Q3 2010 Iran Oil & Gas Report INCLUDES 10-YEAR FORECASTS to 2019

Q3 2010 www.businessmonitor.com iRaN oil & Gas Report INCLUDES 10-YEAR FORECASTS TO 2019

ISSN 1748-4022 Published by Business Monitor International Ltd. IRAN OIL & GAS REPORT Q3 2010 INCLUDES 10-YEAR FORECASTS TO 2019

Part of BMI’s Industry Survey & Forecasts Series

Published by: Business Monitor International

Copy deadline: May 2010

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Iran Oil & Gas Report Q3 2010

CONTENTS

Executive Summary ...... 7

SWOT Analysis ...... 9

Iran Political SWOT ...... 9 Iran Economic SWOT ...... 10 Iran Business Environment SWOT ...... 11 Iran Energy Market Overview ...... 12

Global Oil Market Outlook ...... 14

Is The Price Right? ...... 14 Oil Price Forecasts ...... 15 Oil Supply, Demand And Price Outlook ...... 16

Short-Term Demand Outlook ...... 16 Table: Global Oil Consumption (000b/d) ...... 17 Short-Term Supply Outlook ...... 17 Table: Global Oil Production (000b/d)...... 18 Longer-Term Supply And Demand ...... 19 Oil Price Assumptions ...... 20 Table: Crude Price Assumptions 2010 ...... 20 Table: Oil Price Forecasts ...... 20 Regional Energy Market Overview ...... 21

Oil Supply And Demand ...... 21 Table: Middle East Oil Consumption (000b/d) ...... 22 Table: Middle East Oil Production (000b/d) ...... 23 Oil: Downstream ...... 24 Table: Middle East Oil Refining Capacity (000b/d) ...... 24 Gas Supply And Demand ...... 25 Table: Middle East Gas Consumption (bcm) ...... 25 Table: Middle East Gas Production (bcm) ...... 26 Liquefied Natural Gas...... 27 Table: Middle East LNG Exports/(Imports) (bcm) ...... 27 Business Environment Ratings ...... 28

Middle East Region ...... 28 Composite Scores...... 28 Table: Regional Composite Business Environment Ratings ...... 28 Upstream Scores ...... 29 Table: Regional Upstream Business Environment Ratings ...... 29 Iran Upstream Rating – Overview ...... 30 Iran Upstream Rating – Potential Returns ...... 30 Iran Upstream Rating – Risks To Potential Returns ...... 30 Downstream Scores ...... 31 Table: Regional Downstream Business Environment Ratings ...... 31 Iran Downstream Rating – Overview ...... 32 Iran Downstream Rating – Potential Returns ...... 32

Iran Oil & Gas Report Q3 2010

Iran Downstream Rating – Risks To Potential Returns ...... 32 Business Environment ...... 33

Legal Framework ...... 33 Infrastructure ...... 34 Labour Force ...... 35 Foreign Investment Policy ...... 36 Tax Regime ...... 37 Security Risk ...... 38 Industry Forecast Scenario ...... 39

Oil And Gas Reserves ...... 39 Oil Supply And Demand ...... 40 Gas Supply And Demand ...... 41 LNG ...... 43 Refining And Oil Products Trade ...... 43 Revenues/Import Costs...... 44 Table: Iran Oil And Gas – Historical Data And Forecasts ...... 45 Other Energy ...... 46 Table: Iran Other Energy – Historical Data And Forecasts ...... 48 Key Risks To BMI’s Forecast Scenario ...... 48 Long-Term Oil And Gas Outlook ...... 48 Oil And Gas Infrastructure ...... 49

Oil Refineries ...... 49 Table: Refineries In Iran ...... 49 Service Stations ...... 51 Oil Storage Facilities ...... 51 Oil Terminals/ Ports ...... 52 Oil Pipelines ...... 52 LNG Terminals ...... 53 Gas Pipelines ...... 54 Gas Storage ...... 58 Macroeconomic Outlook ...... 59

Table: Iran – Economic Activity ...... 61 Competitive Landscape ...... 62

Executive Summary ...... 62 Table: Key Players – Iranian Oil And Gas Sector ...... 63 Overview/State Role ...... 63 Licensing And Regulation ...... 63 Government Policy ...... 64 International Energy Relations ...... 65 Table: Key Upstream Operators – Iran Oil And Gas Sector ...... 70 Table: Key Downstream Operators – Iran Energy Sector ...... 70 Company Monitor ...... 71

National Iranian Oil Company (NIOC) ...... 71 National Iranian Oil Refining and Distribution Company (NIORDC) ...... 76 Eni ...... 79 Total Iran ...... 82

Iran Oil & Gas Report Q3 2010

Shell Development Iran ...... 85 China National Petroleum Corporation ...... 88 Statoil – Summary ...... 91 Inpex/Japex – Summary ...... 91 Lukoil – Summary ...... 91 CNOOC – Summary...... 92 PTTEP – Summary ...... 92 OVL – Summary ...... 92 OMV – Summary...... 93 BP – Summary ...... 94 Sinopec – Summary ...... 94 Crescent Petroleum – Summary ...... 95 Gazprom – Summary ...... 95 Others – Summary ...... 96 Oil And Gas Outlook: Long-Term Forecasts ...... 97

Regional Oil Demand ...... 97 Table: Middle East Oil Consumption (000b/d) ...... 97 Regional Oil Supply ...... 98 Table: Middle East Oil Production (000b/d) ...... 98 Regional Refining Capacity ...... 99 Table: Middle East Oil Refining Capacity (000b/d) ...... 99 Regional Gas Demand ...... 100 Table: Middle East Gas Consumption (bcm) ...... 100 Regional Gas Supply ...... 101 Table: Middle East Gas Production (bcm) ...... 101 Iran Country Overview ...... 101 Methodology And Risks To Forecasts ...... 102 Glossary Of Terms ...... 103

BMI Methodology ...... 104

How We Generate Our Industry Forecasts ...... 104 Energy Industry ...... 104 Cross checks ...... 105 Oil And Gas Ratings Methodology...... 105 Table: Structure Of BMI’s Oil And Gas Business Environment Ratings ...... 107 Indicators ...... 108 Table: BMI’s Upstream Oil And Gas Business Environment Ratings – Methodology ...... 108 Table: BMI’s Downstream Oil And Gas Business Environment Ratings – Methodology ...... 109 Sources ...... 110

Iran Oil & Gas Report Q3 2010

Executive Summary

BMI forecasts that Iran will account for 16.12% of Middle East (ME) regional oil demand by 2014, while providing 16.15% of supply. Regional oil use of 7.47mn barrels per day (b/d) in 2001 rose to an estimated 10.64mn b/d in 2009. It should average 10.98mn b/d in 2010 and then rise to around 11.95mn b/d by 2014. Regional oil production was 22.83mn b/d in 2001, and in 2009 averaged an estimated 24.66mn b/d. It is set to rise to 27.18mn b/d by 2014. Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average of 15.36mn b/d. This total had eased to an estimated 14.02mn b/d in 2009 and is forecast to reach 15.23mn b/d by 2014. Iraq has the greatest production growth potential, followed by Qatar.

In terms of natural gas, the region consumed an estimated 367.6bn cubic metres (bcm) in 2009, with demand of 492.5bcm targeted for 2014, representing 28.7% growth. Estimated production of 429.9bcm in 2009 should reach 657.8bcm in 2014 (+39.8%), which implies net exports rising to 165.0bcm by the end of the period. Iran consumed an estimated 32.64% of the region’s gas in 2009, with its market share forecast at 30.90% by 2014. It contributed an estimated 28.15% to 2009 regional gas production and, by 2014, will account for 31.92% of supply.

We are sticking with our forecast that the OPEC basket of crudes will average US$83.00/bbl in 2010. Wide variations in crude differentials so far in 2010 make forecasting tricky for Brent, West Texas Intermediate (WTI) and Urals, but we believe the three benchmarks will average around US$85.11, US$88.22 and US$83.62/bbl respectively, with Dubai coming in at US$83.14. By 2011, there should be further growth in oil consumption and more room for OPEC to regain market share and reduce surplus capacity through higher production quotas. We are assuming a further increase in the OPEC basket price to an average of US$85.00/bbl. For 2012 and beyond, we continue to use a central case forecast of US$90.00/bbl for the OPEC basket.

For 2010, the BMI assumption for premium unleaded gasoline is an average global price of US$96.83/bbl. The year-on-year (y-o-y) rise in 2010 gasoline prices is put at 38%. Gasoil in 2010 is expected to average US$92.45/bbl, with the full-year outturn representing a 37% increase from the 2009 level. For jet fuel in 2010, the annual level is forecast to be US$95.58/bbl. This compares with US$70.66/bbl in 2009. The 2010 average naphtha price is put by BMI at US$82.46/bbl, up 39% from the previous year’s level.

Iran’s real GDP is assumed by BMI to have risen by 1.0% in 2009, followed by forecast 2.1% growth in 2010. We are assuming average annual growth of 3.0% in 2010-2014. We expect oil demand to rise from an estimated 1.61mn b/d in 2009 to 1.92mn b/d in 2014, almost matching the underlying rate of economic expansion. The state-owned National Iranian Oil Company (NIOC) is responsible for all upstream oil

Iran Oil & Gas Report Q3 2010

and gas activities, although there is some small-scale participation by international oil companies (IOCs) on a subcontractor basis. The lack of large-scale IOC investment contributes to modest output growth, with crude production forecast to increase from an estimated 4.19mn b/d in 2009 to 4.38mn b/d in 2014, subject to OPEC quotas and the possible impact of sanctions resulting from the nuclear energy debate. Gas production should reach 210bcm by 2014, up from an estimated 121bcm in 2009. Consumption is expected to rise from 120bcm to 152bcm by the end of the forecast period, providing export potential of almost 58bcm.

Between 2010 and 2019, we are forecasting an increase in Iranian oil production of 11.2%, with crude volumes rising towards 4.65mn b/d by the end of the 10-year forecast period, although there will have been an OPEC-induced dip in 2009/10. Oil consumption between 2010 and 2019 is set to increase by 27.3%, with growth slowing to an assumed 2.0% per annum towards the end of the period and the country using 2.17mn b/d by 2019. Gas production is expected to climb to 290bcm by the end of the period. With 2010-2019 demand growth of 46.0%, this provides export potential rising to 108bcm by 2019. Details of BMI’s 10-year forecasts can be found in the appendix to this report.

Iran ranks fifth, just ahead of Bahrain, BMI’s composite Business Environment (BE) Ratings table, which combines upstream and downstream scores. It holds sixth place in BMI’s updated upstream Business Environment Ratings. Iran is now three points behind Bahrain, in spite of a score benefiting from the region’s biggest gas reserves base and a very healthy oil reserves position. Reserves-to-production ratios (RPRs) are high, but strict government control of the upstream industry prevents Iran’s achieving a better overall score. Iran is above the mid-point of the league table for BMI’s updated downstream Business Environment Ratings, with some high scores but progress further up the rankings unlikely. It is rated third, above Oman, thanks to high scores for refining capacity, oil demand, gas consumption, retail site intensity and population. The growth outlooks for oil/gas consumption and refining capacity represent relatively weak suits. Oman is just two points behind it in the regional rankings and there is some long- term risk of it challenging for Iran’s third place.

Iran Oil & Gas Report Q3 2010

SWOT Analysis

Iran Political SWOT

Strengths ! Since the overthrow of the Pahlavi family in 1979 there has been some reduction in the level of political corruption, and wealth distribution has improved marginally. ! The Revolutionary Guard and Basij militia are fiercely loyal to the Supreme Leader, helping to maintain social stability.

Weaknesses ! The Republic has one of the poorest human rights records in the region, and the authorities do not hesitate to quell dissidents. A number of journalists and anti- government protesters are being held in custody. ! Although ultimately decision-making rests with the Supreme Leader, the regime is heavily fragmented and consensus is hard to reach. ! Widespread perception of electoral fraud during the course of June's presidential elections has damaged the regime's legitimacy in the eyes of many Iranians.

Opportunities ! The majlis (parliament) is more than just a rubber stamp – the move by 150 parliamentarians (out of 290) to hold the president accountable for his handling of the economy is a positive indication that checks exist.

Threats ! Ongoing nuclear tensions raise the prospect of further US and UN Security Council sanctions and the, albeit very limited, possibility of a military strike by the US or Israel. ! Ethnic tensions are on the rise. ! High youth unemployment. ! The rising influence of the Revolutionary Guards within the political and economic arena may present a challenge to the status quo over the long term.

Iran Oil & Gas Report Q3 2010

Iran Economic SWOT

Strengths ! Iran has the world's second-largest proven oil reserves after Saudi Arabia, and the world's second-largest proven gas reserves after Russia. ! Oil and gas aside, the republic is rich in other resources and has a strong agricultural sector.

Weaknesses ! Local consumption of hydrocarbons is rising rapidly and this, coupled with ageing technology in the oil and gas sector, will have a negative impact on its oil- and gas-exporting capacity. ! After a concerted effort to reduce public debt in recent years, there are signs that it is once again rising.

Opportunities ! The gas sector remains underdeveloped, and there is considerable room to maximise this source of revenue.

Threats ! A decline in world oil prices would have a marked impact on the economy. Although an Oil Stabilisation Fund (OSF) exists to protect the economy at times of weaker oil prices, it has increasingly been used to fund government overspending and could be close to empty. ! A further deterioration in Iran's relations with the international community over its nuclear programme could result in the imposition of more extensive economic measures by the UN Security Council or the US. ! There is a serious risk of capital flight owing to fears of conflict or sanctions.

Iran Oil & Gas Report Q3 2010

Iran Business Environment SWOT

Strengths ! The Foreign Investment Promotion and Protection Act (FIPPA) gives some protection to foreign investors and allows relatively good terms for the repatriation of profits. ! Although stifled in the years since the Islamic revolution in 1979, Iranians have traditionally been renowned for their entrepreneurial skills, a factor that is potentially a strong pull for foreign investors. ! Iran is OPEC’s second largest oil producer. Oil reserves in 2008 were 138bn bbl, some 10% of the world total. Around 29,610bcm of natural gas reserves gives the country approximately 15% of global gas resources.

Weaknesses ! Progress on the privatisation front remains slow. ! Foreign firms are currently unable to own Iran’s hydrocarbon resources. The resulting ‘buy back’ deals offer less advantageous terms than those elsewhere, limiting hopes of new investment. ! Iran’s existing oil fields have a natural decline rate estimated at up to 13% per annum, with a requirement for substantial upgrading and modernisation. Investment in enhanced oil recovery is needed to raise the below average recovery rates of less than 30%.

