Iran O&G projects: A possible market comeback?

The Oilholic has been tweeting like mad from the 21st World Petroleum Congress over a hectic few days, though not all of the chirps are 'crude' of course.

Away from tweeting today, one found an opening to talk to members of the Iranian delegation who are using the Congress – their first since a partial lifting of sanctions – to declare the country's oil & gas sector open for business. The aim is to bring in more foreign investment and technological know-how, in wake of securing limited international sanctions relief from a November interim agreement to temporarily curb its nuclear activities.

Setting out its stall, the National Iranian Oil Company (NIOC) has floated the idea of 41 projects aimed at the development of oil & gas fields, establishment of natural gas liquid (NGL) plants, and the collection of ancillary petroleum gas at oilfields. The latter project slant is of great significance, as the Iranians usually burned off the gas in the past due to lack of infrastructure, rather than tap it as an additional resource.

The total valuation is in the region of US$100 billion, as confirmed by an NIOC official and a new contractual framework is on the table. According an official, under the terms of the previous buy-back contracts, the said contractors were a set price for oil & gas produced. Under the planned new system (the Iranian Petroleum Contract), state-run energy companies will establish joint ventures with their international counterparts, which will be paid with a share of the output.

All sounds clear enough, but unless the sanctions are lifted further, one doubts how international players can circumvent the existing sanctions and proceed anyway. Nonetheless, there seems to be a very relaxed atmosphere within the Iranian camp here in Moscow, who are at the forefront of making their country's pitch. And there is some bluster too as usual.

Iranian Oil Minister Bijan Namdar Zanganeh has said that the country's oil industry would go ahead with the projects, with or without sanctions, which have "not hindered progress." The Oilholic doubts that, but agrees with Zanganeh's assertion, back in April, that in order for Iran to revise how it regulates oil & gas contracts further, sanctions must be lifted more meaningfully.

Companies are still queuing up though led by CNPC, Gazprom and Petronas. The Oilholic can confirm Eni and Total are also in talks with Iran, according to a senior source. However, US oil & gas majors are largely staying away and BP is understood to be "monitoring the situation" with nothing concrete having materialised so far. With proven reserves in the region of 360 billion barrels of oil (boe) equivalent, there is a lot at stake, so watch this space!

Among what the country holds, the Northern Iranian states should be pretty interesting, according to Farrokh Kamali, a recently retired technical advisor to the Iran LNG Company. In 2011 and 2012, Iran found potential for 10 billion barrels of crude and 5 trillion cubic feet (tcf) of gas in its territory of the Caspian Sea. Kamali describes the findings as "economically viable".

Meanwhile, the Indians are making waves too. People turned up in their hordes to hear what the newly appointed Minister of State for Petroleum and Natural Gas Dharmendra Pradhan had to say about the Narendra Modi government's planned revision to India's highly political subsidy system, which if significantly altered, could aid investment in the country's oil & gas sector.

First off, Pradhan stressed on the ties and friendship between Delhi and Moscow. Secondly, he noted that energy policy must serve broader economic growth and its benefits should not exclude "the poor and the vulnerable." Thirdly, he noted that the oil & gas industry's efforts must focus on promoting fiscal and regulatory regimes that are stable and equitable to both investors and owners of natural resources.

Fourthly, he called for enhancing technological collaboration across the value chain since the nations have to "delve deeper" and explore in more difficult areas for hydrocarbons. And then he left! Some were disappointed with Pradhan, but the Oilholic wasn't. A new minister, in a new government was hardly going to go down the path of saying something beyond the box – that's India, correction politics, for you.

Sticking with India, a Bharat Petroleum official gave fascinating insight into how the company is improving surveillance of its vast pipeline network. Manoj Kumar Jadhaw, manager of pipelines at the Indian state-owned company, said they are trialling a GPS tracking system for their 'line walkers' to ensure the walkers are actually walking and monitoring (and not skiving) along the length of the pipeline to prevent resource tapping or pilferage, a common occurrence in that part of the world.

Initial feedback has been great but the project only extends to 300km. When you are talking 40,000km of pipelines, there's some way to go yet! That's all from Moscow for the moment folks! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2014. Photo: National Iranian Oil Company enclosure at 21st World Petroleum Congress, Moscow, Russia. © Gaurav Sharma, June 2014.

Speculators, production & San Diego’s views

It is good to be in the ‘unified’ port of San Diego, California for a few days to get some crude views, especially those of the trading types who have a pad on the city’s Ocean Beach waterfront looking out to the Pacific. While the view from one of their living room windows is a testament to the current serenity of the Pacific Ocean (an example on the left), markets are anything but serene with politicians blaming paper traders for the current volatility.

Instead of shrugging and quipping ‘typical’, most admit candidly that the ratio of paper (or virtual) barrels versus physical barrels will continue to rise. Some can and quite literally do sit on the beach and trade with no intention of queuing at the end of pipeline in Cushing, Oklahoma to collect their crude cargo.

