Investment in oil and gas fields; a necessity toward development | Drilling Magazine

Investment in oil and gas fields; a necessity toward development

HE, Rokneddin Javadi is the deputy minister of Petroleum in supervision on hydrocarbon reservoirs and former CEO of National Iranian Oil Company (NIOC). He, among the others, has the most updated data on the current situation of the matters regarding the oil and gas reservoirs of the country.

 

The black gold is the main part and a power source to Iranian economy. Thus, oil price fluctuations affect Iran’s economy significantly. As the first question, what are the consequences of oil price decrease over the recent years on this strategic industry in the world and especially in our own country?

Generally the fall in the price of oil has two major consequences for countries: first, it reduces the income of countries, and second, it restricts the development of the country. Then those who are involved in the development of the country’s economy are affected. All the manufacturers and developers in the industry have to lower the prices for goods and services, as the supply becomes more than demand. As a tangible example, this happened for the rigs; as the daily rental of the rig fell by one third by the reduction in development investments. Countries move toward lowering costs to reduce the expenditures. The oil price lowering consequences extends in global, regional, and local scales, slow down.

As a result, new projects were not defined in the country and all the attention was paid to the completion of ongoing projects, so that limited available capital could be used on these projects with the most efficiency. This was an immediate effect, while its long-term effect is the oil production decrease, where fuel consumption does not decrease as much as production. The reduction of production is due to two main reasons; one is the difference between production and consumption, and the other is natural fall of production in the oil and gas fields. This results in a direct impact of increase in investment to develop and increase production as the oil prices increase. It is more or less similar to Mark Twain’s theory of the civilization development goes up and down which has happened many times for the economy.

What are the plans of Oil Ministry to manage the effects of oil price reductions on current  and future processes and projects in Iran oil industry? What are the short-term strategies?

As I said, the most important immediate effect of the oil price reduction is reduction in investment amount. While project implementation costs have declined over time, particularly in drilling and related services, the CAPEX and OPEX did not go down significantly. Therefore, the Oil Ministry found two solutions; the first was to prioritize the development and completion projects to maximize the efficiency of investment and available capital, the second was to revise project financing structure. In this context, it was focused on reforming the laws and using the National Development Fund, which financed the development of South Pars and West Karoun oil fields. Some projects were defined as “EPCF “. The BOO and BOT projects were launched, as well as investments by the private sector in the refining gas condensate surplus in Asalouyeh.

What is the framework for the rule, ownership and management of oil resources in Iran, according to the rules of the country regarding the ownership of oil resources? What steps should be taken in the area of oil sovereignty and what is the current definition of this issue? How much can the pattern of other countries (e.g. Norway) be used or can it be used at all? What is your directorate’s role in this regard?

Your question has two parts: one is how the development and production of the fields will be, and the other is what our law does in this regard. According to The Oil Law, oil is considered as public wealth and it belongs to the nation and is managed by the Islamic government according to Article 45 of the Constitution. It has been entrusted to the government for the administration, and the Ministry of Oil on behalf of the state. However, it is important to determine what parts of this public property can be transferred as managed by private sector, and what parts cannot and to what extent this transfer will be possible. Since oil is the largest national capital and due to wide and diverse aspects involved in the oil subject, it has always been a social and political concern to discuss about oil ownership.

ANFAUL means the property of the Islamic State, and therefore, the Article 44 of the Constitution says the capacities available to the government can be delegated to the private sector. The transferring process of mines has begun years ago, and nowadays it is very easy for mines to be given to the private sector by granting a license to develop and produce. However, there are some limitations in accordance with a series of rules and frameworks for market regulation, and the government has the right to suspend or renew it whenever it wishes. It seems that this mechanism is also debatable for oil fields, which shall be in the agenda of parliament and government. For example, Norway has managed the oil and gas fields successfully though the kingdom and government have the sovereignty on behalf of people; according to the laws and regulations, it could be temporarily assigned to the private sector to do the development part with clear mechanisms.

In my opinion, this could be an important issue for the development of the country and it should be discussed among the elites, and is likely to start with small reservoirs as a practice, just like mines. Of course, the rational mechanism for protecting national interests must be considered and the rules must be defined by the Islamic parliament.