Opportunities ! As part of the fourth Five-Year Development Plan (FYDP) 2005-2009, the government will end tax and customs concessions currently afforded to the country’s quasi-state bonyads, or foundations. ! The bulk of Iranian natural gas has not been developed, meaning that Iran has huge potential for gas production. ! In June 2009, building work began on a new pipeline from Iran through Turkey that could supply European markets. The 1,740km Pars pipeline will run from Iran through Turkey to Greece, then through Italy and onwards to other Western European countries.

Threats ! UN and EU sanctions pose a significant threat to the participation of foreign firms in the oil and gas sector. ! Central bank supervision of charitable funds will be stepped up sharply, after it emerged that a number of these funds had collapsed because of indiscriminate lending practices. ! Iran has said that its oil and gas sector will need US$500bn of investment over the next 16 years in order to boost production.

Iran Oil & Gas Report Q3 2010

Iran Energy Market Overview

Iran is OPEC’s second largest oil producer. According to the BP Statistical Review of World Energy, June 2009, oil reserves in 2008 were 137.6bn bbl, some 10% of the world total. The vast majority of Iran’s crude oil reserves are located in giant onshore fields in the south-western Khuzestan region, near the Iraqi border. In total, there are 40 producing oil fields, of which 27 are onshore. Around 29,610bcm of natural gas reserves gives the country approximately 15% of global gas resources.

The country’s sustainable crude oil production capacity is estimated by the Paris-based International Energy Agency (IEA) to be no more than 4.00mn b/d. Crude production was 3.68mn b/d in March 2010 and under the new OPEC quotas introduced from January 2009, its entitlement had fallen to 3.34mn b/d. Iran’s existing oil fields have a natural decline rate estimated at up to 13% per annum, with a requirement for substantial upgrading and modernisation. Investment in enhanced oil recovery is needed to raise the below-average recovery rate of less than 30%. The country’s ambitious plans to boost oil production require large-scale foreign oil company participation that seems most unlikely given the current political climate. The Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or permitting a direct equity stake, so potential foreign partners have no ownership rights.

The country consumes around 1.61mn b/d of oil and has net exports of around 2.58mn b/d (largely to Japan, South Korea, China, Taiwan and Europe). Iran’s economy relies heavily on oil export revenues, which represent some 80-90% of total export earnings, 40-50% of the government budget, and 10-20% of GDP. Gasoline demand has been rising by up to 10% a year thanks to heavily subsidised prices that are an increasing burden for the state. Iran currently imports some refined oil products, mainly gasoline (around a third of which is imported), although surplus refining capacity provides the potential for increasing net products exports.

There are nine operational refineries with a combined capacity of 1.83mn b/d. With the help of Chinese investment, the country is pursuing a highly ambitious seven-refinery expansion programme, with the aim of ending oil product imports in 2010/2011.

In 2008, Iran said that its oil and gas sector would need US$500bn of investment over the next 16 years in order to boost production. Although the government has committed 3% of Iran’s US$70bn annual revenues to the development of the giant South Pars gas field, the project will require foreign investment and technical know-how. Delayed contract agreements and financial problems caused in part by international sanctions have postponed the development of South Pars, which contributed to a gas shortage in Iran in the winter of 2007-2008.

Iran Oil & Gas Report Q3 2010

Iran holds the world’s second largest gas reserves but its production and infrastructure are insufficient to meet the country’s consumption and distribution needs. Iran therefore remains a net gas importer, with gas brought in from Turkmenistan and Azerbaijan to supply the north of the country.

Gas was the dominant fuel for Iran in 2009, accounting for an estimated 56.8% of primary energy demand (PED), followed by oil at 40.8% and hydro with a 1.4% share of PED. Regional energy demand is forecast to reach 1,084.5mn toe by 2014, representing 24.85% growth over the period since 2009. Iran’s estimated 2009 market share of 21.87% is set to reach 22.04% by 2014.

According to BMI calculations, by end-2009 Iran had installed power generation capacity of around 51GW. In 2009, the country generated an estimated 212TWh and consumed an estimated 177TWh of electricity. Since 2000, electricity generation has risen by 70% and consumption by more than 60%. The highly subsidised price of gas for the power sector has resulted in a large share of steam-cycle and single- cycle gas turbines in the generation mix, with a slower incorporation of combined-cycle gas turbines and hydro-power technologies.

Iran is controversially developing a nuclear energy capability to reduce its increasing dependence on natural gas as a power station fuel. The first of several planned reactors may reach full design capacity during 2010. Pressure has been mounting in 2010 for tougher sanctions to be introduced by the international community in an effort to check the advance of Iran’s nuclear programme, which is believed by many to have military applications.

In February 2010, the head of the Atomic Energy Organization of Iran (AEOI), Ali Akbar Salehi, said the country's first nuclear power plant in the southern city of Bushehr was only one test away from operation, according to the semi-official Fars news agency. In January, AEOI announced that the plant will come onstream by the autumn of 2010.

The country’s share of MEA regional electricity generation in 2009 was an estimated 17.15%. By the end of the forecast period, we expect the country to account for 16.54% of regional power generation, and to remain a net exporter of electricity to neighbouring states. Electricity generation in Iran is largely based on gas, oil and hydro power. Gas provides 76% and oil almost 18% of generated electricity. Hydro accounts for 6% of generation. Renewables do not yet make a meaningful contribution.

Iran trades electricity with Afghanistan (exports to the western part of the country), Armenia (exports and imports), Azerbaijan (exports and imports), Pakistan, Turkey and Turkmenistan (exports and imports). It has more recently begun to supply Iraq with power.

Iran Oil & Gas Report Q3 2010

Global Oil Market Outlook

Is The Price Right?

In parallel with the cogitation at the International Energy Forum (IEF)’s end-March gathering in Mexico it was suggested that a price range of US$70-80/bbl for crude oil was pretty much perfect in the current and near-term environment. Many market participants apparently believe this level is high enough to deliver adequate producer-state revenues and project returns, but low enough to avoid further demand destruction and to keep out marginal production. If only it were that easy.

OPEC ministers, who met earlier in March, might share the view expressed by the IEF in Cancún, but the group looks to be on the brink of virtually abandoning genuine production quotas for all but select core member states. Growing discord within the organisation reflects the impatience being shown by some countries keen to push ahead with field development and carve out a wider and deeper niche for themselves. Actual production is moving further and further away from the theoretical ceiling and there is a real danger of a mini-OPEC free-for-all.

Fortunately, the big guns are generally remaining silent as the cartel grandees let the junior club members have their fun. The real test of unity can be avoided until oil prices come under pressure. Thanks to global demand recovery, threats to supply in various regions and the slow pace of non-OPEC expansion, there is little risk of a near-term confrontation that could tear OPEC apart.

Other shadows are falling over the consumer market, as pump prices head ever higher. As fuel prices move close to, or even above, the highs seen in 2008, there will be trouble. Heavy handed use of fuel taxation as a bogus substitute for environmental policy means that most motorists, airlines and truck operators could this year face unprecedented fuel costs. With a fragile OECD economic recovery underway, there is a macroeconomic as well as an oil-specific threat. This represents the so-called ‘double whammy’, where demand is destroyed by high prices at the same time as economic activity stumbles.

In the US, oil inventories have recently been heading ominously in the wrong direction, establishing an unhealthy surplus that has the potential to keep prices in check later in the year – particularly if the gasoline season gets off to a slow start.

Most third-party forecasters, including BMI, remain confident that demand and prices will hold up throughout 2010. However, the greater the price strength in Q2, the weaker demand may be in Q3 and Q4. None of this makes it necessary to review our existing central price assumptions but it does help reinforce our view that price progress beyond this year’s recovery may be subdued as the market struggles to find a balance.

Iran Oil & Gas Report Q3 2010

We again stick with our forecast that the OPEC basket of crudes will average US$83.00/bbl in 2010. Wide variations in crude differentials so far in 2010 make forecasting tricky for Brent, WTI and Urals, but we believe the three benchmarks will average around US$85.11, US$88.22 and US$83.62/bbl respectively, with Dubai coming in at US$83.14/bbl.

Oil Price Forecasts

In terms of the OPEC basket of crudes, the average price in Q110 was approximately US$75.40/bbl, up modestly from the US$74.32/bbl recorded during the previous three months. In Q109, the OPEC price averaged US$42.91/bbl, so the most recent quarter has seen a y-o-y gain of almost 76%. From the weekly average low of US$70.55/bbl in mid-February 2010, the OPEC basket climbed to a daily peak of US$82.55/bbl in early April. The monthly averages for the first three months of 2010 have been US$76.01, US$72.99 and US$77.21/bbl. The early signs are that April will deliver an average close to US$80/bbl.

Given that the unusually cold and disruptive winter will have provided unexpected price support, the prospects for Q2 might have looked a little shaky as temperatures rose and seasonal demand fell. Once again, the so-called Q2 ‘demand trough’ appears unlikely to trigger a sustained fall in prices.

In terms of other marker prices, North Sea Brent averaged US$76.24/bbl during Q1, with WTI achieving US$78.67, Urals (Mediterranean delivery) at US$75.32/bbl and Dubai realising an average US$75.83/bbl. These averages have been calculated using OPEC data and monthly prices from the International Energy Agency (IEA).

The BMI assumption for April 2010 OPEC crude is US$79.40/bbl and for the second quarter we are expecting an average of US$81.60/bbl, in spite of demand downside risk. This suggests an 8% strengthening of quarterly realisations when compared with Q110 and a y-o-y gain of US$23/bbl when compared with Q209 (+39.5%).

As mentioned earlier, for 2010 as a whole, we continue to assume an average OPEC basket price of US$83.00/bbl (+36.4% y-o-y). This is the forecast introduced in our October 2009 quarterly report. The equivalent US WTI price is now put at US$88.22/bbl. The April 2010 monthly report from the US-based Energy Information Administration (EIA) predicts a 2010 average WTI crude price of just under US$81/bbl, rising to US$83.50 in 2011. BMI is assuming an OPEC basket price of US$85.00/bbl in 2011, with WTI averaging US$90.35. Our central assumption for 2012 and beyond is an OPEC price averaging US$90.00/bbl, delivering WTI at just under US$95.70/bbl.

Iran Oil & Gas Report Q3 2010

Oil Supply, Demand And Price Outlook

Short-Term Demand Outlook

The BMI oil supply and demand assumptions for 2010 and beyond have once again been revised for all 71 countries forming part of our detailed coverage, reflecting the changing macroeconomic outlook and the impact of environmental initiatives. Investment in exploration, development and new production is once again rising as a result of higher crude prices, but not yet to the same level seen earlier in the decade. Costs associated with oil field development and exploration/appraisal drilling have begun to rise again, following the relief provided by the global recession. This may reduce the effectiveness of planned budget increases. For many companies, significant budget increases may be delayed until 2011 as they seek greater confidence in the macroeconomic picture and the trend in crude prices.

We have made only modest changes to forecast oil production levels, in line with recent OPEC levels and known project delays, with no clear evidence so far of large-scale spending changes by IOCs or NOCs.

According to the updated BMI model, 2010 global oil consumption will increase by 1.60% from the 2009 level. This represents a slight downgrade from the forecast contained in the January 2010 quarterly report, when 1.63% growth was predicted. The 2010 forecast represents slightly lower OECD demand (-0.21%) and a revised non-OECD increase of 3.23%. The overall increase in demand is estimated at 1.40mn b/d. North America is expected to see expansion of just 70,000b/d (0.33%), with OECD European demand set to recover by just 19,000b/d (0.15%). Non-OECD gains are expected to be 2.17% in Asia, 1.58% in Latin America and 1.72% in Africa.

The IEA, in its April 2010 Oil Market Report (OMR), predicts a more bullish rise in 2010 oil demand of 1.97%, or 1.67mn b/d. The organisation’s assumptions suggest an impressive 4.51% rise in non-OECD consumption (+1.78mn b/d). This points to 0.24% lower OECD oil demand, in spite of likely economic recovery and any weather-related benefits in Q1.

April 2010 EIA estimates suggest that world demand will rise y-o-y from 84.04mn b/d to 85.50mn b/d, with the 1.46mn b/d increase in consumption amounting to a gain of 1.74%. This view sits neatly between the somewhat cautious BMI assumption and the IEA’s more generous estimate. Non-OECD demand is predicted to increase by 3.70% (1.43mn b/d), while OECD demand is expected to rise by just 30,000b/d (0.07%). Consumption in the US is expected to increase by 150,000b/d (0.8%). With Canadian demand 1.8% higher and European demand 0.41% lower, it is in Japan that the US energy body sees the greatest risk of a decline – forecasting a fall of 3.67%.

Iran Oil & Gas Report Q3 2010

OPEC’s April 2010 report suggests a likely increase in 2010 global oil consumption of 0.90mn b/d, or 1.06%. OECD demand is forecast to fall by 160,000b/d (0.36%). Non-OECD demand is expected to average 39.83mn b/d, compared with 38.77mn b/d in 2009 (+2.73%).

Table: Global Oil Consumption (000b/d)

2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Africa 3,457 3,598 3,603 3,665 3,761 3,861 3,997 4,135

Middle East 9,959 10,558 10,635 10,984 11,214 11,451 11,716 11,947

NW Europe 13,440 13,429 13,096 13,115 13,162 13,238 13,335 13,336

N America 23,003 21,714 20,895 20,985 21,188 21,400 21,614 21,734

Asia/Pacific 25,575 25,673 25,841 26,388 27,227 28,065 28,836 29,585

Central/Eastern Europe 5,969 6,096 5,805 6,036 6,196 6,357 6,525 6,691

Latin America 7,728 7,952 7,915 8,040 8,171 8,340 8,534 8,692

Total 89,131 89,020 87,800 89,204 91,002 92,893 94,738 96,398

OECD 44,796 43,215 41,626 41,540 41,817 42,276 42,568 42,801 non-OECD 44,335 45,805 46,174 47,664 49,185 50,617 52,170 53,597

Demand growth % 1.41 (0.12) (1.37) 1.60 2.02 2.08 1.99 1.75

OECD % (1.01) (3.53) (3.68) (0.21) 0.67 1.10 0.69 0.55

Non-OECD % 3.98 3.32 0.81 3.23 3.19 2.91 3.07 2.73

e/f =estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

Short-Term Supply Outlook

According to the revised BMI model, 2010 global oil production will rise by 1.96%, representing an OPEC increase of 2.88% and a non-OPEC gain of 1.25%. The overall increase in supply is estimated at 1.72mn b/d in 2010, which represents a slight upgrade from the forecast delivered in the January 2010 quarterly report. We continue to assume that the existing OPEC production ceiling will be retained for the whole of 2009, but that actual output will remain close to the early-2010 level. Should quota adherence deteriorate further, OPEC volumes could emerge rather higher.

