Iran’s Oil Boom Continues, Powered by Russian-Chinese Support

Despite ongoing international sanctions and the recent bombing campaign against it by Israel and the U.S., Iran is continuing its push the record levels of oil production it reached in 2024. According to official data and industry sources, last year saw the Islamic Republic produce around 4.3 million barrels per day (bpd) of crude oil, plus a further 725,000 bpd of other liquids, which marked a post-1979 Iranian Revolutionary record. Understandably, production slumped slightly in the aftermath of the heightened military activity between Tehran, Tel Aviv, and Washington earlier this year. However, a senior oil industry source who has worked closely with Iran’s Petroleum Ministry told OilPrice.com last week that the Islamic Republic is pushing production back up to last year’s levels and may even surpass them this year. “Assistance has come from Russia, on the ground and from equipment and technology, and China is still a big buyer, in keeping with the long-term agreements done [by Iran] with both,” he said.

Russia’s involvement in this push is unsurprising, as it already had extensive energy interests and ambitions in Iraq, even before the U.S.’s unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) on 8 May 2018. Specifically, it had concluded multiple major memoranda of understanding (MoU) for seven big oil and gas fields in Iran – the most of any country. These were by GazpromNeft for the Changuleh and Cheshmeh-Khosh oilfields, Zarubezhneft for the Aban and Paydar Gharb fields, Tatneft for the Dehloran field, and Lukoil for the Ab Teymour and Mansouri oil fields. In the aftermath of its invasion of Ukraine, July 2022 saw Russian President Vladimir Putin visit his Iranian counterpart in Tehran to set the seal on a larger (US$40 billion) wide-ranging MoU signed just a few days before between the National Iranian Oil Company (NIOC) and Russia’s Gazprom, as analysed in full in my latest book on the new global oil market order. Among other deals contained in the MoU, Gazprom pledged its further extensive assistance to the NIOC in the US$10 billion development of the Kish and North Pars gas fields with a view to its producing more than 10 million cubic metres of gas per day. The MoU also detailed a US$15 billion project to increase pressure in the supergiant South Pars gas field on the maritime border between Iran and Qatar. Gazprom further pledged assistance in the completion of various LNG projects, the construction of gas export pipelines, and crucially to provide the technology and equipment to increase output from its holdings in the West Karoun oil fields cluster.

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The current focus of Russian development efforts is on Iranian oil fields that can yield a significant increase in oil output over the short- and medium-term from relatively modest improvements in development equipment and techniques. “Russia is also continuing with the development of the bigger fields, together with China, but these smaller fields are seen as the priority targets to raise oil output quickly, and the work is being done partly because of the big cooperation deal signed last year [between Russia and Iran] and partly as payment for the military equipment [drones and missiles] Iran is providing [to Russia] for its war in Ukraine,” the Iran source said last week. This big deal refers to the 20-year agreement – ‘The Treaty on the Basis of Mutual Relations and Principles of Cooperation between Iran and Russia’ – that was presented for consideration of Supreme Leader Ali Khamenei on 11 December 2023, and which was subsequently agreed to last year.

Two of these priority field targets are the Changuleh and Cheshmeh-Khosh oilfields. Originally developed under the first of the then-new investor friendly ‘Integrated Petroleum Contract’ with a US$2.2 billion initial investment by Russia, Changuleh’s development has been inconsistent to now but is expected to begin in earnest early this coming year. It has a conservatively estimated 4.8 billion barrels of in-place oil reserves and is expected to hit crude oil production of around 60,000 bpd in the first phase. Last week saw major repair and completion operations at the site, according to the Petroleum Engineering and Development Company (PEDEC). The firm added that the onus of current efforts are to repair and complete existing wells and to construct wellhead facilities and crude oil transfer pipelines. Following that, the focus will shift to corollary road construction and infrastructure preparation activities. Crucially from Russia and Iran’s perspective, Changuleh is a shared field with neighbouring Iraq (whose Badra field stems from the same oil reservoir as it, and Iran’s Azar field as well). This has historically allowed Iranian oil from such sites to be passed off as non-sanctioned oil, thus acting as the critical financial lifeline by which Tehran has managed to endure decades of sanctions, as also detailed in my latest book on the new global oil market order.

Another such Iranian site is Arvand (shared with Iraq’s South Abu Ghurab), which is also due to see expedited development by Russian firms before the end of this year, according to the Iran source. Located around 50 kilometres (km) south of Abadan in Khuzestan Province, Arvand is estimated to contain around one billion barrels of oil in place in three major layers, plus about 14 billion cubic metres of dry gas and 55 million barrels of gas condensate. Although there have been issues over which of the three countries – Iran, Iraq, or Kuwait – that contain parts of the reservoir has ownership over which parts of it, Tehran now believes that the matter has been largely settled, OilPrice.com understands from sources close to the Petroleum Ministry. “The section that was under dispute by Iran, Iraq, and Kuwait, is estimated to have reserves of 6 billion barrels, with at least 18 per cent of that deemed recoverable,” said one of the sources. “The [Petroleum] Ministry estimates that this section is relatively straightforward to develop, given the right equipment and technology, with an average cost recovery per barrel being at least 15 per cent lower than the lowest average recovery rate in the region – that is US$1.65 to US$1.70 per barrel – whereas the average low for Iran, Iraq, and Saudi Arabia is around US$2.00 per barrel,” he added. “The NIOC estimates that crude oil production from this section could rise to 1.4 million barrels per day within the first five years of proper development and could be stabilised around that level, making it one of the biggest producing oil fields in the world,” he told OilPrice.com.

The final part of the next phase of development by Russia will be renewed efforts on Iran’s potentially huge Chalous field – also included as one of the key energy assets in the Russia-Iran 20-year deal. The wider Caspian basins area, including both onshore and offshore fields, is conservatively estimated to have around 48 billion barrels of oil and 292 trillion cubic feet (tcf) of natural gas in proven and probable reserves. That said, in 2019, Russia was instrumental in changing the legal status of the Caspian basins area, cutting Iran’s share from 50% to just 11.875% in the process, as also analysed in full in my latest book. Early estimates were that Chalous contained around 124 billion cubic feet (bcf) of gas in place. This equated to around one quarter of the gas reserves contained in Iran’s supergiant South Pars natural gas field that account for around 40% of Iran’s total estimated gas reserves and about 80% of its gas production. The latest estimates are that it is a twin-field site, nine kilometres apart, with ‘Greater’ Chalous having 208 bcf of gas in place, and ‘Lesser’ Chalous having 42 bcf of gas, giving a combined figure of 250 bcm of gas.

For its part, China remains the world’s biggest buyer of Iranian oil, despite threatened sanctions from the U.S. This is hardly surprising, given the extremely favourable terms for Beijing in its all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and analysed in full in my latest book on the new global oil market order. China would get be allowed first refusal on most of the oil, gas, and petrochemicals projects that came up in Iran for the duration of the deal. Additionally, the per barrel payments to China were the higher of either the mean average of the 18-month spot price for crude oil produced or the past six months’ mean average price, tilting the remuneration firmly in Beijing’s favour. The deal’s terms also included at least a 10% discount to China on the value of the oil it recovered – although in several cases with extra bonuses applied this totalled 30%. The latter was the same discount to the lowest mean one-year average market price at the key gas pricing hubs for the gas that Chinese firms captured as well.

By Simon Watkins for Oilprice.com