Anecdotal evidence suggests the ratio of paper versus physically traded barrels has risen from 8:1 at the turn of millennium to as high as 33:1 in 2012. Furthermore, one chap reminds the Oilholic not to forget the spread betting public. “They actually don’t even enter the equation but have a flutter on the general direction of crude benchmarks and in some cases – for instance you Brits – all winnings are tax free,” he added.

Nonetheless, on his latest visit to the USA, yours truly sees the supply and demand dynamic stateside undergoing a slow but sure change. In fact old merchant navy hands in San Diego, which is a unified port because the air and sea ports are next to each other, would tell you that American crude import and export dispatch patterns are changing. Simply put, with shale oil (principally in Eagle Ford) and rising conventional production in Texas and North Dakota in the frame and the economy not growing as fast as it should – the US is importing less and less of the crude stuff from overseas.

The IEA projects a fall of 2.6 million barrels per day (bpd) in imports by US refiners and reckons the global oil trading map and direction of oil consignments would be redrawn by 2017. Not only the US, but many nations with new projects coming onstream would find internal use for their product. India’s prospection drive and Saudi Arabia’s relatively new oilfield of Manifa are noteworthy examples.

So a dip in Middle Eastern crude exports by 2017 won’t all be down to an American production rise but a rise in domestic consumption of other producer nations as well. Overall, the IEA reckons 32.9 million bpd will trade between different regions around the globe; a dip of 1.6 million bpd over last year. With some believing that much of this maybe attributed to dipping volumes of light sweet crude demanded by the US; the thought probably adds weight to Eastward forays of oil traders like Vitol, Glencore and Gunvor. Such sentiments are also already having an impact on widening Brent’s premium to the WTI with the latter not necessarily reflecting global market patterns.

Elsewhere, while the Oilholic has been away, it seems BP has been at play. In a statement to the London Stock Exchange on Monday, BP said it had agreed 'heads of terms' to sell its 50% stake in Russian subsidiary TNK-BP to Rosneft for US$28 billion via a mixture of US$17.1 billion cash and shares representing 12.84% (of Rosneft). BP added that it intends to use US$4.8 billion of the cash payment to purchase a further 5.66% of Rosneft from the Russian government.

BP Chairman Carl-Henric Svanberg said, “TNK-BP has been a good investment and we are now laying a new foundation for our work in Russia. Rosneft is set to be a major player in the global oil industry. This material holding in Rosneft will, we believe, give BP solid returns.”

With BP’s oligarch partners at AAR already having signed a MoU with Rosneft, the market is in a state of fervour over the whole of TNK-BP being bought out by the Russian state energy company. Were this to happen, Rosneft would have a massive crude oil production capacity of 3.15 million bpd and pass a sizeable chunk of Russian production from private hands to state control. It would also pile on more debt on an already indebted company. Its net debt is nearing twice its EBITA and a swoop for the stake of both partners in TNK-BP would need some clever financing.

Continuing with the corporate front, the Canadian government has rejected Petronas' US$5.4 billion bid for Progress Energy Resources. The latter said on Sunday that it was "disappointed" with Ottawa’s decision. The company added that it would attempt to find a possible solution for the deal. Industry Minister Christian Paradis said in a statement on Friday that he had sent a letter to Petronas indicating he was "not satisfied that the proposed investment is likely to be of net benefit to Canada."

Meanwhile civil strife is in full swing in Kuwait according to the BBC World Service as police used tear gas and stun grenades to disperse large numbers of people demonstrating against the dissolution of parliament by Emir Sheikh Sabah al-Ahmad al-Sabah whose family have ruled the country for over 200 years.

In June, a Kuwaiti court declared elections for its 50-seat parliament in February, which saw significant gains for the Islamist-led opposition, invalid and reinstated a more pro-government assembly. There has been trouble at the mill ever since. Just a coincidental footnote to the Kuwaiti unrest – the IEA’s projected figure of 2.6 million bpd fall in crude imports of US refiners by 2017, cited above in this blog post, is nearly the current daily output of Kuwait (just to put things into context) ! That’s all from San Diego folks! It’s nearly time to say ‘Aloha’ to Hawaii. But before that the Oilholic leaves you with a view of USS Midway (above right), once an aircraft carrier involved in Vietnam and Gulf War I and currently firmly docked in San Diego harbour as a museum. In its heydays, the USS Midway housed over 4,000 naval personnel and over 130 aircraft.

According to a spokesperson, the USS Midway, which wasn’t nuclear-powered, had a total tank capacity of 2.5 million gallons of diesel to power it and held 1.5 million gallons of jet fuel for the aircraft. It consumed 250,000 gallons of diesel per day, while jet fuel consumption during operations came in at 150,000 gallons per day during flying missions. Now that’s gas guzzling to protect and serve before we had nuclear powered carriers. Keep reading, keep it ‘crude’!

© Gaurav Sharma 2012. Photo 1: Ocean Beach, San Diego. Photo 2: USS Midway, California, USA © Gaurav Sharma 2012.