The US-based EIA was in April 2010 forecasting a 600,000b/d y-o-y rise in non-OPEC oil output, representing a gain of 1.19%. World oil production is predicted to be 85.66mn b/d in 2010, up from 84.16mn b/d (+1.78mn b/d) in 2009. The US organisation expects a 0.90mn b/d (2.66%) upturn in OPEC oil and NGL output. Given the aggressive stance of several OPEC producers, it would be no great surprise to see a significant upward revision to EIA assumptions.

Iran Oil & Gas Report Q3 2010

It is interesting to note that the EIA’s assumption of US oil demand even in 2011 is lower than it was in 1999, and is 1.7mn b/d below the highest level of annual consumption, reached in 2005.

OPEC itself sees 2010 non-OPEC supply rising by 500,000b/d to 51.53mn b/d. In 2010, OPEC natural gas liquids (NGLs) and non-conventional oils are expected to increase by 0.52mn b/d over the previous year to average 4.87mn b/d. The April 2010 OPEC monthly report argues that the call on OPEC crude is expected to average 28.8mn b/d, representing a downward adjustment of 135,000b/d from its previous assessment and a decline of 100,000b/d from the previous year. This suggests little scope for members to raise output.

The IEA’s 2010 assumption for non-OPEC oil supply is 52.04mn b/d, a rise of 1.09%. This somewhat cautious view is based on output declines in the US, Mexico, the UK and Norway, which will offset partly the growth predicted for Brazil, Russia, China, India and Colombia. OPEC production of gas liquids is expected to rise sharply from 4.65mn b/d to 5.46mn b/d. Increased biofuels supply (+20%) and a downturn in processing gains imply a need for OPEC crude volumes of 29.10mn b/d in 2010. This is very close to OPEC’s estimated Q110 output.

Table: Global Oil Production (000b/d)

2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Africa 10,193 10,172 9,686 10,155 10,325 10,758 11,275 11,793

Middle East 25,218 26,248 24,783 25,049 25,357 25,747 26,419 27,220

NW Europe 4,858 4,608 4,462 4,208 3,916 3,708 3,555 3,481

N America 10,167 9,974 10,495 10,510 10,545 10,625 10,685 10,600

Asia/Pacific 8,369 8,442 8,471 8,813 9,034 9,146 9,110 8,850

Central/Eastern Europe 12,950 12,981 13,381 13,606 13,845 13,967 14,239 14,554

Latin America 10,118 9,854 9,627 9,930 10,070 10,199 10,395 10,647

OPEC NGL adjustment 4,300 4,600 4,800 5,350 5,424 5,557 5,741 5,967

Processing gains 1,985 2,084 2,125 2,168 2,211 2,255 2,301 2,347

Total 88,158 88,963 87,847 89,570 90,631 91,990 93,678 95,455

OPEC 34,746 35,700 33,398 33,948 34,467 35,400 36,552 38,037

OPEC inc NGLs 39,046 40,300 38,198 39,298 39,899 40,979 42,313 44,031

Non-OPEC 49,111 48,663 49,649 50,271 50,732 51,011 51,365 51,424

Supply growth % 0.35 0.91 (1.25) 1.96 1.19 1.50 1.83 1.90

OPEC % (0.09) 3.21 (5.22) 2.88 1.53 2.71 3.26 4.06

Non-OPEC % 0.71 (0.91) 2.03 1.25 0.92 0.55 0.69 0.11

e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Longer-Term Supply And Demand

The BMI model predicts average annual oil demand growth of 1.89% between 2010 and 2014, followed by 1.39% between 2014 and 2019. After the forecast 1.60% global demand recovery in 2010, we are assuming 2.02% growth in 2011, followed by 2.08% in 2012, 1.99% in 2013 and 1.75% in 2014. Growth is expected to be stronger in 2011-2013, before slowing once again as energy-saving initiatives take effect later in the forecast period.

OECD oil demand growth is expected to remain relatively weak throughout the forecast period to 2019, reflecting market maturity, the ongoing effects of recent demand destruction, and the greater commitment to energy efficiency. Following the 3.68% decline in 2009 OECD oil consumption and the forecast 0.21% fall in 2010, we expect to see a rise of 0.67% in 2011. The upturn forecast for 2012-2014 delivers annual gains of 1.10%, 0.69% and 0.55% respectively. We expect growth trends to turn negative once again beyond 2014. On average, OECD demand is forecast to rise by 0.56% per annum in 2010-2014, then fall by 0.17% per annum in 2014-2019.

For the non-OECD region, the demand trend in 2010-2014 is for 3.03% average annual market expansion, followed by 2.59% in 2014-2019. Demand growth is forecast to recover from 0.81% in 2009 to 3.23% in 2010 and 3.19% in 2011.

BMI is forecasting global oil supply increasing by an average 1.68% per annum between 2010 and 2014, with an average yearly gain of 1.74% predicted in 2014-2019. We expect the trend to be at its weakest towards the end of the 10-year forecast period, with gains of just 1.04% and 0.68% predicted in 2018 and 2019.

Non-OPEC oil production is expected to rise by an annual average of 0.71% in 2010-2014, then 0.22% in 2014-2019. OPEC volumes are forecast to increase by an annual average of 2.89% between 2010 and 2014, rising to 3.44% per annum in 2014-2019.

Iran Oil & Gas Report Q3 2010

Oil Price Assumptions

The OPEC basket price, having averaged an estimated US$75.40/bbl in Q110, is forecast to be US$81.60/bbl in Q2 and US$88.87/bbl in Q3. The full-year forecast remains an average of US$83.00/bbl. Brent, WTI and Urals prices for 2010 are put at US$85.11, US$88.22 and US$83.62/bbl respectively.

Table: Crude Price Assumptions 2010

Q409 Q110e Q210f Q310f Q410f

Brent (US$/bbl) 74.56 76.24 84.22 89.86 90.13

Urals – Med (US$/bbl) 74.29 75.32 81.48 88.75 88.92

WTI (US$/bbl) 76.06 78.67 86.06 92.45 95.71

OPEC basket (US$/bbl) 74.32 75.40 81.60 88.87 86.12

Dubai (US$/bbl) 75.43 75.83 81.07 88.72 86.94

Source: BMI. e/f = estimate/forecast.

By 2011, there should be further growth in oil consumption and more room for OPEC to regain market share and reduce surplus capacity through higher production quotas. We are assuming a further increase in the OPEC basket price to an average of US$85.00/bbl, implying Brent at US$87.17, WTI at US$90.35/bbl and Urals at US$85.64. For 2012 and beyond, we continue to use a central case forecast of US$90.00/bbl for the OPEC basket.

Table: Oil Price Forecasts

2007 2008 2009 2010f 2011f 2012f 2013f 2014f

Brent (US$/bbl) 72.52 96.99 61.51 85.11 87.17 92.29 92.29 92.29

Urals - Med (US$/bbl) 69.51 94.49 61.04 83.62 85.64 90.67 90.67 90.67

WTI (US$/bbl) 72.26 99.56 61.68 88.22 90.35 95.67 95.67 95.67

OPEC basket (US$/bbl) 69.08 94.08 60.86 83.00 85.00 90.00 90.00 90.00

Dubai (US$/bbl) 68.37 93.56 61.69 83.14 85.15 90.16 90.16 90.16

e/f = estimate/forecast. Source = BMI.

Iran Oil & Gas Report Q3 2010

Regional Energy Market Overview

The Arabian Gulf states will continue to dominate oil supply, backed by huge and largely untapped reserves. Gas is another important export product for the region, mainly in the form of LNG. The Gulf plays a growing role in the supply of the world’s gas. Large parts of the region remain off limits to IOCs, thanks to state control in the major Gulf countries. Iraq is formulating oil laws, however, that may result in foreign partnerships. Investment in Iran by IOCs has come under increasing pressure thanks to the nuclear standoff. Refinery investment opportunities do exist for IOC partners, with the region building a substantial surplus with which to meet demand growth in Asia, Europe and North America.

Oil Supply And Demand

Thanks to the Gulf producers, this remains the most important region in terms of supply. It also has an increasingly significant role to play as a consumer of oil. Oil- and gas-based wealth creation has stimulated regional economies, triggering a surge in fuel demand that could ultimately have a negative impact on the export capabilities of Iran and others. OPEC policy and a relatively high level of quota adherence led to a meaningful downturn in 2009 regional supply, but there is now appreciable scope for growth in 2010 thanks to the quota-busting activities of certain members. We have assumed an unchanged OPEC ceiling for 2010, but with quota compliance remaining around the 55% seen in March 2010.

Iraq remains the region’s ‘wild card’, having medium-term production potential of at least 3mn b/d, with the government still targeting longer-term supply of up to 6mn b/d. For the immediate future, volumes look set to continue recovering slowly in spite of the uncertain political climate. New deals with IOCs should result in high-level investment in developing new reserves. For the region as a whole, we expect to see output reach 27.18mn b/d by 2014, representing a gain of 9.1% over 2010. Apart from likely growth in Iraq, the big supply winner will be Qatar. With regional consumption set to reach 11.95mn b/d in 2014, the growing export capability is clearly vast. Some 15.23mn b/d is likely to be exported in 2014, up from an estimated 13.93mn b/d in 2010.

Iran Oil & Gas Report Q3 2010

Table: Middle East Oil Consumption (000b/d)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Bahrain 40 41 42 44 45 46 48 49

Iran 1,693 1,730 1,610 1,700 1,760 1,812 1,867 1,923

Iraq 620 700 780 850 900 975 1,024 1,075

Israel 285 285 275 279 283 288 292 296

Kuwait 269 300 303 306 311 317 330 339

Oman 62 63 64 67 71 74 78 82

Qatar 90 104 100 104 110 117 124 131

Saudi Arabia 2,054 2,224 2,335 2,490 2,565 2,616 2,708 2,762

UAE 425 467 472 481 493 515 533 552

BMI universe 5,538 5,914 5,981 6,321 6,537 6,760 7,002 7,209

Other ME 4,421 4,644 4,654 4,663 4,677 4,691 4,714 4,738

Regional Total 9,959 10,558 10,635 10,984 11,214 11,451 11,716 11,947

e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

Middle East regional oil use of 7.47mn b/d in 2001 rose to an estimated 10.64mn b/d in 2009. It should average 10.98mn b/d in 2010 and then rise to around 11.95mn b/d by 2014. Iran accounted for 15.14% of estimated 2009 regional consumption, with its market share expected to be 16.09% by 2014.

Iran Oil & Gas Report Q3 2010

Table: Middle East Oil Production (000b/d)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Bahrain 49 48 50 55 58 65 70 75

Iran 4,322 4,325 4,185 4,180 4,250 4,300 4,350 4,380

Israel na na na na na na na na

Kuwait 2,636 2,784 2,485 2,505 2,575 2,630 2,720 2,850

Oman 701 728 810 850 825 820 835 820

Qatar 1,197 1,378 1,383 1,553 1,652 1,670 1,717 1,822

Saudi Arabia 10,449 10,846 9,905 9,925 9,985 10,150 10,330 10,700

UAE 2,925 2,980 2,650 2,665 2,725 2,800 2,875 2,915

BMI universe 22,280 23,089 21,468 21,734 22,070 22,435 22,897 23,562

Iraq 2,144 2,423 2,475 2,485 2,525 2,600 2,850 3,010

Syria 415 398 386 374 363 352 335 318

Yemen 345 305 296 287 278 270 257 249

Other ME 35 33 33 34 35 36 37 38

Regional Total 25,218 26,248 24,658 24,914 25,271 25,693 26,376 27,177 e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI. Figures for total regional production vary between regional and global tables as a result of a change in regional composition.

Regional oil production was 22.83mn b/d in 2001, and in 2009 averaged an estimated 24.63mn b/d. It is set to rise to 27.12mn b/d by 2014. Iran in 2009 accounted for 16.97% of estimated regional oil supply, and its market share is expected to be 16.12% by the end of the forecast period.

Oil exports are growing steadily, because demand growth is lagging the pace of supply expansion. In 2001, the region was exporting an average 15.36mn b/d. This total had eased to an estimated 14.02mn b/d in 2009 and is forecast to reach 15.23mn b/d by 2014. Iraq has the greatest production growth potential, followed by Qatar.

Iran Oil & Gas Report Q3 2010

Oil: Downstream

Table: Middle East Oil Refining Capacity (000b/d)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Bahrain 262 262 262 262 262 262 262 302

Iran 1,822 1,832 1,832 1,900 2,000 2,000 2,000 2,250

Iraq 674 681 685 725 750 1,000 1,150 1,300

Israel 220 220 220 220 220 320 320 320

Kuwait 931 931 931 990 990 990 1,150 1,150

Oman 85 85 85 235 235 235 235 235

Qatar 200 240 390 390 650 650 650 650

Saudi Arabia 2,100 2,100 2,100 2,450 2,530 2,630 2,630 3,450

UAE 625 673 773 1,000 1,000 1,000 1,150 1,250

BMI universe 6,919 7,024 7,278 8,172 8,637 9,087 9,547 10,907

Other ME 802 808 848 765 765 803 843 886

Regional Total 7,721 7,832 8,126 8,937 9,402 9,890 10,390 11,793

e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

Refining capacity for the region was 6.76mn b/d in 2001, rising gradually to an estimated 8.13mn b/d in 2009. Oman, Iraq, Saudi Arabia and the UAE are all expected to increase significantly their domestic refining capacity, with the region’s total capacity forecast to reach 11.79mn b/d by 2014. Iran’s share of regional refining capacity in 2009 was an estimated 22.54% and its market share is set to be 19.08% by 2014.

