IRAN: Ways and Means to Achieve Capacity Increase by 2010

1. IRAN: Ways and Means to Achieve Capacity Increase by 2010 East Meets West CERA Energy Conference June 2005,Istanbul Abbas Maleki

2. Basic Fact Sheet • Population: 68.5 million, 2005 • Area: 1,648, million sq kilometers, 17th largest country in the world • Literacy Rate: 85%, 2004 • Urbanization: 66% • Oil Reserves: 130 billion barrels, 2nd in the world after Saudi Arabia • Natural Gas Reserves: 27.57 tcm. 2nd in the world after Russia • Oil Production Capacity: 4.17 mmbbl/day • Gas Refinery Capacity: 368 mcm/day • Oil Refining Capacity: 1.34 mmbbl/day • Oil Export Capacity: 2.7 mmbbl/day, 2nd largest OPEC exporter • Total pipeline network (oil & gas): 26,000 km

3. Historical Milestone of Iran’s Oil Trend • 1873: Granting of an oil concession, the first in the Middle East, to Reuter • 1902: Granting of a 60-year concession to William Knox Darcy 1909: Formation of the Anglo-Persian Oil Company (APOC) • 1933: Granting of a new 60-year concession and changing the name of the enterprise to the Anglo-Iranian Oil Company (AIOC) • 1951: Nationalization of the AIOC and the formation of the National Iranian Oil Company (NIOC). NIOC takes over the operations of the AIOC • 1954: Formation of the ‘Consortium’, a grouping of 17 Western oil companies to take over the operations of the AIOC. Amalgamation of the NIOC and IOCs and Iranian production peaks at 6 m b/d • 1979: The Islamic revolution. • 1998: Opening the upstream sector of Iran’s oil and gas industry to foreign participation. The industry emerges from a 20-year isolation period. • 2004:Ratification of Iran’s 20-Year Perspective Document and Fourth Five-Year Plan.

4. IRAN has • 1% of the world’s population, • 7% of the world’s natural reserves including -10% of the global proven oil reserves -16% of the world’s natural gas resources. 130 b barrel oil (17 billion tons) 27 trillion cm gaswhich means $3000 billions • Oil revenues comprise 70% of the country’s hard currency revenues and half of the state budget.

5. Counties with Oil Reserves > 1 bill. t and Strategic Ellipse

6. World Oil Reserves

7. Iran’s Hydrocarbon Reserves by Different Sources

8. What would be Iran after 20 Years? Iran’s 20-Year Perspective Document Says: • The first country in the region at economic, scientific and technology levels • line of thinking, i.e. the prioritization of becoming an “economic and technological power” over other policy areas, is very evident in Iran’s 20-Year Perspective Document which has produced the first ever official long-term macro strategy of the Islamic Republic.

9. Iran and its Subregions • Middle East • Persian Gulf • South West Asia • Central Asia, Caucasus, and Afghanistan • Caspian Basin

10. Desired Iranian Society Desired Iranian Society, for the year 2025: • Secure, independent and powerful • Progressive • Knowledge-based • Economic growth based on a large portion of social capital • Growth of social capital through education • Society capable of steady economic capacity building

11. 3 Scenarios for Iran’s Future • Expansionism, • Isolationism, • Pro Development, The 20-Year Perspective calls for Iran to become an “economic and technological power”, underscores the Islamic Republic’s desire to give economic development priority over other policy areas.

12. Five-Year Plans Foci • While the document outlines the various policies in the fields of culture, socio-political developments, foreign policy, defense, economy and environment, it also determines the foci of the five-year plans (2005-2010) that will be drafted in the 20-year period.

13. Orientations of the four upcoming five-year plans -Realization of fast-pace and sustainable growth; -Generation of sustainable employment opportunities and reduction of unemployment figures; -Creation of a competitive market environment and facilitation of Iran’s competitiveness on an international scale; -Promotion of efficiency growth, especially the efficiency of Total Factor Production (energy, capital, human resources, water etc.) -Proactive interaction with the rest of the world in all fields and mutual interrelationship between the global economy and the Iranian economy; -Promotion of entrepreneurship as well as innovative initiatives and technological and research capacity building; -Provision of food security through self-sufficiency in agricultural production; -Development of a diverse, knowledge-based economy driven by human capital and modern technologies; -Active presence in regional and international markets and participation in the international division of labor; -Generation of incentives for non-oil exports and promotion of all products that are internationally competitive; -Creation of a market environment that attracts the domestic and international business community as well as entrepreneurs focusing on security, sustainability and respect for material and intellectual property rights; -Focus on Iran’s competitive and comparative advantages and the creation of new advantages; -Containment of inflation and promotion of growing purchasing power for the lower and medium income classes; -Promotion of the role of the cooperative sector through facilitation of this sector’s access to market intelligence, technology and facilitation of greater interaction between various cooperatives; -Promotion of the role of the private and cooperative sectors in all economic activities by limiting the government role to presence in the key sectors mentioned in Article 44 of the Constitution and by making the regulatory role of the government as efficient as possible.

