Shuttered Gas Field Could See New Life with Iran Negotiations

As Western powers prepare to negotiate with Iran this month in Geneva, energy companies are watching closely for signs of a diplomatic breakthrough that could free up production in the petroleum-rich country.

The recent thaw in U.S.-Iranian relations -- culminating in President Obama's historic phone call with Iranian President Hassan Rouhani late last month -- isn't likely to ease oil and gas sanctions barring a radical shift from Tehran over its contentious nuclear program.

But the possibility of reconciliation has calmed oil futures and could even help reboot a shut-down BP PLC gas field shared 50-50 with a National Iranian Oil Co. subsidiary in the North Sea.

BP's Rhum field, capable of producing 200 million cubic feet of gas per day, was closed in 2010 as tougher sanctions on Iran threw the site into legal limbo.

If output starts again, the field could meet about 4 percent of the United Kingdom's daily gas consumption, based on 2012 data from the U.K. Department of Energy and Climate Change.

DECC has raised the possibility of exempting the site from international sanctions. A U.S. State Department official confirmed that discussions had taken place with the United Kingdom about the Rhum field but declined to elaborate. The DECC did not respond to requests for comment.

There is precedent for offering exceptions for oil and gas projects with Iranian ties. The BP-led Shah Deniz field in the Caspian Sea is 10 percent owned by Iran but is clear for operation because of its strategic importance for Europe. Caspian gas is expected to ease the European Union's reliance on Russia as key pipeline projects come online in the next few years.

Peter Hughes, an independent energy analyst based in London, said the United Kingdom should be able to get the green light for the Rhum field, especially as winter sets in and gas demand ramps up.

"Clearly they're trying to get an exemption, and my best bet is they will succeed," said Hughes, who has previously held senior positions at BP and BG Group PLC. "The current warming of relations [with Iran] gives a bit of cover for that exemption to be granted."

BP spokesman Toby Odone said the company would let the U.K. government determine Rhum's future options, given the lack of legal clarity.

"As the operator of the gas field, our priority is to keep the field safe and to remain compliant with the law," he said in an emailed statement.

Odone noted that if Rhum were fired up again, it would extend the life of the nearby Bruce gas platform, a separate operation that has seen its production taper off in recent years. He said BP is considering decommissioning Bruce "as a precaution" but added that such a move would hinge on market factors.

Shell and Total

The "warming" atmosphere toward Iran has left energy companies with direct stakes in the country, including Royal Dutch Shell PLC and Total SA, comfortable airing their long-term hopes.

At a conference in London last Tuesday, Shell CEO Peter Voser said Iran's oil and gas "will have to be developed" to meet global energy demand, the Telegraph reported.

Total CEO Christophe de Margerie urged business in Iran to move forward "as soon as possible."

Both companies have had close ties to Tehran over the past several decades -- sometimes too close, in Total's case. The French company agreed to pay $398 million earlier this year after the U.S. Securities and Exchange Commission charged it with violating the Foreign Corrupt Practices Act for allegedly bribing Iranian officials in a 1995 offshore oil deal.

Shell ceased its upstream activities in Iran three years ago to comply with sanctions, the company said in SEC documents, but has struggled to fully extract itself from downstream operations such as trading activities and retail services.

Analysts agree that both companies would come rushing back to Iran if the United States and the European Union ease up on oil embargoes.

'Clear sailing'

With sanctions lifted, it would be "clear sailing" for Iran's cash-strapped energy sector, said Fadel Gheit, managing director and senior analyst covering the oil and gas sector at Oppenheimer & Co. Inc.

He doubted that the latest talks would lead to a breakthrough right away, given decades of hostility since the 1979 Iranian Revolution.

But "once things are close to normal, or at least give [Iran] the chance of having access to technology and foreign capital, the rate of growth will be significantly higher than that of Saudi Arabia," Gheit said.

Iranian liquid fuel production could even overtake Saudi Arabia's in the next three decades, based on models from the U.S. Energy Information Administration.

In the best-case scenario for Tehran, liquids production would hit 8.1 million barrels per day compared to the Saudis' 6 million bpd by 2040, according to EIA's International Energy Outlook released in July.

The EIA's low-end estimate for Iran places its liquids production at 3.9 million bpd in 2040, highlighting the country's status as a wild card due to political uncertainties.

In 2011, Iran was the world's third-largest exporter of crude oil and condensate, but its rank slipped to fifth last year as tightening sanctions took hold, the EIA reported.

And while the country has the world's second-biggest natural gas reserves, most production so far has been channeled toward domestic demand. Tehran's liquefied natural gas hopes have failed to gain traction, and analysts say the window may be closing for Iran to join the increasingly competitive LNG market (EnergyWire, July 11).

Some have questioned Iran's long-term influence over oil markets, given rising unconventional production, uncertain demand and the possibility of a widespread shift to renewable sources.

Iran Oil Minister Bijan Namdar Zangeneh has launched an aggressive campaign to restore the OPEC member's crude output to 4.2 million barrels per day -- a distant target as long as U.S.-led sanctions stay in place.

The U.S. House of Representatives passed measures in July aimed at further hampering Iran's oil export capacity, but the Senate has postponed taking up the sanctions until after the Geneva talks.

By the time output gets going again, the world may have already adjusted to an oil market sans Iran, said Hughes in London.

"I think oil demand is looking structurally weak going forward, so will Iranian oil be needed? Probably not," Hughes said.

Nevertheless, Iran borders the Strait of Hormuz, where roughly 20 percent of the world's traded oil passes daily. When Tehran speaks, markets listen, despite the outsized U.S. naval presence in the region.

The China factor

Energy-hungry countries such as China and Pakistan have been tempted by Iran's reserves of fossil fuels despite the threat of sanctions.

Pakistan's Prime Minister Nawaz Sharif incensed U.S. officials last month when he reaffirmed plans for an Iran-Pakistan natural gas pipeline to ease power shortages in Islamabad (EnergyWire, Sept. 30).

Meanwhile, state-owned China National Petroleum Corp. has secured a stake in Iran's sprawling North Azadegan field, set to begin producing oil by 2016.

John Garver, a professor at the Sam Nunn School of International Affairs at the Georgia Institute of Technology and a specialist on China-Iran relations, said China will continue to rely on Iranian oil and gas despite efforts to diversify its energy mix.

"Most people in China would be delighted to see a ratcheting down of the U.S.-Iran [tension]," he said. "China would like to go develop commercial relations in Iran without the U.S. leaning over its shoulder and berating it."

Garver noted that China is not too concerned with Iran's political interests, from its nuclear program to its tendency to fund groups linked to terrorism. Iran's Supreme Leader, Ayatollah Ali Khamenei, has repeatedly insisted that the nuclear program is for peaceful purposes.

Western powers worry Iran is seeking atomic weapons, which could be directed against Israel or other U.S. allies. The U.N. Security Council has imposed four rounds of crippling economic sanctions since 2006 in an effort to reverse Tehran's nuclear progress.

However, the United Nations may not be able to hold back Iran's ambitions, given the country's vast energy resources and political influence from Syria to China.

"I think China has placed a geopolitical bet on the long-term role of Iran," Garver said. "They see Iran as likely to emerge as a major power in the region."

Blake Sobczak, E&E reporter

Republished from EnergyWire with permission. EnergyWire covers the politics and business of unconventional energy. Click here for a free trial

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