Iran Oil & Gas Report Q3 2010

Gas Supply And Demand

Table: Middle East Gas Consumption (bcm)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Bahrain 9.0 9.2 10.0 10.5 10.7 12.0 12.6 13.2

Iran 113.0 117.6 120.0 125.0 132.0 140.0 146.3 152.2

Iraq 4.0 5.0 5.0 5.0 5.5 6.0 6.6 7.3

Israel 0.8 1.0 2.3 2.7 3.0 3.0 3.2 3.5

Kuwait 12.1 12.8 14.0 16.0 18.5 20.0 22.0 23.8

Oman 12.0 12.6 13.0 13.7 14.5 16.0 16.5 17.0

Qatar 19.7 19.8 21.4 23.5 25.6 28.5 31.3 35.1

Saudi Arabia 74.4 78.1 81.2 81.4 86.8 93.0 99.3 106.9

UAE 49.3 58.1 58.0 60.0 64.2 69.0 74.2 79.0

BMI universe 294.3 314.2 324.9 337.8 360.8 387.5 411.9 437.9

Other ME 34.8 40.7 42.8 44.9 47.1 49.5 52.0 54.6

Regional Total 329.1 354.9 367.6 382.7 408.0 437.0 463.9 492.5

e/f = estimate/forecast. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Table: Middle East Gas Production (bcm)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Bahrain 11.8 13.4 13.0 12.0 11.0 11.0 13.0 15.0

Iran 111.9 116.3 121.0 130.0 145.0 160.0 180.0 210.0

Iraq 4.0 5.0 8.0 10.0 13.0 15.0 17.0 20.0

Israel 0.8 1.0 1.0 1.0 1.5 1.5 1.5 3.0

Kuwait 12.1 12.8 13.2 13.3 14.8 18.1 18.5 19.1

Oman 24.1 24.1 28.0 31.0 32.0 33.0 35.0 35.0

Qatar 63.2 76.6 107.0 131.0 140.0 145.0 147.8 156.6

Saudi Arabia 74.4 78.1 81.2 81.4 86.8 93.0 99.3 106.9

UAE 50.4 50.2 53.0 56.0 65.0 75.0 80.0 85.0

BMI universe 352.7 377.5 425.4 465.7 509.1 551.6 592.1 650.6

Other ME 4.1 4.1 4.5 4.9 5.4 6.0 6.6 7.2

Regional Total 356.8 381.6 429.9 470.6 514.5 557.5 598.6 657.8 e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

In terms of natural gas, the region consumed an estimated 367.6bcm in 2009, with demand of 492.5bcm targeted for 2014, representing 28.7% growth. Estimated production of 429.9bcm in 2009 should reach 657.8bcm in 2014 (+39.8%), which implies net exports rising to 165.0bcm by the end of the period. Iran consumed an estimated 32.64% of the region’s gas in 2009, with its market share forecast at 30.90% by 2014. It contributed an estimated 28.15% to 2009 regional gas production and, by 2014, will account for 31.92% of supply.

Iran Oil & Gas Report Q3 2010

Liquefied Natural Gas

Table: Middle East LNG Exports/(Imports) (bcm)

Country 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Iran na na na na na na 10.0 15.0

Kuwait na na (1.0) (2.0) (2.7) (1.4) (2.6) (3.5)

Oman 12.2 10.9 13.5 15.0 15.0 16.0 17.0 17.0

Qatar 38.5 39.7 68.6 89.0 94.4 96.5 96.5 96.5

UAE 7.6 7.5 8.0 8.0 9.0 10.0 10.0 10.0

Regional Total 58.3 58.1 89.1 110.0 115.6 121.1 130.9 135.1 e/f = estimate/forecast. na = not applicable. Historical data: BP Statistical Review of World Energy, June 2009/BMI. All forecasts: BMI.

The leading LNG exporter by 2014 will be Qatar (+8.5% from 2010). Iran has significant longer-term gas export potential, although the first volumes have yet to flow. The country is signing gas supply deals, which point to rising LNG sales from 2013. Turkey is set to be a key gas importer, although LNG volumes will be modest as the country raises pipeline supplies from the likes of Azerbaijan and Iran. Kuwait took its first deliveries of imported LNG from the summer of 2009.

Iran Oil & Gas Report Q3 2010

Business Environment Ratings Middle East Region

The regional business environment scoring matrix is broken down into upstream and downstream segments, providing a detailed analysis of the growth outlook, risk profile and market conditions for both major elements of the oil and gas industry.

The Middle East region comprises nine countries, including all major Gulf states. State influence remains very high, with limited privatisation activity. Oil production growth for the period to 2014 ranges from a negative 10% for Oman to a positive 36% in Bahrain, while oil demand growth ranges from 6% to 26% across the region. Increases in gas output range from 17% to 200% across the region over the period to 2014. The spread of gas demand growth estimates ranges from 22% to 49%. The political and economic environment varies, depending partly on market maturity and specific factors such as the uncertainty in Iraq and the nuclear-inspired standoff in Iran.

Composite Scores

Composite Business Environment scores are calculated using the average of individual upstream and downstream ratings. The UAE and Saudi Arabia/Kuwait now occupy the top and bottom slots of the regional league table. The composite upstream and downstream combined scores are 63 points and 46 points respectively, out of a possible 100. Qatar still claims second place behind the UAE, having established a comfortable lead over Israel. There is a three-point gap between Israel and Iraq, but the latter is clearly capable of moving much higher once IOC involvement picks up. Kuwait has fallen back alongside Saudi Arabia at the foot of the table, with Oman and Bahrain now ahead of both.

Table: Regional Composite Business Environment Ratings

Upstream Rating Downstream Rating Composite Rating Rank

UAE 68 57 63 1

Qatar 70 51 61 2

Israel 57 59 58 3

Iraq 64 45 55 4

Iran 52 54 53 5

Bahrain 55 48 52 6

Oman 44 52 48 7

Kuwait 47 46 46 8=

Saudi Arabia 41 51 46 8=

Source: BMI. Scores are out of 100 for all categories, with 100 the highest.

Iran Oil & Gas Report Q3 2010

Upstream Scores

Qatar and Saudi Arabia remain the best and worst performers in this segment, showing that the overall pecking order is quite different from that for combined scores. The UAE has remained just behind Qatar, trailing 68 points against the leader’s 70. This represents a lead of four points over third-placed Iraq, which we believe has the long-term potential to challenge the regional leaders. Israel holds the middle ground on 57 points, but is threatened over the medium term by Bahrain. Iran’s risk profile will probably keep it in the lower half of the table, although it may be able to keep ahead of Kuwait. Saudi at the foot of the table has accumulated 59% of the points allocated to Qatar.

Table: Regional Upstream Business Environment Ratings

Risks to the Realisation of Limits of Potential Returns Potential Returns

Upstream Country Industry Country Upstream Market Structure Limits Risks Risk Risks Rating Rank

Qatar 66 85 71 65 78 69 70 1

UAE 61 75 65 75 80 77 68 2

Iraq 81 65 77 45 14 34 64 3

Israel 34 70 43 95 77 89 57 4

Bahrain 36 65 43 85 81 84 55 5

Iran 71 35 62 15 53 28 52 6

Kuwait 64 15 52 10 84 36 47 7

Oman 20 60 30 90 55 78 44 8 Saudi Arabia 58 10 46 10 67 30 41 9

Scores are out of 100 for all categories, with 100 the best. The Upstream Business Environment Rating is the principal rating. It comprises two sub-ratings ‘Limits of potential returns’ and ‘Risks to realisation of returns’, which have a 70% and 30% weighting, respectively. In turn, the ‘Limits’ rating comprises ‘Upstream market’ and ‘Country structure’, which have a 75% and 25% weighting, respectively. They are based on the oil and gas resource base/growth outlook and sector maturity (Upstream) and the broader industry competitive environment (Country). The ‘Risks’ rating comprises ‘Industry risks’ and ‘Country risk’, which have a 65% and 35% weighting, respectively, and are based on a subjective evaluation of licensing terms and liberalisation (Industry) and the industry’s broader country risk exposure (Country), which is based on BMI’s proprietary Country Risk Ratings. The ratings structure is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please consult the Methodology section at the end of the report. Source: BMI

Iran Oil & Gas Report Q3 2010

Iran Upstream Rating – Overview

Iran holds sixth place in BMI’s updated upstream Business Environment Ratings. Iran is now three points behind Bahrain in spite of a score benefiting from the region’s biggest gas reserves base and a very healthy oil reserves position. Reserves-to-production ratios (RPRs) are high, but strict government control of the upstream industry prevents Iran’s achieving a better overall score.

Iran Upstream Rating – Potential Returns

Upstream Market: On the basis of upstream data alone, Iran ranks an impressive second in the region, five points ahead of Qatar but falling 10 points short of regional leader Iraq. The country is ranked first for gas reserves and second for oil, while its oil and gas RPRs are fourth and third respectively.

Country Structure: Contributing to Iran’s fourth position in the Limits to Potential Returns section is the seventh-place ranking for Country Structure. Iran is seventh by the number of non-state operators in the upstream sector and eighth in terms of state ownership of assets.

Iran Upstream Rating – Risks To Potential Returns

Industry Risks: Iran is rated last in the Risks to the Realisation of Potential Returns section of our ratings, behind even Saudi Arabia. Its seventh position for Industry Risks is attributable to an unattractive licensing environment that is exacerbated by very limited privatisation progress.

Country Risks: Its broader country risk environment is also rather unattractive, ranking Iran eighth and ahead only of Iraq – although with a very wide margin. The best score is for physical infrastructure, which represents the key benefit for private companies. The ability to operate is aided by the country’s reasonable score for long-term policy continuity but hampered by the level of corruption and Iran’s rule of law.

Iran Oil & Gas Report Q3 2010

Downstream Scores

Israel and Iraq now bracket the remaining seven ME states in the downstream ratings, with the former driven by the favourable country risk profile, privatisation moves and the competitive landscape. Israel is just two points head of the UAE, which has the potential to take over regional leadership. Oman has now risen to fourth place above Qatar and Saudi Arabia, with Iran holding a vulnerable third place. There is little to choose between Kuwait and Iraq at the foot of the table, although either could ultimately challenge Bahrain.

Table: Regional Downstream Business Environment Ratings

Risks to the Realisation of Limits of Potential Returns Potential Returns

Downstream Country Industry Country Downstream Market Structure Limits Risks Risk Risks Rating Rank

Israel 37 74 46 100 70 88 59 1

UAE 59 54 58 50 64 56 57 2

Iran 68 58 65 10 54 28 54 3

Oman 50 44 49 60 56 59 52 4

Qatar 63 32 56 20 74 42 51 5= Saudi Arabia 62 46 58 10 69 34 51 5=

Bahrain 40 48 42 60 66 62 48 7

Kuwait 52 42 50 15 70 37 46 8

Iraq 60 44 56 10 33 19 45 9

Scores are out of 100 for all categories, with 100 the best. The Downstream Business Environment Rating is the principal rating. It comprises two sub-ratings ‘Limits of potential returns’ and ‘Risks to realisation of returns’, which have a 70% and 30% weighting, respectively. In turn, the ‘Limits’ rating comprises ‘Downstream market’ and ‘Country structure’, which have a 75% and 25% weighting, respectively. They are based on the downstream refining capacity/product growth outlook/import dependence (Downstream) and the broader socio-demographic and economic context (Country). The ‘Risks’ rating comprises ‘Industry risks’ and ‘Country risk’, which have a 60% and 40% weighting, respectively, and are based on a subjective evaluation of regulation and liberalisation (Industry) and the industry’s broader country risk exposure (Country), which is based on BMI’s proprietary Country Risk Ratings. The ratings structure is aligned across all the industries for which BMI provides Business Environment Ratings, and is designed to enable clients to consider each rating individually or as a composite. For a list of the data/indicators used, please consult the Methodology section at the end of the report. Source: BMI

Iran Oil & Gas Report Q3 2010

Iran Downstream Rating – Overview

Iran is above the mid-point of the league table for BMI’s updated downstream Business Environment Ratings, with some high scores but progress further up the rankings unlikely. It is rated third above Oman, thanks to high scores for refining capacity, oil demand, gas consumption, retail site intensity and population. The growth outlooks for oil/gas consumption and refining capacity represent relatively weak suits. Oman is just two points behind it in the regional rankings and there is some long-term risk of it challenging for Iran’s third place.

Iran Downstream Rating – Potential Returns

Downstream Market: On the basis of downstream data alone, Iran is first among the region’s 10 countries, comfortably ahead of Saudi Arabia. This score reflects the region’s second highest oil consumption and refining capacity, highest gas demand and lowest retail site intensity. Offsetting these factors are the ninth and sixth places respectively for oil and gas demand growth.

Country Structure: Iran is ranked first in terms of the Limits to Potential Returns section, although its Country Structure holds a distant second place in the region. Population for Iran is ranked first, while growth in GDP per capita is also highest. State ownership of assets and competition attract the equal lowest scores with Iraq.

Iran Downstream Rating – Risks To Potential Returns

Industry Risks: In the Risks to the Realisation of Potential Returns section of our ratings, Iran is eighth, ahead of only Iraq. Its equal lowest score for Industry Risks, alongside Saudi Arabia and Iraq, reflects the tough regulatory regime and zero progress in terms of privatisation of government-held assets.

Country Risks: Its broader country risk environment is also flawed, rated eighth ahead of Iraq. Iran’s best score is for short-term economic external risk, followed by short-term policy continuity. Operational risks for private companies are reduced further by the state’s physical infrastructure. Short-term economic growth risk is high. Rule of law and legal framework are the other categories that let Iran down.

Iran Oil & Gas Report Q3 2010

Business Environment

Legal Framework

The Iranian legal system is very complicated. It has its historical foundations in Western systems, and provides separate courts for civil and criminal hearings, plus higher and lower courts according to the value or seriousness of the case. However, in addition to these courts there are clerical tribunals, revolutionary tribunals and the Court of Administrative Justice. Furthermore, the Iranian legal system is firmly based on shari'a law – as it has been since the 1979 Revolution – with all judges and most members of the ruling clergy certified in Islamic Law.

Clerical tribunals, which function independently of the regular judicial framework, hear cases against the clergy and are accountable only to the supreme leader. The revolutionary tribunals, on the other hand, deal with crimes against national security, narcotics smuggling and acts that undermine the Islamic state. Decisions rendered in these courts are final and cannot be appealed. The Court of Administrative Justice hears complaints against government officials, organs and statutes.