14. General Policies of Five Year Plan in Oil & Gas

15. The Main Targets of the Fourth Five-Year Plan (2005-2010) • To achieve surplus oil production of 1 million bpd by 2010 • Replacement of additional capacity to annual depletion rates (350 000 b/d) • As well as a daily gas production of 250 mcm by 2010. • Reducing domestic consumption, so that more crude can be opened up for export. • To maintains the Oil Stabilization Fund (OSF). • In pursuit of long term goals, oil recovery factor is due to increase to 27% by 2010.

16. The Main Targets of the Fifth Five-Year Plan (2010-2015) • Reaching a crude oil production capacity of 5.5 mmb/d by 2010 and 7 by 2015 • Producing 900 mcm per day of natural gas by 2015 • Producing annually $20 billion petrochemicals • Concentration on energy-intensive industries (with the aim of them consuming a minimal 100 mcm per day of gas), so as to promote added-value production. • Attracting foreign investment and resources and providing them with the support necessary to achieve the needed $100 billion investments in the petroleum sector by 2015. • Increasing refining capacity by about 1 million bpd, with a concentration on gas condensates and very heavy crude, with the ultimate goal of reaching 2.3 million bpd of refining capacity

17. Iran’s Economic Performance

18. A Look at Iran’s Economic Realities • In the past, the country’s economic performance has suffered from extreme internal and external irritants, but there are growing signs that a period of sustained growth is emerging in Iran; • Due to its demography, the economy needs to produce some 800,000 new jobs each year for the next decade. While the main job-creating sectors would be services, agriculture and industry, the oil and gas wealth would have to drive the economic effort in this decade; • A new and more technocratic approach to managing Iran’s wealth will pave the way for an improved and a more balanced economy which needs to be integrated in the world economy, both because of its own drive for exports, but also because of the country’s need for investment and technology; • Socio-economic phenomena such as unemployment, underemployment and subsidies will remain the key irritants for the next few years, but none of them will pose a major threat to the sustainability of economic development in the country.

19. Legal Aspects of the Fourth Plan relating to the E&P Sector (1) • Maintaining and exercising government's ownership over the oil and gas resources of the country; • Requiring no government, CBI or governmental bank guarantees assuring the undertakings by the government; • Paying the original investment, interest, risks and expenses associated with finance and all other related expenses for carrying out the project from the sale of the products of the fields based on market prices at the time of sale of the products;

20. Legal Aspects of the Fourth Plan relating to the E&P Sector (2) • Contractors accepting the risks associated with not reaching the goals of the contract, non-commerciality of the field, or insufficiency of the products for remunerating contractors; • Determining the rate of return for contractors based on the conditions of each project and with purpose of creating incentives for utilization of superior methods for exploration, development, and exploitation; • Guaranteeing preservation of oil and gas reserves for the duration of the contract; • Complying with local content laws of Iran; • Observing and complying with environmental laws and regulations

21. Projected petrochemical Production Capacity (million tons per annum)

22. The Ways for Increasing Capacity • Since early 2004, NIOC has started a process which will eventually lead to the tendering of 100 oil exploration blocks through international tenders. • From an economic point of view, successful exploration projects will increase the country’s total reserves and in turn promote its international status.

23. Investments needed in the oil upstream sector until 2010

24. Needed Investments in the Gas Sector until 2010

25. Needed Investments in the Energy Sector until 2015

26. Expectations from IOCs • Technology transfer and training; • Management skills (especially project management); • Financing solutions (though the country is in a better position today, many of the Iranian oil companies lack the basic knowledge to secure financing); • Partnership with Iranian companies and gradual transfer of knowledge and technology to them; • Acceptance of buy-back as the contractual framework; • Maximization of local content.

27. What is Buy-back • Foreign investors will not own any part of the relevant oil or gas reserves. • Retention by NIOC of a negotiable percentage of gross production (typically around 40%). • Allocation of the portion of the remaining production to the contractor sufficient to cover recovery of the contractors allowable costs (taxes and import duties paid plus interest charges) and a negotiable remuneration fee calculated to yield an agreed rate of return on the contractors investment. • Retention by NIOC of any remaining percentage. • Operatorship is handed over to NIOC on the commencement of the commercial production. • Cost recovery and remuneration are spread over a number of years from commencement of commercial production, i.e. a period in which the investor can recoup his investment and agreed rate of return.

28. Selected Buy-Back Projects awarded to IOCs

29. Strengths and Weaknesses of Buy-Back Strength • A fixed rate of return on each project which has, to date, been in the 15-18% range. • This rate is independent of the oil price, and is attractive at times of oil price uncertainty. • There is low or no geological risk associated with each project as the fields under negotiation are generally well defined. Weaknesses • There is no incentive to complete the project below the agreed budget. • The fact that NIOC will manage the projects from the beginning could limit operating efficiency. • The limited life of each project may become a potential problem particularly for the very large projects such as the Azadegan field development.

