Iran oilfields could spring back from Western sanctions

Thu Jun 13, 2013 8:54am EDT

* Production has plunged 1 million bpd on sanctions

* Output could recover to 3 mln bpd in months post-sanctions

* Shutdowns help oil reservoirs, but capacity still eroded

By Peg Mackey

LONDON, June 13 (Reuters) - Iran's oilfields will be able to bounce back within months from drastic production cuts if Western sanctions are lifted although a full recovery would take over a year and require hefty investment, oil industry experts say.

Once ranked No. 2 in OPEC behind Saudi Arabia, Iran's production has plunged by 1 million barrels per day to 2.6 million bpd as harsh measures imposed early last year by the United States and Europe make it ever harder for Tehran to sell crude and fund its vital oil sector.

Iran votes for a new president to succeed Mahmoud Ahmadinejad on Friday, but the victor will see no immediate relief from the sanctions against Iran's nuclear programme. Tehran says the programme is for peaceful, domestic purposes.

Washington is now seeking to squeeze Iran's exports below 500,000 bpd - a quarter of the rate before the tighter sanctions - which would reduce production to levels last seen 30 years ago when Iran was at war with Iraq.

Shutting down such large volumes of oil is choking off billions of dollars in revenue, but it is also reviving Iran's fields by allowing pressure to rise.

In this condition - when the day comes for sanctions to be lifted - the fields could ramp up to 3 million bpd within months and reach to 3.6 million about a year later, experts say.

"It does not matter how low Iran's production goes. Building back up to 3.6 million barrels a day would take about the same amount of time - roughly 12 to 18 months," said Peter Wells of geological consultancy Neftex.

"My best guess is that Iran would need to invest a billion or so - mostly in gas handling facilities - to sustain that rate of production."

To keep most of Iran's oilfields in robust health, gas injection and water handling facilities must be installed and wells re-completed or re-drilled, said Wells, who has first-hand knowledge of the sector through his work with Lasmo, now part of Eni, which has invested in the country.

This crucial equipment comes at a price and sanctions have hindered the ability of Iran, the world's fourth biggest holder of proven oil reserves, to fund the effort.

"The problem they always have is they are not investing," said Leo Drollas of the Centre for Global Energy Studies.

"Iran could reach 3.2 million barrels a day from its current production rate of 2.65 million within two to three months, but it would have to invest quite a bit to do so within such a short period of time."

Iranian oil officials declined to comment on the country's production programme. Former officials based in Iran also declined to comment, citing the sensitive nature of the issue.

OIL CAPACITY CHALLENGE

For years, Iranian engineers have battled to get the best out of Iran's hard-worn oilfields, deprived of easy access to cutting-edge technology designed to maximize flows due to successive rounds of U.S. sanctions.

Their effective management of star producers Ahwaz, Marun and Gachsaran - situated in southwestern Khuzestan near the border with Iraq - had kept Iran in second position behind Saudi Arabia in the Organization of the Petroleum Exporting Countries.

But lower output due to sanctions pushed it to third place behind fast-growing Iraq last year.

Iran hit its production stride in the 1970s, when output peaked at just above 6 million bpd. But since the 1979 Islamic revolution, war with Iraq, under-investment, sanctions and natural oilfield declines have prevented a return to those heights.

Its ability to produce had recovered to around 3.9 million bpd in 2010. But capacity is deteriorating as sanctions squeeze the finances of the National Iranian Oil Co. (NIOC) and internal politics at the company hinder effective management of fields.

"Personnel and experience are just as important as equipment and money and there have been many damaging staff upheavals under Ahmadinejad," said Wells.

The International Energy Agency reckons Iran can now pump at most 3 million bpd, while other Western oil experts rank capacity as high as 3.6 million. Getting much above that level may be a challenge, given internal friction at NIOC.

"The management of Iran's oilfields is an unqualified mess," said Mehdi Varzi, formerly of NIOC. "Oilfield management has taken second place to political considerations," said Varzi, who now runs an energy consultancy in the UK.

Despite changes at the top of NIOC and the oil ministry, Iranian oil officials say there is a capable corps of young technocrats who will keep the country's oilfields in top shape.

And shutting off oil wells for a while can actually help production in the long run, for a country that has been an oil producer for more than a century.

"If they are extracting oil under natural pressure, the pressure builds up and it does not do the oilfield harm to stop it, you actually get a bit of rejuvenation," said Drollas. (Additional reporting by Alex Lawler; Editing by Giles Elgood)

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