A complicated and poorly enforced commercial legal code undermines the effectiveness of the Iranian judicial system. The supreme leader appoints the head of the judiciary, who in turn appoints the head of the Iran’s Supreme Court and the chief public prosecutor. Though nominally independent, political influence and interference with the administration of justice are rife, and the judiciary does not enjoy the independence theoretically accorded to it by constitutional provisions. Lower court judges are often pressured to investigate cases by senior officials with business or political interests to pursue. Safeguards for defence against unfair trial are minimal, and conservative clerics still control the main levels of power in the judiciary. In addition, the system suffers from structural inadequacies, which can result in irregular trial procedures. Resorting to the court system seldom leads to speedy dispute resolution, and written contracts are only rarely of any use in investment disputes. Many foreign firms instead attempt to use connections with Iranian partners to ensure their interests are upheld.

Stoning and hanging are accepted means of execution, and can be applied to charges of homosexuality. Children are still executed, despite Iran signing up to international treaties that prohibit it. One recent case caused an outcry from Human Rights Watch and Amnesty International when a man was hanged for raping three other young men, although his alleged accusers withdrew their charges before he was convicted.

Foreigners nominally enjoy the same rights as nationals with regard to the leasing of houses, apartments and offices, whether for dwelling or business purposes. For instance, in case of foreign investment, the Iranian government theoretically guarantees fair compensation when foreign investors' property is expropriated, and extends its protection to all foreign capital imported into the country.

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However, in reality, foreigners do not have the same rights as Iranian nationals. Most foreign firms have bad experiences when disputing a contract, and written agreements offer very little protection for the contracting party. Indeed, according to the Heritage Foundation's International Index of Economic Freedom, Iran only scores 10 out of 100 in the property rights category, the worst score of any country in the Middle East region. Often, finding an influential local business partner that also enjoys substantial political patronage is the more effective way to protect contracts.

Iran has its own trademark and patent law, and is a party to the Paris Convention for Protection of Industrial Property, which safeguards non-Iranians' rights to intellectual property. Iran also joined the World Intellectual Property Organisation Convention in 2002. However, Iran is not a member of the Berne Convention for the Protection of Literary and Artistic Works. Since Iran only has observer status with the WTO – due primarily to vehement US opposition – it does not comply with the TRIPS agreements.

Iran scored a dismal 1.8 in Transparency International's Corruption Perception Index 2009, and ranked 168th out of 180 countries measured. Worryingly, the Islamic Republic's score in the index has fallen every year since 2002, when it was 3.0, indicating a growing level of corruption in the country. With newspapers and news agencies tightly controlled and censored, there is little information available from inside the country on the level of corruption; independent estimates, such as Transparency International's CPI, remain the best indicator.

Infrastructure

Iran has a well developed transport system that is reliable, cheap and extensive. There are 8,367km of railway, most of which is single-tracked, and 179,388km of roads, of which 67% are paved. There are 331 airports in the country, although the majority – 61% – have unpaved runways.

Although road surfaces are generally excellent and petrol is extremely cheap thanks to subsidies, travelling by road can also be extremely dangerous. To all appearances there are no road rules and the country has one of the highest rates of road accidents in the world. In addition, the authorities sometimes mount informal roadblocks in cities and highways, which can be problematic for foreign travellers – it is advisable to carry ID at all times in case of such an incident. With a number of bus companies offering competitive services, transport by bus is cheap, although it can be quite slow and unsafe, mainly because of poor driving by other road users. The train network is extensive – covering most of Iran’s major cities – and offers efficient services that are safer and more comfortable than bus travel.

Air travel is generally less reliable and frequent than any other form of transport and comes with an added risk, as most of the aircraft flown on domestic routes in Iran are ageing. Recently, Mahan Air had its UK

Iran Oil & Gas Report Q3 2010

and EU operating licences suspended owing to safety concerns, and a collision between KLM and Lufthansa planes at Imam Khomeini International Airport highlights the safety risk of air travel.

Iran has a number of ports, although many areas of the Caspian Sea and Persian Gulf are highly sensitive politically. The waters around the islands of Abu Musa and the Tunbs in the southern Persian Gulf are particularly sensitive and are militarised. In recent years there have been a number of cases of tourists being arrested and imprisoned for entering these waters and individuals are advised by the UK Foreign and Commonwealth Office (FCO) not to sail into waters around these islands without express permission from the Iranian authorities and not to dock at all.

The communications infrastructure is rapidly improving, thanks to investment and privatisation plans. Iran now has one of the most developed fixed-line networks in the region, as the government continues to modernise the sector by increasing the volume of the urban service, and bringing services to several thousand villages not presently connected. Main line availability has more than doubled to 19mn lines since 1995. In addition, mobile telecommunications have increased dramatically, serving some 8.5mn subscribers in 2005. The internet is becoming more and more prevalent, as the number of private internet service providers (ISPs) grows rapidly. In addition, with 18mn internet users, more than 1,500 internet cafés have been set up – mainly in Tehran – to respond to growing demand, especially as the government has banned residential ADSL services with a speed higher than 128kbit/s, although the speed limitation only applies to houses and not offices. Iran has one of the lowest broadband penetration rates in the region, at an estimated 0.8% in 2006.

Labour Force

The working population is estimated at 26.2mn, out of a total population approaching 70mn, and unemployment is estimated at 15% of the active population. Around 30% of the workforce is employed in agriculture, 25% in industry and 45% in services. In recent years, robust oil and gas income from high oil prices has driven economic expansion, resulting in employment growth. However, economic growth is not matching the rise of new entrants to the labour market, averaging 750,000 a year, and job creation in Iran remains a key challenge for the authorities. On a positive note, the World Bank has noted a phenomenal leap in the participation of women in the labour force in Iran, which has risen from 33% to 41% in the past five years.

The government faces a tough task in reforming Iran’s highly convoluted raft of labour legislation, which remains a distinct problem for running businesses in the country. In some respects, labour laws are beneficial to business: strikes are not permitted and workers are not allowed to bargain collectively. Sometimes employers have demanded ‘blank contracts’, which workers are required to sign in order to get jobs, with the conditions subsequently filled in by the employer. However, the labour market operates

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under restrictive regulations that hinder employment and productivity growth. The non-salary cost of employing a worker is high and dismissing a redundant employee is costly.

Furthermore, regulations on increasing or contracting the number of work hours are very inflexible. Firing a worker requires the approval of the Islamic Labour Council or the Labour Discretionary Board. Hiring and firing costs are prohibitive, with the sum of social security payments and payroll taxes as a percentage of the worker’s salary high by international standards. According to the World Bank, the firing cost is currently equal to 90.7 weeks of wages. In the rigidity of employment index – which measures the average of three sub-indices: a difficulty of hiring index, a rigidity of hours index, and a difficulty of firing index – Iran scores a relatively high 49 out of 100. Overall, economic reform is having an effect in the workplace. Workers in establishments with fewer than 10 employees and workers in the carpet industry have had the protection of the labour law removed in recent years, in order to make the companies more competitive.

The government maintains a ban on independent trade unions. The labour code grants workers the right to form their own organisation, yet the state-controlled Workers’ House is the only authorised labour organisation and a dissident labour leader who runs a union grouping of bus drivers was recently jailed for ‘distributing statements against the system’. There are signs that the Islamic Republic is developing a more restive workforce. In 2007, tens of thousands of deprived workers gathered in Tehran to protest about their unpaid wages and the regime’s anti-labour law, while similar protests were organised in other cities such as Shiraz, Mashhad and Semnan. Work stoppages are frequent in the public sector, often precipitated by the failure to pay civil servants.

Foreign Investment Policy

The Islamic Republic is facing a significant challenge to its investment climate, with economic sanctions being imposed under the auspices of the UN and the US – a consequence of growing international pressure over Iran’s alleged uranium enrichment programme.

Although President Mahmoud Ahmadinejad has not sought to take a substantially tougher line on foreign investors, the heightened regional tensions that have accompanied his term in office have proved inclement for attracting more foreign direct investment (FDI). Still, the Iranian president has also committed to a five-year development plan, which supports structural economic reform. The truth is, that despite some improvements in the early part of the 2000-2004 five-year plan, which saw the introduction of a new FDI law, much of the impetus has drained since 2003, as the political battle between conservatives and the weakened band of reformists intensified. With arbitrary political decisions the order of the day, Iran is unlikely to see a substantial improvement in FDI flows.

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The oil and gas sector has seen relatively little interest from foreign companies on account of the poor terms offered by the so-called ‘buyback’ contracts, which was a formula devised to get around Iran’s historical antipathy to foreign equity ownership of its hydrocarbons. These contracts are arrangements in which the contractor funds all investments and receives remuneration from NIOC in the form of an allocated production share, and then transfers operation of the field to NIOC after the contract is completed. This policy could prove harmful for Iran as, according to former oil minister Kazem Vaziri Hamane, the country needs an annual investment of around US$20bn in the oil industry. The main sources of foreign investment are Germany, Italy, China and Turkey, with petrochemicals and oil and gas the key sectors.

Bureaucracy is widespread in Iran and one area where investors find it difficult to gain access is the traditional marketplace. This is centred on the bazaars, where a number of merchant families – bazaaris – maintain a strong hold. On top of this, prominent internal oil companies have in the past been found guilty of maintaining ‘slush funds’ to pay to local businessmen. Meanwhile, excessive regulation and controls can impose considerable costs on businesses. In addition, Iran’s private sector remains hamstrung by extensive red tape and other market distortions.

Tax Regime

The tax regime has undergone substantial reform, with a sharp reduction in the maximum corporate tax rate to 25%. Resident companies enjoy a corporate tax rate of 10% on taxable income, with the remainder taxed according to a progressive scale ranging between 12% and 54% according to their income. The authorities are planning to curb tax exemptions.

The maximum corporate tax rate is now capped at 25%, down from a previous cap of 54%. According to the tax code, the taxable income of companies or non-resident persons operating in sectors including construction, technical installations, transport, preparation of construction and installation drawings, surveying, supervising, and technical calculations, is limited at just 12%. For companies quoted on the Tehran Stock Exchange, there is a further 10% rebate on taxes.

The top rate of income tax is 54%, on a sliding scale going down to 12%. Various ceilings within these bands have been raised in recent years. VAT does not exist, although there are plans to introduce a low VAT rate of just 7% in 2008. Low-income Iranians are to be protected by the exemption from the VAT list of goods that are most commonly used by that section of the population. Foreign contractors sub- contracting part of their project to Iranian firms must pay a withholding tax of 2.5% from payments to the Iranian sub-contractor.

Iran Oil & Gas Report Q3 2010

Security Risk

There remains a small risk of terrorist attacks, although these have been sporadic in recent years. Foreigners may also be targeted due to widespread anti-Western sentiment, which is exacerbated by government statements: Tehran has blamed the US and/or UK governments for involvement in the February 2007 bombing that killed Iranian military forces in Zahedan in the south east and the 2005/2006 bombings in Ahvaz/Khuzestan in the south west. As a result, foreigners are advised by Britain’s Foreign and Commonwealth Office to maintain an increased level of vigilance and exercise good security practice.

A further threat comes from political demonstrations and public gatherings that are regularly organised to protest against the policies of Western governments, in particular those of the US, UK and Israel. In the past three years, there have been sporadic violent attacks on, and violent demonstrations outside, the British Embassy compound in Tehran, coinciding with moments of tension in political relations between the UK and Iran, and with events elsewhere in the region. Most recently, in April 2007, demonstrators blocked access to the embassy and threw bricks at the premises. In addition, there have been a number of anti-government demonstrations in recent months which have often been broken up with violence, most notably demonstrations by students against Ahmadinejad at Tehran University. Foreigners are advised to follow news reports and avoid public gatherings and demonstrations.

One area in which the security risk is high is Iran’s borders with other countries in the Middle East, most notably the Iran/Afghanistan border and the Iran/Iraq border, and the UK government advises citizens not to travel within 100km of either border. The Pakistan border area is also insecure and is notorious for its banditry, as it is the main route for drug-traffickers from Afghanistan and Pakistan. There have been incidents of kidnapping of foreigners by armed gangs in south eastern Iran, near this border, and local insurgent groups have also contributed to insecurity in the area, reportedly carrying out a series of violent attacks in 2006, which left a large number of civilians dead.

Major crime is generally not a problem for foreigners in Iran and street crime in Tehran, as in other Iranian cities, is low. That said, incidents of robbery against foreigners are not unknown. There have been a number of robberies carried out by men in unmarked cars and on motorcycles, who drive up alongside their victims and snatch items. In addition, there have been a number of attempted robberies by bogus policemen, usually in civilian clothing, and foreigners are advised not to carry large amounts of hard currency or any important documents with them.

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Industry Forecast Scenario

Oil And Gas Reserves

According to the June 2009 BP Statistical Review of World Energy, at the end of 2008 Iran held 137.6bn bbl of proven oil reserves. The majority of crude oil reserves are located in giant onshore fields in the south-western Khuzestan region near the Iraqi border. Gas reserves are put at around 29,610bcm, surpassed only by those of Russia. Upside potential exists for gas, but is unlikely to be realised quickly, owing to the lack of IOC involvement.

Iran’s former oil minister Gholamhossein Nozari announced in August 2009 that the country had made an oil discovery of around 8.8bn bbl of crude oil at the Sousangerd oil field. He further stated that the discovery is thought to be the largest oil find in the past five years. According to initial estimates, in-place reserves have been put at 8.8bn bbl, while the expected and possible in-place reserves have been estimated at 5.83bn bbl of oil. No further details on the discovery have been released.

The country in July 2008 announced the discovery of a new oil field with 525mn bbl of in-place reserves. The news followed an earlier announcement of the discovery of a significant oil field in the oil rich province of Khuzestan, which is said to hold 1.1bn bbl of in-place reserves. The discovery was made near the southern port city of Assaluyeh, Islamic Republic of Iran Broadcasting (IRIB) said without giving further details. Nozari said that a few other fields had also been discovered and that further announcements were imminent.

In February 2010, Iran’s oil minister Massoud Mirkazemi claimed the country had discovered a new oil and a new gas field, which Mirkazemi estimated to hold 475mn bbl of total reserves (of which 70mn bbl are recoverable). The oil field, known as the Soumar field, is said to be located in the western Kermanshah province. The newly discovered Halgan gas field, which is located in the southern Fars province, could produce around 18bcm per year over a 20-year period, the minister said. As no further details on the discoveries have been announced and no other sources have confirmed the discoveries, BMI considers it too early to assess the potential impact the finds could have on Iran’s reserves levels.