30. Projects owned by Iranian Companies • South Pars Phase 1 with Petropars • South Pars Phases 6-8 with PetroPars and Statoil • South Pars Phases 9&10 (LG Construction 40%, OIEC 37%, IOEC9 23%). This contract is not a buy back contract but is a Finance & EPC type of contract. • Salman with PEDCO. • Nosrat & Farzam with PEDCO. • Esfandiar & Foroozan with PEDCO. • Masjed Soleyman with Naftgaran. • Rag Sefid with QEOID10 Co (a subsidiary of OIEC). • Ahvaz-Bangestan with PEDCO. • South Pars Oil Layer with PEDCO. • South Pars Phase 15&16 with Norwegian led Consortium (Aker Kvaerner).

31. Buy-Back Projects owned by Iranian Companies

32. Legal Issues pertaining to the presence of IOCs in the Iranian market • Buy Back Tender Requirements and NIOC Transactions Regulations • Authority over Upstream Activity in Iran -NIOC's Exercise of Ownership Rights • Arbitration Issues Under the Buy Back • Local Content Considerations • Pre-emption Rights of Consortium Members

33. Energy resource periphery Energy demand heartland

34. Iran’s Foreign Relations:Conceptual Challenges to 2010 • Iran-US Relations • Iran-EU Relations • Oil price • Treaty of Friendship between Iran and Iraq (1975) • Iran’s share of Hirmand river • 3 Iranian Islands in Persian Gulf • Regional Crises • Caspian legal regime

35. Models for-US Iran Ties • Leadership • Isolation • Engagement • Sticks and Carrots • Sticks • Attack

36. US military in Asia

37. Iran and Europe • Member ship of each central or Eastern Europe countries to EU means a new demand for Energy. • Europe is surrounded by the sea of gas, most important of them: Russia, Iran and Qatar. • In the Cold War era, with political motivation, Europe preferred to follow the Soviet gas pipeline instead of the cheap and costless Iranian gas.

38. Iran and Europe (2) • Now again, because of US extraterritorial rules like ILSA, the oil and gas companies can not invest more than 20 million dollars in Iran's energy industries. • The gas pipeline from Central Asia to Iran then Europe is a key project in trilateral cooperation among three regions. The physibility study of the two routes from Iran to Europe via Turkey and Ukraine had been done.

39. Iran and Europe (3) • -An expanded pipeline consortium with governments participation in the Caspian -Kazakhstan, Turkmenistan and Iran (KTI) is one option (TotalFinaElf Project) -Azerbaijan, Iran (Tabriz), Turkey (Ceyhan). • Dialogue on Human Rights • Collective Security in Iran’s Subregions: -Persian Gulf -Caucasus -The Roof of the World

40. World Energy Security (1) • -A perception is World should be concerned about its energy security given recent developments in the Middle East. • -Reality is that despite a war in the Middle East, World has not faced problems with its energy supplies. • -Over these past months, there were never any disruption of oil supplies from the Persian Gulf beyond Iraq and what’s more.

41. World Energy Security (2) • Saudi Arabia and other Persian Gulf OPEC producers significantly increased production to fill the gap. • -Reality is that the market remains well-supplied. • -The Persian Gulf continues to be the home of the most easily exploited and cost-effective petroleum reserves in the world. • Persian Gulf natural resources are undergirding the phenomenal economic rise of India and China.

42. Neka-Ray Old and New Pipeline (370 000 b/d)

43. Caspian Oil Terminals and Neka

44. Conclusion (1) Iran wants to • Increase the regime’s legitimacy among the Iranian society through improved economic conditions and higher efficiency; • Consolidate Iran’s regional and international position by projecting a greater significance both as an engine of regional economic stability, and also as one of the key suppliers of energy in a tense global energy market; • Secure the international respect that has been missing in Iran’s international relations.

45. Conclusions (2) • Iran’s position in OPEC as well as its international positioning strongly depend on its crude production capacity. • Iran’s Foreign policy is facing serious challenges during Iran’s 20-Year Perspective. • Energy demand and supply equilibrium has dramatic impacts on Iran. • United States different approaches to Iran will change Iran’s destiny. • Looking to East is one option for Iran

46. Conclusion (3) • Considering the volume of oil and gas reserves in Iran, there is no doubt that hydrocarbons will be the main engine of economic growth in Iran. • With more than 70 percent of Iran’s oil and gas prospects still untapped, the Iranian government is pursuing ambitious plans to assign these unexplored projects to domestic and foreign companies. • This provides opportunities for IOCs but the risks of such projects are naturally higher than others. • There is still a huge potential for the companies to launch independent gas exploration operations

47. Thank You maleki@caspianstudies.com