Southern Prescription for Development

Mostafa Ashaari
Oil and gas journalist

Last fall, National Iranian South Oil Company began to present a new template for their field development plans. These contracts are significantly distinct from the IPC contracts and in a sense, they are more complicated. NISOC got NIOC permission to sign contracts with domestic and foreign contractor companies regarding 9 reservoirs which are located in 4 oil fields as NIOC representative.

Differences between new contracts and IPC
First, NISOC contract’s duration is much shorter compared to IPC contract (its validity terminates after 5-10 years compared to IPC contracts which their term of agreement is 20-25 years); second, contractor is not liable whether to reach predetermined objectives or not and contractor will be paid in full for the services done
with no regard to outcome; third, bonus payment calculation is based on a more complex method and formulation which is different than IPC formula. IPC contracts are introduced in another article of this magazine. The concept of drainage base line is introduced in IPC as a future production forecast curve which basically means if the field undergoes no development in the future, what the field production in the future would be. The contractor bonus payment is calculated based on excess production from this base line in the future. For example, if baseline drainage predicts the next year production as 250,000 barrel per day but as a result of  development conducted by contractor, actual production of the field goes high as 240,000 barrel per day, contractor would not receive any bonus payment for that year; but if the production exceeds 250,000 barrel per day, contractor would receive a bonus payment.
There are two curves considered in NISOC’s contracts instead of only one curve for field future prediction. First one is similar to what was mentioned in IPC  ontracts with the same name (baseline drainage curve). Second one as called base scenario curve is an indication to the field production minimum improvement prediction made by NISOC. For example consider the case where the baseline drainage curve predict a 120,000 barrel per day production for the next year and base scenario curve predict 140,000 barrel per day. This means if no action is taken to improve field production, the production would remain on 120,000 barrel per day and NISOC predicts a 140,000 barrel per day production if necessary steps are taken.
Based on NISOC proposed contract, Contractor will receive the payment for their operation cost but return of investment (ROI) and interest would be proportional to difference between current production rate and baseline drainage curve; and in addition, the bonus payment will be determined based on the excess production
from the base scenario curve. Now, consider the previous example if contractor can increase production to 170,000 barrel per day for the next year, ROI of the  contractor would be proportionate to 50,000 (170,000 – 120,000= 50,000) and the bonus would be proportionate to 30,000 (170,000 – 140,000 = 30,000).
Challenges of NISOC’s new model: One of the major changes in IPC contracts is the increase in term of agreement. In previous NIOC contracts known as buyback contracts, term of agreement was about 6-12 years whereas in IPC contracts the duration of agreement is increased to 20 years and even more. It usually takes more
than 3-4 years in a routine scenario to increase recovery factor for oil and gas fields; but NIOC’s contracts did not have satisfying terms of agreement for the  contractor to benefit from this increase in recovery.
In fact, there are contracts with similar intervals of agreement to NIOC in international petroleum industry; contracts between national or international oil  companies and small and medium sized ones. However, their objective is mainly to provide an integrated service operations for an oil/gas field. In other words, the objective of 5-10 year term of agreement is to reduce the trouble of field producer related to daily routines and mostly equipment maintenance and production and they are not included in designing and conducting plans for improving reservoir recovery.
Another issue that might be concerning in NISOC contracts is base scenario curve. Baseline drainage curve, which is mentioned in both NISOC and IPC contracts, is the result of scientific study and the contractor is in charge of preparing it; while client confirms its validity prior to beginning Iran doesn’t have enough experience in improving recovery factor of old reservoirs. Also average recovery factor of Iranian reservoir are significantly less than that of the global average of a project. However’ there are a lot of simplifications in base scenario curve definition. According to its definition, the base scenario curve is a straight line equal to current
field production for the reservoirs which produced half of their reserve and a straight line with a constant and negative slope which the magnitude of slope is  determined by comparing current production depletion with last year. In other words, base scenario curve is not going to be the result of a technical study but rather a simplification of current and last year oil/gas production statistics. These simplifications in base scenario definition are probably to prevent an unwanted obstacle in technical studies. These two curves must get the approval of the supreme reservoir council of oil ministry.

Remaining issue

Despite the fact that there has been some effort to discover new oil/gas fields and to exploit green oil fields in the recent years, what is really happening right now is that NSIOC is responsible for approximately 80 percent of Iran oil production. These 4 fields that are going to be developed under NISOC new contracts and comprising a small amount to total NISOC production are currently producing oil with a rate of 500,000 barrel per day.
Iran oil reservoir in the NISOC territory has been producing oil for decades now which is another bitter truth to Iran petroleum industry and an imminent and real threat also. Iran’s main focus is to increase recoverable oil from brown oil fields as it is for other countries, though there has not been any major improvements in recovery factor of oil reservoirs and also average recovery factor of Iranian reservoirs is significantly less than that of global average. Perhaps these concerns are what motivate NISOC experts and managements to design 5-10 years contracts but in order to act swiftly, instead of shortening the contracts interval agreement , the shortcuts should be taken to cut out the unnecessary bureaucracy; otherwise it might
take 5 to 10 years just to sign contracts.