Iran began drilling its first well in the Caspian Sea in February 2010, according to IRNA. The well is being drilled by the Iranian contractor North Drilling Company (NDC). Although the move into the Caspian Sea opens up a new prospective region for Iran, the successful commercialisation of any discoveries could be limited by the country’s lack of oil infrastructure in the area.

Iran Oil & Gas Report Q3 2010

Oil Supply And Demand

Iran’s output in March 2010 was 3.68mn Iranian Oil Production, b/d, as the country remains well ahead of Consumption And Exports its OPEC-agreed allocation (of around (2000-2014) 3.34mn b/d). Weaker demand for heavier crudes and refinery throughput cuts appear to have reduced buying interest.The IEA puts sustainable Iranian productive capacity at 4.0mn b/d.

CNPC and Naftiran Intertrade Company (NICO), a subsidiary of NIOC, signed a final agreement in September 2009 for the North Azadegan oil field. Under the deal, CNPC will take e/f = estimate/forecast. Source: Historical data – BP Statistical Review of World Energy June, 2008; forecasts – BMI a 70% interest in the project, while it will provide 90% of the required financing, according to Iranian news sources.

The North Azadegan field will be developed in two phases, with the second phase depending on the successful submission of a comprehensive development programme that will need to be approved by the NIOC. It is planned that in the first phase, lasting four years, output will reach 75,000b/d. Ultimate production in the second phase could reach 150,000b/d. CNPC is also said to be leading the development of the South Azadegan field that could produce 260,000b/d of oil, with 150,000b/d in the first phase and 110,000b/d in the second phase.

Iran has approved the first development phase of the Yadavaran oil field, according to media reports citing the Islamic Republic News Agency (IRNA). State-controlled China Petroleum & Chemical Corporation (Sinopec) signed a US$2bn deal for the field in December 2007. According to Iranian estimates, the Yadavaran field has in-place reserves of 18.3bn bbl of oil and 354bcm of gas, of which 3.2bn bbl of oil and 76bcm of gas are recoverable.

Under the deal, Yadavaran will produce 85,000b/d in the first phase of the field’s development, with a further 100,000b/d to be added in the second phase. The first phase is expected to last four years, with a three-year period scheduled for the second phase, according to media reports when the deal was signed in 2007. Apart from announcing that the first phase of the field’s development has now been approved, no further details have been released and it remains unclear when work at the first phase is likely to start. In September 2008 the Tehran Times International Daily reported that Sinopec had started the build-operate- transfer (BOT) operations at the field.

Iran Oil & Gas Report Q3 2010

Although it seems unlikely that Iran can deliver much more than 4.30mn b/d of crude and liquids over the next couple of years, given the depletion of mature fields, new projects should kick in later in the decade. Our projections suggest an increase to 4.38mn b/d in 2014. This assumes higher OPEC quotas after the recent reductions. Iran is expected to see demand for oil rise at around 2% per annum while fuel prices are subsidised, so consumption by 2014 is likely to reach a minimum of 1.92mn b/d – providing potential exports of 2.46mn b/d.

Gas Supply And Demand

The government plans billions of dollars- Iranian Gas Production, worth of further investment to increase Consumption And Exports this share. The price of gas to consumers (2000-2014) is kept extremely low, encouraging rapid consumption growth and replacement of fuel oil, kerosene and LPG demand. Besides domestic gas consumption, Iran also has the potential to be a large natural gas exporter. The US$4.2bn development of Phases 9 and 10 of Iran’s South Pars gas field was launched in March 2009 and is expected to produce in excess of 18.25bcm per annum of gas, primarily supplying domestic requirements. South e/f = estimate/forecast. Source: Historical data – BP Statistical Review of World Energy June, 2008; forecasts – BMI Pars reserves are equal to around 40% of Iran’s total reserves and 8% of the world’s reserves. However, its development progress has been slower than expected. The development of Phases 11 and 12 will include the set-up of new gas export projects, which could bring in billions of dollars a year if they are realised. Likely export markets include India and Turkey, as well as Europe.

In February 2010, the managing director of the National Iranian Gas Company, Javad Oji, stated that the country’s natural gas production capacity had increased to 0.63bcm per day, equivalent to an annualised total of 230bcm. Actual production for 2009 is not yet known, but risk appears to be on the upside from BMI’s modest output assumption. However, it is a challenge to reconcile claimed production numbers with the domestic demands of the power sector, industry, commerce and the Iranian consumer.

Iran’s gas distribution infrastructure is insufficient for meeting the country’s consumption needs. Iran therefore imports gas from Turkmenistan to supply the north of the country. In July 2009, Turkmenistan agreed to increase gas exports to Iran from 8bcm to 14bcm per annum. Turkmenistan has opened a new gas pipeline to Iran. The new 12bcm supply line from the Dauletabad field in the south-eastern Matriy

Iran Oil & Gas Report Q3 2010

province to Khangeran was inaugurated in December 2009 by Turkmenistan’s president Gurbanguly Berdymukhamedov and his Iranian counterpart Mahmoud Ahmadinejad.

The Dauletabad-Sarakhs-Khangeran pipeline is the second gas link between the two countries. The 200km Korpezhe-Kurt Kui pipeline was opened in 1996 and supplies northern Iran with around 8bcm per annum. In July 2009, Turkmenistan agreed to increase gas exports to Iran to 14bcm per annum following the completion of the pipeline from Dauletabad. Given that total transportation capacity between the two countries is now 20bcm, Iran has an option to ramp up supplies by an additional 6bcm in the future.

Over the near term, we see Iranian gas production rising to 210bcm by 2014. With demand increasing to 152bcm over the same period, there should be some 58bcm of export potential in 2014. Our forecast falls somewhat short of the Iranian government’s predictions that production could reach 200bcm per annum by 2012.

Azerbaijan’s state oil company Socar signed an MoU with NIGEC in November 2009 to supply 0.5bcm of Azeri gas to Iran, starting in 2010. The MoU provides for supplies to be increased gradually, with potential volumes dependent on the state of the gas infrastructure connecting the two countries. The gas will be supplied via the 1,475km Kazi-Magomed-Astara gas pipeline, a branch of the Gazakh-Astara-Iran trunkline, which was completed in 1971 (although it was not used for many years) and has capacity of 10bcm. Work is currently under way on repairing the pipeline and upgrading a compressor station in Astara in order to facilitate rising gas volumes. Azeri news portal News.Az reported Socar president Rovnaq Abdullayev as saying that a long-term gas supply contract was being prepared and was expected to be signed in the summer of 2010. While the volumes involved are small, the deal will entail the repair and expansion of the pipeline network linking the two countries and could therefore increase the capacity for gas exports to Iran in future.

South Pars Development The South Pars gas field is shared between Iran and Qatar, where it is known as the North Dome field. The Iranian section of the giant field, where the development plan is divided into 24 phases, is estimated to contain up to 60% of the country’s total gas reserves. The EIA estimates the field to hold 12tcm of potential gas reserves, around two thirds of Iran’s total proven reserves, and 6% of global proven reserves. Phases 1-8 are onstream, with the remainder of the 24 phases being at various stages of development and planning, with more phases under proposal.

In March 2009, Iran officially launched Phases 9 and 10 of the South Pars gas field development programme, which together should produce 18.25bcm annually. The state-controlled Islamic Republic News Agency (IRNA) said Phases 9 and 10 cost US$4.2bn to develop.

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In May 2008, Royal Dutch Shell and Madrid-based Repsol YPF quit Phase 13 of the South Pars project. The Financial Times (FT) reported that the consortium would no longer develop the US$10bn Phase 13, which, along with Phase 14, was intended to contribute the gas for the Persian LNG project. Later in the same month, the government announced it was in negotiations with Repsol and Shell over switching their South Pars development phases for others that are due to be developed at a later stage.

In June 2008, Paris-based major Total announced that it would not invest in Phase 11 of the South Pars development. Total’s partner in the project, Petronas of Malaysia, is said to be keen to remain involved. Austria’s OMV was replaced at Phase 12 in late 2009.

LNG

Although we still expect Iran to export its first LNG in 2013, possibly to some European countries and China, there is no guarantee and a delay to 2014 or beyond would be no great surprise. Construction of the country’s first LNG plant is under way. The Iran LNG facility will have two processing trains. Initially, 2.5mn tpa will be exported, rising to 10.8mn tpa when the second train is available. This represents almost 15bcm of gas. BMI is assuming first LNG exports in 2013 at 10bcm.

Iran had previously said that it is planning to spend US$28bn on LNG projects. Speaking at the 19th World Petroleum Congress in June 2008, managing director of NIGC, Reza Kassaei Zadeh, said the country was planning to spend US$6bn a year on LNG investments over the medium term. Zadeh said that by 2025 Iran is planning to control 10% of the global natural gas trade, a target we see as optimistic.

Refining And Oil Products Trade

At the end of 2009, Iran had six large refineries with around four smaller facilities of less than 100,000b/d. Estimates of refining capacity vary wildly owing to the lack of reliable data from the country. The OGJ World Refining Survey states that as of January 1 2010 Iran has nine refineries with a total capacity of 1.45mn b/d, while the BP Statistical Review of World Energy, June 2008, on which BMI’s forecasts are based, put capacity significantly higher at 1.83mn b/d.

In order to meet rising domestic demand for fuels (gasoline demand is growing at around 9% per annum), Iran plans to increase its refining capacity. One goal of this expansion is to allow Iran’s refineries to process a heavier crude slate. The head of NIORDC said in December 2008 that the country plans to invest US$27bn in its programme to build a further seven oil refineries. According to Seyed Noureddin Shahnazizad, once the refineries are onstream, the country’s production capacity in gasoline and gasoil will increase by 190mn litres per day (1.2mn b/d) and 180mn litres per day (1.13mn b/d) respectively. According to the government, the first new refinery scheduled for completion is a 360,000b/d plant known as Persian Gulf Star, which could be built by 2012, and the last of the six refineries should be

Iran Oil & Gas Report Q3 2010

finished by 2015. Plans also exist for a seventh refinery, which will refine crude from neighbouring countries in the Caspian region, although these are still at a very early stage.

BMI is sceptical whether many of these refineries will be onstream on schedule. Although we see scope for increases in capacity over the coming years, we believe that the Persian Gulf Star refinery is the only project with a realistic chance of coming onstream by 2015. We see capacity increasing from an estimated 2010 level of 1.9mn b/d to 2.25mn b/d by 2014. Longer term, however, there is scope for capacity to continue to increase to 2.9mn b/d by 2020, although this could depend upon continued levels of investment as well as the role of international sanctions.

The other potential wildcard in the refining sector is China, which has been touted as a potential investor in several refining projects. A report in the Iranian oil ministry’s Shana news service in 2009 claimed that a number of MoUs on refining projects were signed during a visit to Beijing by an Iranian delegation headed by Nureddin Shahnazizadeh, managing director of NIORDC. The MoUs were said to include one calling for Chinese investment of US$2-3bn in the Abadan and Persian Gulf Star refineries. China could also have an impact on Iranian refining projects through refined product exports, which could decrease the pressure on Iran to construct its own facilities. In September 2009 Chinese state-owned oil companies started selling gasoline via intermediaries to Iran, according to a report in the FT. According to the report, Chinese companies are currently supplying 30,000-40,000b/d to Iran, making up around a third of the country’s total gasoline import needs.

Revenues/Import Costs

Using an OPEC basket price of US$83.00/bbl in 2010, US$85.00/bbl for 2011, followed by an average US$90.00/bbl in 2012-2014, crude export revenues are expected to rise from the estimated US$75.13bn in 2010 to US$80.72bn in 2014. There is 58bcm of gas export potential in 2014 – bringing in a further US$19.52bn of revenues. Oil and gas export revenues in 2014 are estimated at US$100.24bn.

Iran Oil & Gas Report Q3 2010

Table: Iran Oil And Gas – Historical Data And Forecasts

2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Proven Reserves, mn bbl 138.2 137.6 137.0 135.5 133.9 132.4 130.8 129.2

Oil Production 000b/d 4,322 4,325 4,185 4,180 4,250 4,300 4,350 4,380

Oil Consumption 000b/d 1,693 1,730 1,610 1,700 1,760 1,812 1,867 1,923

Oil Refinery Capacity 000b/d 1,822 1,832 1,832 1,900 2,000 2,000 2,000 2,250

Oil Exports 000b/d 2,629 2,595 2,575 2,480 2,491 2,488 2,483 2,457

Value of Petroleum Exports in US$mn (BMI base case) 66,008 88,660 57,432 76,685 81,415 88,477 92,945 100,240

Value of Oil Exports US$mn (BMI base case) 66,284 89,119 57,203 75,128 77,268 81,721 81,578 80,724

Oil Price (US$/bbl) OPEC Basket 69.1 94.1 60.9 83.0 85.0 90.0 90.0 90.0

Value of oil exports at constant US$50/bbl - US$mn 47,976 47,366 46,994 45,260 45,452 45,401 45,321 44,847

Value of oil exports at constant US$100/bbl - US$mn 95,952 94,732 93,988 90,520 90,903 90,802 90,642 89,693

Value of Petroleum exports at constant US$50/bbl - US$mn 47,755 47,130 47,181 46,198 47,891 49,154 51,636 55,689

Value of Petroleum exports at constant US$100/bbl - US$mn 95,510 94,259 94,363 92,397 95,782 98,308 103,272 111,378

Refined petroleum products imports, 000b/d (BMI) 53 81 (39) (10) (41) 12 67 (102)

Gas Proven Reserves bcm 28,130 29,610 29,700 30,000 30,000 30,000 29,840 29,660

Gas Production, bcm 111.9 116.3 121.0 130.0 145.0 160.0 180.0 210.0

Gas Consumption, bcm 113.0 117.6 120.0 125.0 132.0 140.0 146.3 152.2

Gas Exports, bcm (BMI) (1.1) (1.3) 1.0 5.0 13.0 20.0 33.7 57.8

Value of Gas Exports, US$mn (BMI base case) (276.3) (459.0) 228 1,557 4,147 6,756 11,367 19,516

Value of Gas Exports at constant US$50/bbl – US$mn (221.1) (236.3) 188 938 2,440 3,753 6,315 10,842

Value of Gas Exports at constant US$100/bbl – US$mn (442.2) (472.7) 375 1,877 4,879 7,506 12,630 21,685

LNG Exports, bcm na na na na na na 10.0 15.0

LNG Price, US$/mn BTU na na 8.12 11.07 11.34 12.01 12.01 12.01

LNG Revenues, US$mn (BMI) na na na na na na 3,362 5,043 e/f = estimate/forecast; na = not available/applicable. Source: Historical data: BP Statistical Review of World Energy June 2009; forecasts: BMI

Iran Oil & Gas Report Q3 2010

Other Energy

Electricity consumption in Iran has been growing at a steady rate of about 8% per year in the past few decades. Iran’s estimated 12TWh of hydro-electric demand in 2009 is forecast to reach 18TWh by 2014, with its share of the MEA hydro market rising from 28.8% to 31.1%. Iran’s nuclear demand is forecast to reach 10TWh by 2014, with its share of the MEA nuclear market rising to 42.55%. Overall 2009 electricity demand in Iran was an estimated 177Wh and forecast to rise to 213TWh by 2014. The industrial segment is the largest user of power, accounting for 34% of all electricity consumed. Residential customers consume 32%, with commerce having an 18% share of the power market and agriculture using 12% of Iran’s electricity. Losses during power transmission and distribution mean that the actual level of Iranian power exports is well below the theoretical surplus, but is set to rise.

