News ID: 213488
Published: 0738 GMT April 19, 2018

Iran signs $2.4b deal with local company in oil industry

Iran signs $2.4b deal with local company in oil industry

National Iranian Oil Company (NIOC) signed a long-term $2.4 billion agreement with local firm Pasargad Energy Development Company (PEDC) for the development of the Sepehr and Jofair oil fields.

The agreement, which coincided with the 67th anniversary of the nationalization of petroleum industry in Iran, will see the two fields produce 110,000 b/d of oil. Accumulated production from Jofair and Sepehr will reach 512 million barrels over a 20-year period. It is the first time in the history of Iran’s petroleum industry that an Iranian private company is set to operate integrated development and production projects at oil fields. The agreement follows the terms of the Iran Petroleum Contract (IPC), the newly developed model of oil contracts to replace old buybacks, IRNA reported.

The contract was signed on March 18 in the presence of Iranian Minister of Petroleum Bijan Zangeneh, CEO of NIOC Ali Kardor and CEO of PEDC Mehdi Mir-Moezzi. Implementation of this agreement is forecast to cost $2.427 billion with indirect costs estimated at $413 million. The agreement will take effect in three months, and 30 months after its entry into force, with the start of production the contractor will be remunerated.

100% Local Content Addressing the ceremony to sign the contract, Zangeneh said intensive talks had been held with PEDC for the project, saying: “It is the first IPC-style contract signed with an Iranian E&P company.”

He said that PEDC is required by the agreement to provide nearly $3 billion finance for the project.

“In addition to conventional horizontal drilling in this project, improved oil recovery (IOR) and enhanced oil recovery (EOR) methods, which are complicated, must be applied,” he added. Zangeneh touched on PEDC’s involvement in the construction of the $1.8 billion Iran Gas Trunkline 6 (IGAT6), which is currently delivering gas from Iran to neighboring Iraq, saying: “Given the successful experience of cooperation with this company, we decided that PEDC could finance such a big project better than other bidders owning to its affiliation with Pasargad Bank.”

He said PEDC benefitted from young manpower. He added that young staff at this company had helped provide a realistic understanding of the financial aspects of the project.

Zangeneh heaped praise on the NIOC and PEDC experts, who brought this agreement to fruition through empathy, saying: “Given the fact that an Iranian company is the monthly operator of the project we believe that the job has been assigned to an Iranian firm 100%. I hope that in practice Iranian companies would be given the bulk of the project.” He underlined the significance of the signing this agreement on the anniversary of the victory of the Islamic Revolution. “I had already said that the victory of the Islamic Revolution nationalized oil which means feeling free to make decisions about production levels.”

“For the time being, national oil means we must have our own E&P companies and we must be able to operate big projects by ourselves,” said the minister.

Zangeneh said Iranian companies were required to boost their potential. “Currently, 14 Iranian companies have been cleared to operate E&P projects. We have sufficient projects to assign to this number of companies, either independently or in partnership with foreign firms.” 

“We have more than 100 oil and gas fields up for development. Therefore, all these companies will have job to accomplish provided that they prove their technical, project management and financing potential for this purpose,” he added.

Zangeneh said IPC terms require foreign companies to hire Iranian partners. “I hope that alongside signing contracts with foreign companies we would sign agreements with Iranian companies.” 

The minister said that Iranian companies would work alongside foreign companies in order to learn from them and benefit from their experiences in exploration and production projects. “We want Iranian companies to learn from foreign companies because experience is our yardstick,” he said. 

“The truth is that when it comes to implementing projects, designing and monitoring implementation, we need experience. Such things could not be learnt in classrooms. There are some who are more experienced than us and we can benefit from their experience.”

3% Contractor Share

Gholam-Reza Manouchehri, deputy CEO of NIOC for development and engineering, said the revenue from the development of the Sepehr and Jofair oil fields would total $31 billion. 

“The contractor (PEDC) will have a $97 million (or 3%) share of total revenue,” he said. 

“We feel delighted that in the final days of the calendar year and concurrently with the anniversary of nationalization of petroleum industry we are signing a big contract with a major Iranian E&P company in order to facilitate implementation of oil projects from the stage of exploration to production by an Iranian company,” he added.

