Iran signs massive deal with Total, CNPC for $5bn gas project

French oil giant Total and China's state major CNPC sign first IPC agreement with Iranian state oil company NIOC’s subsidiary Petropars to develop phase 11 of the mega South Pars gas field in offshore Gulf

Total said the contract with NIOC, which has a 20-year duration, with a five-year extension option, is the first Iranian Petroleum Contract (IPC) to be signed.
Total said the contract with NIOC, which has a 20-year duration, with a five-year extension option, is the first Iranian Petroleum Contract (IPC) to be signed.

In a deal that virtually opens up Iran’s oil industry, reeling from the impact of US-led Western economic sanctions, to the world again, the Islamic Republic’s state-owned oil company earlier this week signed a $4.8bn-worth agreement with France's E&P giant Total and Chinese state oil major CNPC to develop its massive offshore natural gas field.

This was the first such deal that Tehran has signed with foreign companies since the landmark 2015 nuclear deal with world powers, although American sanctions continue to be in place and have even been recently reinforced by US President Donald Trump.

In a formal ceremony on Monday in Tehran, officials from the National Iranian Oil Company (NIOC), Total and the China National Petroleum Corporation (CNPC) met and signed the agreement, which will see the French and Chinese companies help NIOC subsidiary Petropars develop a portion of the massive South Pars offshore gas field in the Gulf’s waters, that Iran shares with Qatar.

In a media statement to arabianoilandgas.com, Total said the contract with NIOC, which has a 20-year duration, with a five-year extension option, is the first Iranian Petroleum Contract (IPC) to be signed and is based on the technical, contractual and commercial terms as per the Heads of Agreement (HoA) signed on November 8, 2016.

Since the November 2016 HoA signature, Total has been conducting engineering studies on behalf of the consortium and initiated calls for tender in order to award the contracts required to develop the project by the end of the year.

“This is a major agreement for Total, which officially marks our return to Iran to open a new page in the history of our partnership with the country,” Patrick Pouyanné, Total’s chairman and CEO, has been quoted as saying in the press release.

“We are proud and honoured to be the first international company to sign an IPC, which offers an attractive commercial framework, following the 2015 international nuclear accord (JCPOA) and to therefore contribute to the development of relations between Europe and Iran. Total will develop the project in strict compliance with applicable national and international laws”, Pouyanné reportedly said at the deal signing event.

Total has earned a majority 50.1% share in the new deal with NIOC, while CNPC has won 30% stake of the stake and NIOC's Petropars has retained 19.9 %, meaning Total will be leading the campaign to develop and produce gas from phase 11 of the South Pars field (SP11). The project will require investment estimated at $5bn.

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Reacting to the mega deal, Homayoun Falakshahi, senior research analyst, Middle East and North Africa Upstream, at Wood Mackenzie, told arabianoilandgas.com: “This is a huge development for Iran's oil and gas industry, as the country signs its first-ever Iranian Petroleum Contract (IPC) – and seals its first upstream contract with foreign firms – in 10 years.”

“The South Pars Phase 11 deal will, Iran hopes, prompt other IOCs to re-enter the country’s upstream sector. Reopening the Iranian upstream to foreign investors could very well become one of President Hassan Rouhani's main economic achievements,” Falakshahi said.

According to the statement sent by Total to arabianoilandgas.com, SP11 will be developed in two phases. The first phase, with an estimated cost of around $2bn equivalent, will consist of 30 wells and 2 wellhead platforms connected to existing onshore treatment facilities by 2 subsea pipelines. At a later stage, once required by reservoir conditions, a second phase will be launched involving the construction of offshore compression facilities, a first on the South Pars field.

Total said the SP11 project will have a capacity of 2bn cubic feet of natural gas a day or 400,000 barrels of oil equivalent per day, including condensate. “This project is in line with the (Total) Group’s strategy to expand its presence in the Middle East and grow its gas portfolio by adding low cost, long plateau assets,” Pouyanné said.

With 21 tcf of gas reserves in place, Wood Mackenzie estimates SP11 could recover more than 10tcf of sweetened gas and 450mn barrels of condensate. “Phase 11 opens a new chapter in the story of the South Pars. It closes the 24-phase development plan, and sets the stage for future phases, as compressor platforms are needed for the first time,” Falakshahi added.

“Total is expected to install 20,000-tonne compressor platforms, the biggest platforms ever installed in the Gulf,” he said.

Iran has been relying on the South Pars project to meet its domestic energy needs, as well as to earn crucial export revenues from the sale of natural gas to foreign consumers. The produced gas will supply the Iranian domestic market starting in 2021, according to the statement.

Increased gas production opens new opportunities for piped exports and LNG. Iran started test exports to Iraq a few weeks ago and, by 2019, could send up to 20bn cubic metres to its neighbour, according to WoodMac.

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During the ceremony, Iranian Oil Minister Bijan Zanganeh congratulated all involved in the deal, saying it will lead to "more than $5 billion in foreign investments." He also described it as "one of the outcomes of the nuclear deal and recent presidential election (in Iran)," which saw moderate President Rouhani re-elected over a hardline challenger.

Zanganeh also held out an olive branch to American oil companies, saying his country needs some $200bn of investments in its oil industry in the next five years to make up for time lost during sanctions.

"We do not consider any obstacle for the participation of American companies," Zanganeh said. "The main obstacle is being created by the US government."

Iran hopes to produce 6mn barrels of crude oil and condensates a day in five years, he said, up from some 3.6mn currently.

This massive deal with Total and CNPC is the result of four years of constructive work for Rouhani's administration. Rouhani and the negotiating team, led by oil minister Zanganeh, have successfully brought IOCs back to Iran’s upstream for the long term.

“Hopes are high in Iran that the IPC will enhance local companies’ capabilities. As was the case with previous buy-back contracts, contractors will not have any right to the gas and will be paid by the sale of condensate,” Falakshahi commented.

“As well as hard work, this achievement highlights the administration’s pragmatic approach to negotiations, particularly within Iran. Rouhani and Zanganeh successfully balanced hardliners’ criticism with the need to draft an IPC which meets IOC investment criteria. This deal could be Zanganeh's legacy, as he sets out a new path for Iran’s upstream sector. It may also be his farewell to politics,” Falakshahi opined.

Iran sits atop the world's fourth-largest oil reserves and the second-biggest stores of natural gas. Since the nuclear deal, which saw Iran limiting its enrichment of uranium in exchange for economic sanctions being lifted, the country has quickly boosted its crude oil production and sold what it had in floating reserves. Monday's deal will further boost its coffers and secure a new supply of natural gas for domestic consumption, beginning in 2021.

The 20-year contract with two of the world’s key oil majors, also offers a vote of confidence for Iran in the business world, especially as Trump has threatened to try and renegotiate the nuclear accord, which he has vociferously criticised as a “bad deal” struck by the administration of his predecessor Barack Obama.

Total pulled out of Iran in 2006 as United Nations sanctions first took hold over fears Iran's atomic programme would be used to build nuclear weapons. Tehran has maintained its nuclear campaign is only for peaceful purposes.

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