According to February 2010 reports published by UPI, several countries have lined up to purchase electricity from Iran despite reports that government debt is pushing the domestic grid toward failure. Majid Namjou, the Iranian energy minister, said that various countries have joined the list of potential consumers of Iranian electricity. With several deals under negotiation with Azerbaijan and Russia, the country could emerge as an energy hub for Europe, Namjou said.

However, earlier in February Mohammad Parsa, the chairman of the Iranian Electricity Industry Union, had told the Reformist-leaning Iranian Labor News Agency that the industry was falling behind on loan payments because of a lack of government funding. Parsa complained that the government was not meeting its payment obligations to producers, meaning the electrical sector was funded only for a minimum capacity.

Iran has been building significant new generation capacity, with the goal of adding 18GW by 2010. As a result of significant state investment in this sector, a number of new power plants (mainly hydro-electric and combined-cycle) have come online in recent years. Over the period covered by the government’s fourth Five-Year Development Plan (FYDP), a total of US$34bn is required by the sector – half of which will be dedicated to generation. Conventional thermal sources are expected to remain the dominant fuel for electricity generation in the coming years, with many power projects under construction or planned that will use gas. Nuclear generation looks set to play a role from 2010.

According to BMI calculations, Iran’s installed capacity reached around 51GW at the end of 2009 and is forecast to increase to almost 65GW by 2014.

Gross Iranian power generation in 2009 was an estimated 212TWh, having grown 2.5% over the 2008 level. BMI is forecasting an average 4.5% annual increase to 269TWh by 2014. Iran’s thermal generation in 2009 was an estimated 199TWh, or 17.31% of the regional total. By 2014, the country is expected to account for 15.71% of regional thermal generation.

Iran Oil & Gas Report Q3 2010

The largest hydro-power projects are the 2GW Karun 3 plant, the 2GW Godar-e Landar facility, and a 1GW station in Upper Gorvand. In July 2006, Abbas Aliabadi, director of Iran Power and Water Resources Development Company, announced that Iran plans to add 6.4GW of hydro-electric power generating capacity over the following five years. Iran’s estimated 12TWh of hydro generation in 2009 is forecast to reach 18TWh by 2014, with its share of the MEA hydro market easing from an estimated 27.56% to 28.93% over the period.

The standoff between the UN and Iran has not halted the Iranian nuclear energy programme. Uranium enrichment continues apace, with the country adding more centrifuges as the programme is accelerated. Iran’s current effort includes several research sites, a uranium mine, a nuclear reactor and uranium processing facilities that include a uranium enrichment plant. The Iranian government asserts that the programme’s goal is to develop nuclear power plants, and that it plans to use them to provide 6GW of capacity by 2010.

In February 2010, the head of the AEOI, Ali Akbar Salehi, said the country's first nuclear power plant in Bushehr was only one test away from operation, according to the semi-official Fars news agency. In January, AEOI announced that the plant will come onstream by the autumn of 2010.

It became apparent in late September 2009 that the nuclear programme was more advanced than expected, causing renewed friction between Tehran and the West. It is claimed that Iran has concealed a partially built second uranium enrichment plant, in breach of IAEA rules. Iran told the UN about the plant at the end of September, saying it was not yet operational and would provide only nuclear energy. Tehran had previously acknowledged it has one enrichment plant, at Natanz.

December 2008 press reports suggested that the Iranian authorities are planning to build two new nuclear power stations instead of completing a second unit at Bushehr, with news agencies quoting a civilian nuclear official. Iran had previously planned to build at least another two units at the plant. According to the press coverage, Iran has now decided to build two new plants, each with 1GW capacity, instead of completing the second unit at Bushehr. However, the new sites would be located close to Bushehr.

BMI is assuming that nuclear generation will reach 10.5TWh by 2014, accounting for 3.9% of overall power supply. Given the hostile reaction of the international community to Iran’s nuclear ambitions, and the strong possibility of fresh and tougher sanctions, there is a question mark over the timing and scale of Iranian nuclear capacity introductions.

Iran is believed to have the potential to produce 6.5GW of electricity with wind energy. It also has solar power potential, but non-hydro renewables do not currently form a major part of Iranian energy policy.

Iran Oil & Gas Report Q3 2010

The director of the solar energy division of the Iranian Renewable Energies Organization (IREO) in January said Iran’s first solar power plant was opened in Shiraz on January 10. The plant has a capacity of 250KW energy production that can be extended to 500KW by establishing larger solar panels.

Table: Iran Other Energy – Historical Data And Forecasts

2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Coal Reserves, mn tonnes na na na na na na na na

Coal Production, mn tonnes na na na na na na na na

Coal Consumption, mn toe 1.1 1.1 1.1 1.0 1.0 1.0 1.0 1.0

Consumption of Hydro-electric Power, TWh 18.0 7.5 12.0 16.0 17.0 17.0 18.0 18.0

Consumption of Nuclear Energy, TWh na na na 5.0 6.0 6.0 8.0 10.0

Thermal Power Generation, TWh 178 198 199 198 207 218 227 234

Hydro-electric Power Generation, TWh 18.0 7.5 12.0 16.0 17.0 17.0 18.0 18.0

Electricity Generation, TWh 196.0 206.3 211.5 219.9 232.0 244.8 257.0 268.6

Primary Energy Consumption, mn toe 188.4 192.1 190.0 199.5 209.5 222.0 230.9 239.0 e/f = estimate/forecast; na = not applicable. Source: Historical data: BP Statistical Review of World Energy June 2009; forecasts: BMI

Key Risks To BMI’s Forecast Scenario

Iran is clearly very sensitive to oil price fluctuations. It also faces risks through delays in developing new oil and gas resources. Should the OPEC basket price fall back to an average US$50/bbl to 2014, oil and gas export revenues at the end of the period would amount to an estimated US$55.69bn. A flat US$100/bbl oil price should, however, provide revenues of US$111.38bn, if Iran delivers the forecast capacity expansion.

Long-Term Oil And Gas Outlook

Details of BMI’s 10-year forecasts can be found in the appendix to this report. Between 2010 and 2019, we are forecasting an increase in Iranian oil production of 11.2%, with crude volumes rising towards 4.65mn b/d by the end of the 10-year forecast period, although there will have been an OPEC-induced dip in 2009/10. Oil consumption between 2010 and 2019 is set to increase by 27.3%, with growth slowing to an assumed 2.0% per annum towards the end of the period and the country using 2.17mn b/d by 2019. Gas production is expected to climb to 290bcm by the end of the period. With 2010-2019 demand growth of 46.0%, this provides export potential rising to 108bcm by 2019.

Iran Oil & Gas Report Q3 2010

Oil And Gas Infrastructure

Oil Refineries

At the end of 2009, Iran had six large refineries and four smaller facilities below 100,000b/d each. The refining sector is dominated by NIORDC, which, until 2008, was the country’s only downstream operator. Estimates of refining capacity vary wildly owing to the lack of reliable data from the country. The OGJ World Refining Survey states that as of January 1 2010 there are nine refineries with a total capacity of 1.45mn b/d, while the BP Statistical Review of World Energy, June 2009, on which BMI’s forecasts are based, put capacity significantly higher at 1.83mn b/d.

Table: Refineries In Iran

Refinery Capacity (b/d) Owner (Contractor) Completed Details

Abadan 350,000 NIORDC 1912 Capacity reduced in Iran-Iraq War

Isfahan 284,000 NIORDC na -

Bandar-e ‘Abbas 232,000 NIORDC na -

Tehran 220,000 NIORDC na -

Shazand e Arak 170,000 NIORDC na Includes petrochemicals complex

Tabriz 100,000 NIORDC 1975 -

Shiraz 40,000 NIORDC 1973 -

Lavan Island 30,000 NIORDC na -

Kermanshah 25,000 NIORDC na -

Aras 1,466 na 2008 First privately funded refinery

Total Capacity 1,452,466 - - -

Planned Additional Capacity (*expansion)

Persian Gulf Star 360,000 na 2011-15 To be 80% privately funded

Hormuz 300,000 NIORDC 2012 Heavy/ extra heavy crude

Pars (Shiraz) 120,000 NIORDC 2012 Cost estimated at EUR800mn

Kermanshah (Anahita) 150,000 na 2012 To be developed privately

Tabriaz (Shahriar) 150,000 NIORDC na Aims to produce Euro-5 gasoil

Khuzestan (Abadan) 180,000 NIORDC 2011 Heavy crude refinery

Caspian (Golestan) 300,000 NIORDC 2012 Aimed at exports to nearby countries

Abadan* 210,000 NIORDC na To be part-funded by Sinopec

Total Additions 1,770,000 - - -

Source: Oil & Gas Journal, company data

Iran Oil & Gas Report Q3 2010

In order to meet rising domestic demand for fuels (gasoline demand is growing at around 9% per annum), Iran plans to increase its refining capacity. One goal of this expansion is to allow Iran’s refineries to process a heavier crude slate. Iran is looking to secure investment for a major expansion of its refining capacity as the country proceeds with the gradual elimination of gasoline and gasoil subsidies.

The Iranian government is obliged by law to abolish subsidies for the fuels by 2012. In order to meet domestic demand for refined products and reduce the country’s dependence on fuel imports, Iran plans to spend around US$27bn over the next five years on a major refining investment programme. Under current plans, the country’s nine existing refineries will be upgraded and seven new refineries will be built, providing for a doubling of refining capacity from the current 1.83mn b/d. In December 2008, the head of NIORDC, Seyed Noureddin Shahnazizad, said that once the refineries are onstream, the country’s production capacity in gasoline and gasoil will increase by 190mn litres per day (1.2mn b/d) and 180mn litres per day (1.13mn b/d) respectively.

Abadan Refinery Abadan, located on the border with Iraq in the heart of the country’s main oil-producing Khuzestan region, is the country’s largest refinery with a capacity of 350,000b/d. Prior to the refinery’s near-total destruction in the 1980-88 Iraq-Iran war, it was significantly larger, with a nameplate capacity of 635,000b/d. The refinery, which originally produced primarily for export, is linked to the Abadan and Bandar-e Mashur oil terminals. It is also linked via oil pipeline to the Arak refinery and then onwards to Tehran.

A 2009 report in the Iranian oil ministry’s Shana news service claimed that NIORDC had signed deals with Sinopec to expand the Abadan refinery by 210,000b/d. The Mehr News Agency reported that the July 2009 MoU between Sinopec and NIORDC calls for Chinese investment totalling US$2-3bn in the Abadan refinery and the Persian Gulf Star refinery. A lack of concrete financial details, contradicting reports in the Iranian media, and the absence of any confirmation from the Chinese companies or news agencies suggests the deals are not yet binding.

Aras Refinery In mid-June 2008, the IRNA reported that the state’s first privately owned refinery had become operational. The refinery is located in the Aras Free Trade Zone, which is situated in the north-west of the country. According to IRNA, the plant will be able to produce 1,466b/d of lubricants and oil derivatives. The total cost of the refinery was IRR80bn – of which IRR70bn was provided by the private sector – equivalent to US$8.7mn at the official exchange rate at the time.

Persian Gulf Star Refinery (Under Construction) The Persian Gulf Star (PGS) refinery, which is under construction in the southern region of Bandar-e Abbas, is believed to be the closest to completion of all Iran’s new refinery projects. Construction began at the 360,000b/d refinery in August 2007 and in February 2009 a report in Zawya suggested that the

Iran Oil & Gas Report Q3 2010

project was then 17% complete. The date by which the refinery is expected to come onstream varies significantly between sources. Iranian energy journal Shana claimed in May 2009 that the refinery would be completed by 2011, while in December 2009 respected news source the ISNA put the completion date somewhat later at between March 2013 and March 2015, although it claimed that by December 30% of the refinery was complete.

In May 2009, oil minister Gholam-Hossein Nozari said that an additional US$500mn credit was being offered to the PGS project in order to speed up completion. The project is expected to use condensate from Phase 9 of the South Pars gas project, and is expected to produce high-end products such as gasoline and jet fuel. Around 80% of the funding for the project is believed to have come from the private sector. In February 2009 the project’s director, Mohammad-Esmaeil Karachian, claimed that EUR407mn had already been invested in refinery equipment, with a further EUR600mn to be spent.

Hormuz Refinery (Under Construction) In October 2007, NIORDC and India’s Essar Group announced plans to begin constructing a 300,000b/d refinery, known as the Hormuz refinery, in southern Iran. The project, which will cost some US$8-10bn, will be located at the southern port of Bandar Abbas. It will process heavy crudes such as Soroush and Iran Heavy. A NIORDC spokesperson said that work would start in 2008 and that the refinery would take three to four years to build. Essar will hold a 60% equity stake in the project, with Iran taking the remainder.

Service Stations

NIORDC is the only significant player in fuels retail in Iran, with around 1,100 fuels retail sites and an official market share of 100%.

Oil Storage Facilities

In mid-2009, Iran had an oil storage capacity of just under 60mn bbl. According to the EIA, a significant share of this capacity is located in its export terminals. Kharg Island, the country’s main export terminal, has a storage capacity of 20.2mn bbl, while the Lavan Island export terminal has a capacity of 5mn bbl. In August 2009, the managing director of NIOC, Farid Ameri, told the Fars news agency that the country planned to complete an expansion of this capacity to 68.6mn bbl, although it is not clear whether the expansion has since been completed.

