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Iran's oil bonanza and its problems
By Hooman Peimani

Iran's July 14 announcement of the world's second biggest oil field after Saudi Arabia's Ghawar development appears certain to change the global equation on oil production, to fatten Iran's strained foreign reserves, to involve it ever more deeply in the sticky problems of petroleum contact negotiations, and to present the country with problems as well as promise.

Abolhasan Khamoushi, general director of Iran's Oil Development and Engineering Company (ODEC), confirmed on Monday the discovery of the field, in the vicinity of the Iranian Persian Gulf port of Bushehr. Apart from its importance as the world's second largest crude reserve, at an estimated 38 billion barrels, its discovery provides proof that Iran possesses far larger oil reserves than previously thought, a development with a predictable impact on the interest of the major oil companies and their respective governments in that country's political and economic direction.

Even without any major future oil discovery, the Monday confirmation increases Iran's international importance as a heavyweight oil supplier with an expected increase in its international status the extent of which is yet to be seen. Iran's strategic importance to the West, and a major reason for decades-old American attempts to meddle in its politics, revolves around its vast oil reserves, estimated at 90 billion barrels even before the new discovery. Discovery of major new fields helps Iran prolong its oil exports and, increasingly so, its petrochemical exports as the country pours development money into upstream production facilities.

The Iranians hope that the discovery will sustain the country as a major producer and continue as a major export item, in which they have already invested billions of dollars since the late 1980s. Petrochemical exports generate about US$1 billion dollars a year. However, Iran must develop its new oilfields and keep investing in the operating ones to meet growing domestic needs as its soaring population increasingly demands development, while at the same time increasing its crude and petrochemical exports.

This requires enormous annual investment. Given Iran's growing need to invest in a wide range of sectors, developing such investment is becoming more difficult. For example, the Iranian Oil Ministry annually invests about $3 billion in its operating oilfields to keep their production at a high level to satisfy the domestic market and to export daily about 3 million barrels. Given these realities, depending on the size of projects, partial or total foreign investment has become a necessity for developing new major oilfields. To maintain control over the strategically important oil industry and to prevent foreign political and economic influence, the Iranian government has favored buy-back contracts in place of direct foreign investment in oil development projects.

Through this measure, Tehran has only addressed some of its foreign investment requirements. It demonstrates the reluctance of multinational oil companies to get involved in buy-backs and reflects the political pressure exercised mainly by the American government on potential investors to deny Iran the development of its oil industry, its main source of revenue in foreign currency, and to retard its economic progress.

Consequently, Iran has yet to find an investor for the development of its Azadegan oilfield, for example. After its discovery about two years ago, its phenomenal oil reserves - 26 billion barrels - have not yet helped Iran find a reliable investor. Under American pressure, a group of Japanese oil companies interested in its development delayed signing a $2 billion contract with the Iranian Oil Ministry by the mutually-set deadline of June 30 despite two years of negotiations. (See Americans stymie Japan-Iran oil deal, July 4).

The Americans are bringing pressure on the Iranians to renounce their attempts to develop nuclear weapons. Japan appears to have knuckled under because of the importance of the American export market for its troubled economy and its reliance on the US for security. Tokyo appears to remain interested, and may condition its signing of the contract on Tehran's satisfying the American demand on its joining the additional protocol to the Non-proliferation Treaty (NPT) of 1968 or a similar agreement.

The Japanese-Iranian negotiations are still officially underway. Despite the Iranians expressing optimism that the contract will ultimately be signed, Tokyo's approval will require its standing in the face of Washington's pressure, a possibility, but still not a certainty.

Regardless of the negotiations' outcome, the case reveals the difficulty of attracting foreign investment for the Iranians even when they offer a tempting and promising contract involving a major oilfield with strategic importance to oil companies and their respective governments. Against this background, Iran is now facing a great challenge to find reliable investors to help it develop its newly-discovered oilfield. While there should not be any shortage of investors in principle given its phenomenal oil reserves, turning those interested investors into committed ones may likely be a Herculean task for the Iranian oil industry.

The discovered field combines three neighboring plots with estimated reserves of about 38 billion barrels. According to Khamoushi, the Iranian Oil Ministry's preliminary studies suggested that the Ferdows field, the Mound field and the Zagheh field contained 30.6 billion barrels, 6.63 billion barrels and 1.3 billion barrels, respectively. The Iranians are now undertaking appraisal work to determine the dimensions of the fields. The field is equal to Kazakhstan's Kashagan oilfield, which is the world's second largest oilfield only after Saudi Arabia's Ghawar. The latter reportedly still has 70 billion barrels of extractable crude after more than half a century of operation.

As is true for any oilfield, the volume of economically-sensible extractable crude is likely to be significantly less than its estimated total reserves. For example, the amount of recoverable crude in the Kashagan field is estimated at 7-9 billion barrels, whereas Iran's Azadegan oilfield, with estimated reserves of 26 billion barrels, has only about 9 billion recoverable barrels. Additional geological tests and drilling will be required to determine the exact recoverable volume of the new Iranian field.

Nonetheless, the recent oil find is certainly a positive development for Iran. Added to its existing proven reserves, the discovery has pushed up Iran's previous status as the holder of the world's fifth largest oil reserves. More than that, in addition to other relatively recent discoveries such as the Azadegan oilfield, the latter provides ground for optimism in the existence of much larger oil deposits, including in its central part, which has long been suspected of having hydrocarbon reserves.

Dr Hooman Peimani works as an independent consultant with international organizations in Geneva and does research in international relations.

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Jul 18, 2003

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