Now let’s answer the second part of your question. The role of the deputy in supervision of hydrocarbon resources, with about 1-year background is based on the amendments to the oil law that was ratified in 2011, the law of the limits and powers of oil that were ratified in 2012, and the statutes of the NIOC, approved by the Islamic parliament in 2016.

All of these rules were intended to make the government reduce its ownership and, of course, increase its regulatory role. The results of these two laws are combined in the association articles of the NIOC, which limited its mandate to business. Thus, the legislator tried to separate the government from corporate governance and develop the government’s responsibilities in terms of governance, ownership, and oversight.

That’s why the responsibilities of the sovereignty in this area have been generally and somewhere explicitly outlined in the law, such as licensing for the exploration, production and development; even a supreme supervisory board has been created to oversee the generalities of the government’s work in the upstream, and to ensure that the state does its supremacy and ownership responsibilities. The board is made up of nine members: “Attorney General of the country, chairman of the parliamentary plans and budget committee, chairman of the parliamentary energy committee, president of the Central Bank of Iran, president of the national planning and budget organization, the Economy minister, Oil minister, and two deputies of the oil ministry (CEO of NIOC and Deputy minister in supervision of hydrocarbons)”. Almost from the start of last summer, when this deputy was formed, we tried to turn it into a framework to determine what the duties of the deputy would be. It has been studied for several months and the tasks were explained on the basis of three sources: first, the upstream laws, second, what other countries with the same conditions did -about Ten countries were investigated- and the third, the legal and structural limitations of our country in comparison with those countries for the initial implementation mechanism; then, a detailed report was prepared as a preliminary report for the first year of the project pilot. This report was sent to the Oil Minister. Now we are in the process of defining the structure and the initial organization, in order to make this project ready to start officially. For the second stage, an international advisory organization must be selected and more studies must be performed on the report. We are trying to find a consultant from a group that did the same work for Norway to gather reliable studies, do a well-prepared, coherent and thorough work, and have a good basis to be reviewed over time. There was a condition for the foreign consultant and that was to have an Iranian partner to share the work between them, which would also involve transfer of knowledge to our country.

In the current situation, what is the updated condition of licenses and permits for upstream and downstream operations? Are the licenses currently been issuing? If not, when and under what conditions will the licenses be issued?

There is currently no immediate program for granting licenses named exploration, development or production. A few investigated examples indicate that it requires a lot of mechanisms and legal framework and premises to be determined. So, we have prioritized the forming of a structure to deploy those cases gradually. The main problem is the diversification of the ideas that exists between some elites and experts to issue license and it depends on whether to allow privatization in the oil sector or not. In principle, is it necessary to issue external permits without transferring the fields ownership to the private sector. Another issue that exists is that the NIOC should take the permission of the oil ministry that owns the reservoirs for any development and explorations to develop and produce based on a specific strategy. By the end of this year, hopefully we will be able to issue certificates and licenses to NIOC and it’s subsidiaries and contractors companies for each oil field as the first step is to be taken to perform ownership and sovereignty duties legally.

There was a time when foreign investment was not permitted in the drilling industry or the industry was considered as a sovereign state, even not awarding reservoir studies to private section. How efficient was that paradigm? Which parts and activities in the oil industry continue to be like that?

The economic and political importance of oil had always formed a conservative look in this section. By professional interactions and legal frameworks development along with good benchmarking, it is possible to improve this situation gradually. The ownership of the reservoir and the ability to sell the produced oil is still state owned.

What are the most important plans to increase the recovery factor of the oil fields by IOR/EOR methods?

The first thing is there are some fields that IOR have been, partially and not fully, applied in; which needs to speed up. Considering the increase of gas production in our country, the Ministry of petroleum prioritized increasing the production of oil through gas injection into the reservoirs. In the first step, it should be performed with higher speed. The second priority is the acceleration of upstream development in the framework of new contracts as the state has underlined the recovery factor increase. Out of near 50 fields introduced for the first phase of internationally cooperated development, the majority is brown-fields with EOR mentioned as a main part of the scope of work; the examples are the third phase of Darkhuain, parts of South Pars, Ab Teymour, Ahwaz, Maroon, etc. All of these fields will be developed and implemented under this new framework. A plan was also approved at the Supreme Council of Exploration, which states that any development afterwards should be considered by recovery factor increase from the beginning of production; unlike the case in which the IOR/EOR operations start after a rate decrease in production of the field.

