Sanctions on Iran affect Gulf states

Oil and gas concerns in the region face new dilemmas

New sanctions against Iran are causing dilemmas for Gulf states with oil and gas deposits that cross into Iranian territory. Today, the EU is to impose a package of tough sanctions against Iran that specifically target the country's oil and gas industry. They include bans on the sale of equipment, technology and services to Iran's energy sector, hitting Tehran's activities in exploration and production, liquefied natural gas (LNG) and refining.

The sanctions are expected to disrupt the development of the Gulf region's biggest shared resource, the giant offshore gas and condensate field known as the North Field in Qatar and South Pars in Iran. It ranks as the largest single conventional hydrocarbon deposit in the world, containing an estimated 310 billion barrels of oil equivalent in total reserves and supports Qatar's position as the world's leading LNG exporter.

On top of the gas field lies an oilfield which Qatar calls Al Shaheen and which it has been exploiting for 18 years. Iran has not yet tapped into its small part of the field. It would like to, which is messing up Qatar's efforts to project future output from the field that is central to its oil production plans. The National Iranian Oil Company has set an initial production target for the South Pars oilfield of 35,000 barrels per day (bpd) and is studying a proposal to raise output to 54,000 bpd.

That compares with 300,000 bpd that Qatar Petroleum and its Danish partner Maersk pump from Al Shaheen. The partners last week announced they had produced more than 1 billion barrels of oil from the field. Without OPEC quotas, they could pump 450,000 bpd and they plan to raise output capacity to 525,000 bpd within 12 months. The South Pars oil reservoir is a tiny target for Iran, which has the world's third-largest oil reserves, including several giant oilfields awaiting development. Moreover, it is doubtful that Iran could exploit the deposit without western drilling technology.

"This is a very difficult reservoir that was thought to be impossible to produce oil from," said Abdullah al Attiyah, the Qatari energy minister. So Tehran is probably sabre-rattling to draw attention to its bigger concern, the 1,400 trillion cubic feet of gas reserves it shares with Qatar. The emirate pumped 3.2 trillion cu ft of gas last year from its 64 per cent share of North Field-South Pars, compared with an estimated 2.8 trillion cu ft for Iran - a production ratio that should be acceptable to Tehran. Revenues, however, are less equitable.

In 2008, Qatar received about US$62 billion (Dh227.65bn) from exports of North Field gas and condensate, a type of light oil. All the gas Iran has pumped from South Pars has gone to meet domestic demand at heavily subsidised prices. The country exports South Pars condensate only sporadically. Doha is aware of the tension this causes. In 2005, it placed a five-year moratorium on further North Field development plans, pending a study of the impact of increasing production on the reservoir. It has extended the moratorium several times, most recently until 2015.

The government's stated concerns are valid but the extensions also help it avoid conflict with Tehran. Confusing the situation, various Iranian agencies have given Qatar Petroleum "wildly different" South Pars output projections, the Middle East Economic Survey reported this week. That prevents Qatar from developing an accurate reservoir model. To earn more revenue from South Pars, Iran has long sought to develop LNG production and export facilities to rival Qatar's.

But the big western-based international oil companies that could have provided the technology have pledged to withhold further investment from Iran while it remains under international sanctions. Tehran has replaced them with less technically advanced Asian oil companies and domestic consortiums. The government awarded five South Pars development phases to Khatam-ol-Anbia, the engineering and construction arm of the Iranian Revolutionary Guard. But even that arrangement has gone awry.

Last week, the company unexpectedly withdrew from all five of its assigned South Pars phases. It earlier refrained from bidding on three others. "Khatam-ol-Anbia had no choice but to pull out of the project because it is on the list of sanctioned companies," the company said. "In the present circumstances, it is possible that continued activity ? will endanger national resources." Doha may not care what Iran does with South Pars gas. To avoid conflict, it only matters that it steps up output at the same pace as its neighbour. But even that seems unlikely with sanctions constraining Tehran's ability to finance development.

Iraq and Kuwait also want to develop fields straddling their respective borders with Iran - and face similar quandaries. Those countries are painfully aware that it was border disputes over oil that sparked the 1980-1988 Iran-Iraq War and the First Gulf War.