Iran to resume oil output when and how much?

Baku, Azerbaijan, Apr. 23

By Dalga Khatinoglu - Trend:

Iran says it is preparing to boost oil production and export to pre-sanction levels.

Before the western sanctions were imposed on Iran in mid-2012, the country was producing about 3.7 million barrels per day (mb/d) of crude oil, of which around 2.2 mb/d was being exported.

Currently Iran produces and exports 2.8 mb/d and 1.1 mb/d of crude oil respectively.

Iran and P5+1 Group (UK, France, Germany, the United States, Russia and China) reached a nuclear framework agreement April 2. The sides are in talks to reach a comprehensive nuclear deal by June 30, which would enable Iran to get rid of economic sanctions, including those imposed on purchasing Iranian oil in global markets.

Homayoun Falakshahi, Middle East analyst for Wood Mackenzie's Upstream research service told Trend April 23, "we believe that Iran has cut oil production from its biggest fields: mainly Ahvaz, Marun and Gachsaran. Theoretically, Tehran will be looking to increase oil production from these fields as soon as they will have the possibility to do so, i.e. when sanctions on crude oil exports will be lifted. For the sake of our forecasts, we assume that a deal will be reached by June-July 2015 but we don't expect an immediate removal of sanctions. We assume the unwinding of sanctions will take place over a 12 month period, with banking sanctions assumed to be lifted quicker than those on shipping insurance and the crude oil export cap".

He added, "on the basis of this assumption, Iran's crude oil production will begin rising later this year and into next year. We expect it to grow on an annual average basis by 120,000 b/d in 2015, 300,000 b/d in 2016 and by a further 250,000 b/d in 2017."

Responding to a question about when Iran might bring oil production to the pre-sanctions level, Falakshahi said, "for a number of reasons, we do not expect crude exports to recover to pre-sanctions levels of 2.2 million b/d. Significant reservoir and facility degradation are likely as a result of production curtailment and well shut-ins".

He added that Iran would only be able to resume previous production levels if there is substantial investment in its oil and gas industry and if the amount of gas re-injection into the oil fields is significantly increased.

Old oil fields

Iran hasn't commenced any new oil field since 2007, while about 80 percent of Iran's active oil fields are in their second half-life and lose 8% to 13% of their productivity annually. Iran announced earlier that during last year, the amount of re-injected gas to old oil fields increased by one billion cubic meters (bcm) to about 34 bcm.

"We believe that if a deal is reached and if new fiscal terms are implemented, gas re-injection projects will be among the first ones to be proposed to foreign companies. Current re-injection levels stand at around 3.3 billion cubic feet per day (bcfd) (or about 34 bcm per annum) and we estimate that this amount needs to be more than doubled if Iran wants to prevent its main oil fields from declining and to boost production."

"However, we also believe it will take years for IOCs to gain access to projects and to start having an impact on production capacity, probably at least 3 years from now.

He said that the main prospects for crude oil production rise in Iran are gas re-injection projects and early life field developments."

Recovery rate

In early January 2012, Iran announced that the oil recovery rate increased to an average of 29 percent. But after some critical reports published in Iranian media outlets raised doubts, Abdol-Mohammad Delparish Manager of Integrated Planning in National Iranian Oil Company (NIOC) said the recovery rates of liquid hydrocarbons, crude oil and gas are 29 percent, 25 percent and 70 percent respectively on average.

However, according to the U.S. Energy Information Administration, Iran's oil recovery rate is around 20 to 30 percent.

According to Fourth and Fifth Development Plans (2005-2009 and 2010-2015) Iran should increase the oil recovery rate by 1 percent during the period of each plan, but the recovery rate remained unchanged during the Fourth Plan.

The former head of NIOC, Ahmad Qalebani said in 2012 that Iran needed a $70 bln investment to reach a one percent increase in the crude oil recovery rate.

Falakshahi says the average recovery rate of the Iranian oil fields has been low so far and could be increased thanks to secondary recovery or more enhanced oil recovery schemes. "We estimate that a 1% increase in the recovery rate for Iran's three main oil fields - Ahvaz, Marun and Gachsaran - will add up commercial reserves of about 1.8 billion barrels," he added.

According to the Wood Mackenzie's expert the other big potential comes from the early life field developments, which Iran started developing in the 2000s. "Most of these fields extend into neighboring countries' territories. We believe that if a deal is reached and new terms are implemented, Tehran will focus on these fields' development, such as Azadegan, Yadavaran, Azar and Changuleh".

He added, "Azadegan and Yadavaran have each more than 30 billion barrels stock tank oil in place. In our current estimate, the recovery rate of these two fields is very low - between 4 percent and 7percent - mainly because of underinvestment and sanctions."

In response to a question regarding the fact that Iran hasn't been able to maintain its fields in a good way due to shutting down the wells in these fields, and possibly some fields have lost their profitability, the analyst he said that this assumption is pretty much correct as well shut-ins are indeed having an effect on the reservoirs.

"However, the exact level of damage is quite difficult to assess. Moreover, well shut-ins sometimes result in increased reservoir pressure which would mean a higher flowing rate for the wells".

"What is certain is that Iran urgently needs to drill as high a quality wells as the ones in mature fields - such as Ahvaz, Marun, Gachsaran, Agha Jari, Karanj and Parsi - are ageing and are experiencing a high decrease in their flow rate," he said. "Furthermore, the peripheral pressure in the Bangestan reservoir for these fields has traditionally been low. Hence the high need in gas re-injection. We believe that delays could strongly limit the impact of gas re-injection programs."

"In other words, Iran might not be able to increase the recovery rate for its biggest fields by 10 percent or 15percent anymore, but some gain is still expected, assuming that necessary investment is made in time," Falakshahi said.

Edited by CN

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