, NIOC was about to start projects in Venezuela and Africa and there were great opportunities there. This is the basic way of developing and all companies got developed by having a mutual cooperation with the world. Our potentials are so high but they can improve through reasonable imitation and interaction. Our reservoirs are capable to force foreign companies to transfer new technologies. And for sure, we do not have any problems with the number of E&P companies, but there is a possibility that these companies would be merged. One of the most effective ways that I have recommended is that developments of small fields be awarded to Iranian companies; Another solution, is that governmentally owned company could be transformed into some small companies, or transferred to private section by stock exchange.
The oil industry has many problems in the drilling sector, including low efficiency. As 60 % of companies that own rigs, including National Iranian Drilling Company (NIDC) are governmental, and as many small drilling contractor companies exist, what are your ideas on improving the efficiency of the drilling industry in terms of reducing time and costs?
Our role as the client to define the terms of the tender is important. For instance, the contract can be written in a way that instead of having a daily rig rental system, well activities must be completed in a specific time period. Furthermore, competitions must be much more realistic. Real competition means allow for the foreigners to compete. In today’s competition environment in Iran, no one honors their obligations. Our most deficiencies are in the area of client. NIOC as a client does not operate well. Client’s obligations include defining relevant tender, work, duties, financial resources, controls and supervisions; we however lack almost all of them. For example, NIDC offers a low price, but it cannot carry out the task. To generate fair completion, the client must impose relevant policies and implement them. For instance, the contracts signed during the ninth and tenth presidency terms in South Pars, were EPC contracts where the client was responsible for all risks, e.g., the risk of providing the commodities. Moving forward and to develop the country, we need some wise and smart clients.
Regarding the drilling services, one solution could be to replace daily rig rental with EPD contracts. On the other hand, it seems that the era of EPD has expired. Therefore we should return to EPC, where such contracts have been offered by IOOC. Are you considering these types of contracts for National Iranian South Oil Company, Iranian Central Oil Fields Company, etc. as well?
The fields must be developed by considering risks for the companies. Throughout different development phases, for example during drilling, it must be stated how the job should be given to the local as well as foreign companies. Iranian companies should step-by-step coordinate themselves with international standards. To preserve production, we may sign the contracts via EPCF format. In this case, our contractor can be an Iranian consortium within the framework of EPCF. However due to obligations, they are required to follow more discipline. It is planned to implement EPCF contracts across all companies with most applications at National Iranian South Oil Company.
Have there been any offers for “Buy-back” contracts?
Yes, in some case. I believe that the Buy-back contract model would be suitable for a number of our fields; especially those gas fields where the production rates are constant for 10 to 15 years (e.g., Farzad B field) and we have no plans for their secondary production. From a financial point of view, the best contract model is the EPCF, where a contracting profit is given to the contractor in addition to an interest that accepts the risk of reaching production capacity. But, under Buy-back, in addition to the interest, another interest is considered for the company to accept possible risks, although in Buy-back contracts, it is possible to bargain and reduce these (rem) interest rates. In the new method, we follow the field performance, and should pay an amount to the companies, that when multiplied by the barrel, it will be equivalent to the rem. Therefore, depending on the fields-, contractors-, and financing-circumstances, we would select one of the contract models, and no unique model will be considered for all cases.
What is NIOC’s plan for developing the small fields that have not been considered in the IPC?
Many of the fields available for development have not been offered so far. A large number of these fields exist, and because our management capabilities are limited and NIOC is not able to handle large volumes of the work, it is better to begin with the larger projects. The daily production of a mage project such as the Azadegan field which is around 600,000 barrels per day is equal to the production of nearly 60 small fields. However, the time and effort that it takes for NIOC to develop this large field is less than what it takes to develop the 60 small fields. Therefore it is logical to give priority to develop the large fields compared to small fields; however, it is definitely required to begin developing these small fields as well.
Finally, under IPC, there is no limitation for the fields; it may include large as well as small fields, and the number of fields must increase in time. I generally believe that thousands of local as well as international upstream and downstream service companies must be activated. In the Kurdistan region of Iraq, around 900 local and international subcontractor and service companies are active in the oil & gas sector. These companies do not include manufacturing companies. In the territory of IOOC, there are a large number of small oil fields that due to their poor economic values have been ignored. However if our equipment are updated, they will become economic for investment and development. The solution is to reach to a national solution. The solution is to reach a national agreement. Our oil reserves resemble gold mines and they must be discovered. A large amount of activities must also be carried out to update our surface facilities, an example would be the flaring of gas.
What is the maximum rate of interest in the contracts?
It depends on the contract. Regarding the National Development Fund, it is around 6 to 7 %; for the Chinese, the rate is 8 %. In the IPC, we have designed the interest formula with Total be a maximum of 2.5 %. To date, the National Development Fund has taken the largest steps in the oil industry. This organization is credited for the development of the South Azadegan, Yaran and Azar fields. Fortunately, all debts for this organization are paid off in one or two years. For instance, they have begun paying of the debts for Phase 19of South Pars and we are paying off the loans we have taken for Azadegan. Our next issue is the lack of sufficient resources in the National Development Fund. If for instance, we would like to invest in 2 years an amount of 80 billion USD in the oil and gas industry, the National Development Fund is not able to pay off even 20 % of this amount, i.e., 16 billion USD. The other issue is that in order to activate our investors in the country’s oil and gas sector, we need to increase the added value of our local investments in the country’s oil & gas industry. By defining profitable work packages, we need to make this industry attractive for investors.