As there has been a decline in exploration in recent years, what are your plans to enhance this field?

Considering the strategic policies of the Minister and the Supreme Council of Exploration mentioned in the 6th 5-year development plan, there is a need to explore the border areas and the priority is given to the northwest, north, and northeast parts of the country and also the common oil fields in Persian Gulf and Caspian Sea, since we have never focused on them. Unfortunately, our main oil & gas production is in the south and southwest which sometimes needs to be transferred over 2000 KM to be consumed in Khorasan or Gorgan as an example.

In this regard, exploration would be more affordable and empowers our security and stability, as well as defending our rights in common fields. The second goal is exploring oil fields for gas to inject into oil fields IOR means. And the third is to complete the geology map in the whole territory to identify hydrocarbon potentials, as well as analyzing Oman Sea and recognizing unconventional resource areas. All these are to define what parts should be developed in the 6th development plan.

What do you think about the prospects of new explorations? What are the latest figures for oil and gas reserves in the country?

According to exploration strategic policies and comprehensive corrective viewpoint of exploration management and also by activating new upstream contracts, it is hoped that the oil & gas exploration increase annually, capabilities be recognized in the country, and resources significantly increase. Nowadays, the amount of recoverable liquid hydrocarbon reserves is about 158 billion barrels and natural gas is nearly 34 trillion cubic meters. So Iran has the first place in the world and it will be able to meet the Iran’s needs for more than a century.

As you know, the Iranian E&P companies have been formed to partner up with IOCs in upstream projects. Have they been able to upgrade their capacities along with their special missions in new situation according to expectations of Petroleum Ministry? What infrastructures must they prepare?

The 11 certified companies have made good progress so far. As far as I know, some of them have prepared their structure, while some are at the beginning phase. About how far they have improved, we need to give them more time before evaluation. Anyway, we hope that a number of these companies would be able to grow and take international projects and responsibilities.

Some of the subsets of NIOC, like IOOC or Arvandan are somehow E&P companies as well. Is there going to be any changes in their nature and structure?

These companies are currently meant to maintain state properties and assets. Besides, it is possible that other responsibilities be given to them or even they could be privatized partially or completely. The Statoil Company, as an example, was initially a state owned company and after a while, 40% of its share was sold to private sector. All these matters rely on our legal system; however, there is no specific plan for changing the current situation. Anyway, their duties will be limited by the new upstream contracts.

 

Do you have any plans to develop a regulatory environment for the upstream oil industry?

If the directorate in supervision of hydrocarbon reservoirs is properly formed, it will initially apply the regulatory on each field in the NIOC sector. If the legal arguments in the ownership and control of oil fields would change in the constitution, then this regulatory could also be transferred to private companies as well. In IPC contracts in which private companies participate to develop fields, we can impose some rules and conditions for licensing and regulatory to these companies.

Has any action been taken to prepare and arrange some figures and information of the country’s hydrocarbon reserves (Reserve Book)? What are the details?

To date, hydrocarbon reserves data and statistics are to be prepared by the NIOC on annual basis. Hopefully, the final edition will be done by the establishment of the directorate in supervision of hydrocarbon reservoirs.

What can be the most important message to local/foreign companies at the international oil congress?

We have a couple of imposed international and political constraints and considerations that we hope to be eliminated and/or reduced to a minimum, but the most important thing missing is that we need to consider ourselves in an international class which means we must make the structure, efficiency, technical knowledge, and management lessons so that we could be able to participate in the international market. In my opinion, our most important message can be inviting foreign companies to mutually help and cooperate with local companies inside and outside of the country. As a consequence, our banking system and customs also learn what to do. Capable international companies must be attracted to invest and enhance technical expertise in Iran, as well as providing opportunities for the Iranian companies to work outside the country along with them.

The secret of our survival is these mutual interactions as there is a huge gap in between. For example, a company that wants to work abroad needs to be able to present a bank guarantee, or if a company wants to start its business internationally, it needs to open an LC. There are many other problems, such as tax & customs issues, existing rules, and for sure gaining international expertise and skills. This will not be achieved but through a high national and international perspective in the country to a proper installation inside the country that can legally and practically support Iranian companies to cooperate or compete with first-class international companies.

 

 

 

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