“In the contract for the development of the Sepehr and Jofair oil fields, 50% of target output will be achieved by implementing EOR projects,” he said. 

Manouchehri said the project would require the drilling of 126 wells in the Fahlyan and Ilam reservoir layers.

This contract, he added, would also envisage injecting 40,000 to 50,000 b/d water and 80 mcf/d to 1 mcf/d of gas.

Manouchehri said the rate of recovery from Sepehr and Jofair would reach 10 to 15% at the end of the term of the project.

Reiterating the need for the transfer of technology to Iran, he expressed hope that PEDC would hire international consultants for this purpose. Manouchehri explained portion of profits.

“Although PEDC has a 100% share of implementation in this project its share of revenue, risks excluded, will be more than 3%,” he said, noting that some media had mistakenly confounded the contractor’s part of project obligations with its revenue.

He referred to the recent agreement signed between NIOC and Russia’s Zarubezhneft teaming up with Iranian private entity Dana Energy, saying the Zarubezhneft-led consortium would have a 5% portion of profits while its share of the contract would be 80%.

On this issue, Minster Zangeneh said, “Foreign media became demonstrated mischief with regard to the signature of agreement with Zarubezhneft saying the Russian side had an 80% share and Iranians 20%. That is while under the agreement the Iranian and Russian companies would have each 5% share of revenue over 20 years.”

On Par with World Business Models

For his part, Mir-Moezzi said, “I feel honored to sign on behalf of an Iranian private operator the agreement for integrated development and production at Jofair and Sepehr oil fields under the new model of contracts with a view to opening a new window to a brighter future in the petroleum industry.” 

He said the IPC framework was the result of a new look at affairs at the highest level of the Ministry of Petroleum in harmony with global business models in order to require application of technology throughout development of oil and gas fields for production.

“The new model of oil contracts is also the product of a new look at the Ministry of Petroleum, which believes in the necessity of creating Iranian capacities within the framework of E&P companies for presence in the chain of activities pertaining to development and operation of fields,” he added.

“In harmony with such fundamental change, PEDC established Pasargad Exploration Company to concentrate on development and production activities and bring together necessary specialties so that under the aegis of financial support by Pasargad Bank proper grounds would be prepared for the technical and financial development of oil fields in the country and guarantee maximum profitability for the future of the country,” he said. 

Mir-Moezzi said, “The integrated development of these fields could meet needs of raising national oil output and using cutting edge technologies along with attracting investment.”

He said the most important element in the implementation of the Jofair and Sepehr project was to drill horizontal wells that would be deeper than those currently available in the country, fracking and using downhole pumps for enhanced recovery. Mir- Moezzi said water and gas injection would be used for maximum efficiency recovery from the two fields over 20 years. He added that the benefits from development of these fields would serve NIOC for several decades following the accomplishment of the project.

“We hope that PEDC would expand its activities in the West Karoun area in the future and accomplish its mission alongside NIOC,” said Mir-Moezzi, a former CEO of NIOC.

He offered gratitude to Minister Zangeneh for having cleared the way for business activities in E&P sector for Iranian companies, saying: “On behalf of PEDC, I would also like to offer my gratitude to the NIOC professional group for their financial and technical talks and also Pasargad Bank for its financial support.”

Mir-Moezzi said, “Hopefully constructive cooperation between the parties to the contract and other organizations and institutes involved in the implementation of such contracts would open a new chapter for the Iranian nation to realize its dream of empowering E&P companies and result in creating sustainable capacity in the country and paving the ground for Iranian companies to step into international oil and gas markets.” 

In February 2017, NIOC and PEDC signed a memorandum of understanding (MOU) for conducting studies on the Sepehr and Jofair oil fields. The findings of the studies led to the development of technical and financial model which won the confirmation of NIOC for a contract. Then talks started between NIOC and PEDC to strike an IPC- style deal.

The Sepehr and Jofair oil fields were discovered in 1976 after the drilling of one well in Jofair. They are located in the northeastern section of the sedimentary zone of Abadan Plain and 60 kilometers southwest of Ahvaz. The necessity of integrated development of these two fields was felt after they proved to constitute a petroleum play.

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