Iran has tended to supplement its onshore oil storage with the use of floating storage. In 2008 the Fars news agency reported that the country was storing around 28mn bbl of crude oil in tankers offshore. In February 2010 Bloomberg reported that at least three supertankers with a combined capacity of 6mn bbl were being used for offshore storage.

Iran Oil & Gas Report Q3 2010

Oil Terminals/ Ports

Iran has significant oil and oil products export capacity with around 10 terminals, most of which are located on the country’s south coast. The two largest terminals are Kharg Island and Lavan Island. Other terminals include Abadan, Bandar-e Mahshah, Ras Bahregan, Sirri Island, Bandar-e Abbas, and Kish Island. The country also has an oil terminal at Neka, on the Caspian coast, which has been primarily used for oil imports as part of oil swap deals with producers such as Russia and Kazakhstan.

Kharg Island The Kharg Island terminal, located 483km to the west of the mouth of the Persian Gulf, is Iran’s main oil export terminal. The facility, constructed in the 1960s, is linked to shore by a 25km subsea pipeline that starts at a pumping station at Ganaveh. During the 1980s the terminal was responsible for around 80% of the country’s crude oil exports. The facility was bombed repeatedly in 1985-86 during the Iraq-Iran war and exports ceased. The terminal was reconstructed in the 1990s. According to the EIA, the reconstructed facility has an export capacity of up to 5mn b/d, making it one of the largest terminals in the region.

Lavan Island The Lavan Island terminal is linked to the island’s 30,000b/d refinery and is supplied with crude from the nearby Lavan Group of subsea oil and condensate fields. The terminal is one of Iran’s largest, with a capacity of 200,000b/d according to the EIA. The largest field supplying the terminal is the Salman structure, which is linked to Lavan Island via a 140km subsea pipeline. Following damage during the Iran-Iraq war, the Lavan terminal was reopened on May 1 1993.

Bandar-e Mahshah The Bandar-e Mahshah terminal was one of Iran’s main terminals prior to the construction of the Kharg island facility. Following the construction, Bandar-e Mahshah was primarily used for oil product exports from the Abadan refinery.

Oil Pipelines

According to the EIA, Iran’s domestic oil pipeline network comprises five separate pipelines. Two oil pipelines link the country’s largest refinery at Abadan with producing areas in Khuzestan, and then further north to the Arak refinery. One of the pipelines continues further north to Tehran, and then to the oil refinery at Tabriz in the north-west. Another pipeline transports oil from Khuzestan to the Esfahan refinery, then south-east to the Kerman refinery and finally to the Bandar-e Abbas refinery and oil export terminal by the Straits of Hormuz. The Esfahan and Tehran refineries are also linked by pipeline.

Iran hopes to sign an agreement with Iraq within the next month to build a long-mooted oil pipeline between the southern Iraqi city of Basra and the Iranian city of Abadan, an Iranian embassy official in Baghdad told Reuters on April 25 2010. Ali Heidari, Iran's trade attaché to Baghdad, also told Reuters

Iran Oil & Gas Report Q3 2010

that the draft agreement had been submitted to the Iraqi government and was in the 'final stages' of a review process.

Iran and Iraq first signed a memorandum of understanding (MoU) in February 2004 to build the Basra- Abadan pipeline and three subsequent agreements were signed by the two governments between 2005 and 2007, all of which proposed, in various forms, a twin pipeline system conveying around 150,000b/d of Iraqi crude to Iran's largest refinery at Abadan and sending Iranian refined products back to Basra. An official at NIORDC stated in October 2006 that the engineering design of the pipeline had been finalised, and another official at South Oil Company stated in November 2007 that the company had already commenced work on the pipeline. Notwithstanding these statements and agreements, no tangible progress appears to have been made.

LNG Terminals

Although we still expect Iran to export its first LNG in 2013, possibly to some European countries and China, there is still no certainty, and a delay to 2014 or beyond would be no great surprise. Construction of the country’s first LNG plant is underway. Iran has said that it is planning to spend US$28bn on LNG projects. Speaking at the 19th World Petroleum Congress in June 2008, managing director of NIGC Reza Kassaei Zadeh said the country was planning to spend US$6bn a year on LNG investments over the medium term. Zadeh said that by 2025 Iran is planning to control 10% of the global natural gas trade.

The Iran LNG facility will have two processing trains. Initially, 2.5mn tpa (3.45bcm) will be exported, rising to 10.8mn tpa (14.9bcm) when the second train is available.

In March 2009, three Chinese companies signed a US$3.3bn deal to help develop LNG from the South Pars gas field, according to Iranian state-funded media outlet Press TV. A consortium of the three companies, which were not named, will help develop and finance sections of South Pars phase 12 and another unspecified block of South Pars. The project will be carried out in two stages, each of which will be completed in three years, according to the report. The news appears to reflect Chinese state-owned companies’ ability to take advantage of IOCs unwillingness to invest in Iran.

The make-up of the Chinese consortium was not revealed, but Iranian partner Iran LNG Company said that Phase 12 was expected to produce more than 10mn tpa (13.8bcm). The Chinese consortium will build a line to liquefy gas produced from Phase 12, according to the Los Angeles Times. The head of Iran LNG, Ali Kheirandish, told Iranian broadcaster IRIB that a European firm would also join the project within the next three months.

Iran Oil & Gas Report Q3 2010

Gas Pipelines

Iran has a large and well developed network of both domestic and international gas pipelines, with several major pipeline projects on the cards. Gas import pipelines link Iran to Azerbaijan and Turkmenistan, and give the country import capacities of 10bcm and 20bcm respectively. Export pipelines link Iran to Turkey (10.2bcm) and Armenia (2.3bcm). Additional proposed export pipelines would increase Iran’s gas export capacity to Turkey as well as enabling exports to Pakistan and India.

The country has announced plans to invest US$6.8bn in developing and expanding its gas infrastructure during the Iranian year that started on March 21 2010. The investment, part of the country's fifth five-year plan, will go towards the construction of the ninth Iranian Gas Trunkline (IGAT) pipeline, the completion of a second gas pipeline from Turkmenistan and expansion work on three gas processing facilities at Fajr- e Jam, Parsian and Ilam. Iran's gas transport and distribution system is currently insufficient for meeting the country's needs, meaning investing in gas infrastructure development is a high priority. The spending plans were announced by the managing director of NIGC, Javad Oji, at a press conference on March 13 and were reported by Iran's official Shana News Agency.

Iranian Gas Trunkline (IGAT) Iran is in the process of developing a major domestic pipeline network known collectively as the Iran Gas Trunkline (IGAT). According to NIOC subsidiary Pars Oil And Gas Company (POGC) the network will be fed with gas from the South Pars project and will comprise nine separate pipelines. The pipelines are designed to provide gas to the country’s gas-poor northern regions, possibly allowing it to reduce gas imports from Azerbaijan. While the early phases of the network are already onstream, IGAT 7 is not expected onstream until 2011, with IGAT 8 due in 2012. According to the EIA, IGAT 9 will be the first time Iran has offered a pipeline project on a build-own-operate basis.

Kazi Magomed-Iran Gas Import Pipeline The 1,475km Kazi-Magomed-Astara gas pipeline is the southern branch of the Gazakh-Astara-Iran trunkline, completed in 1971. The pipeline runs from Kazi-Magomed in central Azerbaijan into central Iran where it links in to other gas pipelines at Rasht and Qom. The pipeline has a design capacity of 10bcm. Actual capacity is much lower, however, and the Tehran Times estimates that following repairs it will be able to supply up to 1.8bcm per year to Iran. Socar intends to invest AZN100mn (US$125mn) in expanding a compressor station in the border town of Astara and repairing a section of the Kazi- Magomed-Astara pipeline by the autumn to allow increased supplies to be exported.

Korpezhe-Kurt Kui Gas Import Pipeline The 200km Korpezhe-Kurt Kui pipeline transports gas from the Korpezhe gas field in north-west Turkmenistan to Kurt Kui (Kordkuy) in northern Iran. The pipeline, the first to link the two countries, was opened in 1996 and supplies northern Iran with around 8bcm per annum. Construction of the pipeline

Iran Oil & Gas Report Q3 2010

was carried out by Iran’s National Oil Engineering and Construction Company, which won the US$195mn tender in 1995.

Dauletabad-Sarakhs-Khangeran Gas Import Pipeline (also Dauletabad–Salyp Yar) Iran opened a second gas pipeline from Turkmenistan in December 2009, further diversifying its energy exports away from Russia. The new 12bcm supply line transports gas from the Dauletabad field in the south-eastern Matriy province to Khangeran. The construction of the pipeline increased Iran’s gas import capacity from Turkmenistan to 20bcm.

Iran is hoping to add over 4bcm of Turkmen gas import capacity by end-2010 through the extension of the Dauletabad-Khangeran pipeline, the Iranian Gas Transmission Company (IGTC)'s Managing Director Mostafa Kashkuli told IRNA on April 23. Following the completion of the 155km second leg of the Dauletabad-Khangeran pipeline, Iran will be able to import up to 24bcm of Turkmen gas a year, helping the Central Asian producer to offset some of the fall in Russian gas import demand.

The second leg of the Dauletabad-Khangeran pipeline will run from the Shahid Hasheminejad refinery in the city of Khangeran to the inner north-eastern Razavi Khorasan province. According to Kashkuli, the second phase is currently being built, with construction expected to be completed by year-end, bringing the capacity to around 16.5bcm. He added that eventually the Dauletabad-Khangeran pipeline would carry up to 18.2bcm.

Iran-Turkey Gas Export Pipeline The construction of the 2,577km Iran-Turkey Gas pipeline began in 1996 and was completed in 2001. The pipeline, which has a capacity of 28Mcm/d (an annualised 10.22bcm), links the northern Iranian city of Tabriz to the Turkish capital Ankara. The Iranian section of the pipeline is operated by NIOC. The pipeline joins the Baku-Tbilisi-Erzurum (BTE) pipeline, also known as the South Caucasus pipeline, at Erzurum. The pipeline frequently suffers disruptions, with supply having been cut off repeatedly in the past by bad weather and attacks by Kurdish separatists.

Iran-Armenia Gas Export Pipelines The 2.3bcm Iran-Armenia gas pipeline was completed in 2009 and links the northern Iranian city of Tabriz to Armenia. The Iranian section runs 140km to the Armenian border where it meets the 40km Armenian section stretching from the Meghri region to Sardarian. The Iran-Armenia pipeline was planned to be extended by a further 197km to take gas to the centre of Armenia and link it up to the national distribution network, although it is uncertain whether this expansion will go ahead.

Under a 20-year contract signed by Iran and Armenia in 2004, Armenia agreed to supply Iran with 3kWh of electricity for each cubic metre of natural gas that Armenia receives from Iran. All of the gas exported to Armenia is therefore converted into electricity and then re-imported by Iran, with none of the gas being

Iran Oil & Gas Report Q3 2010

consumed by Armenia. Armenia plans to use the Iran pipeline to meet its own gas needs only in force majeure situations, according to Armenian energy minister Armen Movsisian, quoted in December 2008.

The Armenian section of the pipeline has been owned and operated by ArmRosGazprom (ARG) since 2006. Russian gas export monopoly Gazprom holds majority control of ARG with 80% of the company, while the Armenian energy ministry owns the remaining 20%. Gazprom is the sole owner of the critical 40km section of the pipeline through Armenia.

Pars Gas Export Pipeline (Under Construction) Building work on the Pars gas pipeline from Iran through Turkey began in July 2009, according to a statement by the head of economic affairs at the Iranian embassy in Turkey, Ahmad Noorani. The 1,740km pipeline will run from Iran through Turkey to Greece, then through Italy and onwards to other European countries, according to Noorani, who said that another route could go via Iraq and Syria under the Mediterranean to Greece and Italy. Noorani also said that Iranian gas could be used to supply the planned Nabucco pipeline that will run from Turkey to Austria. No contracts to that effect have been signed, but the construction of the Pars pipeline means that if Iran is selected as a supplier to Nabucco then the infrastructure will already be partially in place to facilitate Iranian gas exports to Europe.

Iran-Pakistan Export Pipeline (Proposed) (aka IPI Pipeline, Peace Pipeline)

Iran and Pakistan signed a 'sovereign agreement' in May 2009 finalising a deal to construct the long- delayed US$7.6bn Iran-Pakistan (IP) pipeline. According to the signatories, the agreement would allow the project to proceed from the planning to the implementation phase, with first gas targeted by the end of 2014. The pipeline will source gas from South Pars field and will run about 900km from the southern port city of Asasluyah (Asalooyeh) to Iranshahr near the Pakistan border, where it will supply Pakistan's Baluchistan and Sindh provinces. Pakistan's Petroleum and Natural Resources Minister Naveed Qamar told reporters that the Gas Sale and Purchase Agreement (GSPA) would see Iran import 21.2Mcm/d, or 7.7bcm per year with a provision to increase it to 28.3Mcm/d, or 10.3bcm per year, at an unspecified later date. The contract period is for 25 years, with the option to extend the agreement by five years. Pakistan will fund the project through a public-private partnership, with costs to Pakistan estimated at US$1.65bn.

In September 2009 Iran and Pakistan opened discussions on the standards and codes of engineering that are to be used in the construction of the Iran-Pakistan (IP) pipeline, according to the Associated Press of Pakistan (APP). The pipeline was envisioned to carry on from Pakistan to India (IPI) but Delhi has been hesitant, forcing Iran and Pakistan to push on with the project on their own. Iran and Pakistan signed a gas sale and purchase agreement (SPA) for the pipeline in May 2009 and are reported by APP to have signed another initial agreement in Tehran in August 2009. The project has already been much delayed thanks to years of fruitless negotiations.

Iran Oil & Gas Report Q3 2010

Talks on the pipeline began in 1994, but stalled because of tension between India and Pakistan. In 2008, India indicated that it would not participate in the project allegedly as a result of political and security concerns, with the US also putting pressure on Delhi not to proceed with the scheme. At the end of December 2008, Iran announced that it was ready to sign a gas supply deal with Pakistan even if India did not participate in the IPI pipeline project, although Tehran has made it clear since that the door to the project would remain open to India should it choose to finally get onboard. In April 2009, it was announced that Pakistan and Iran had agreed a pricing formula for the gas, which was followed on May 24 with the signing of the SPA.

Gas for the pipeline will be sourced from the South Pars field and will be transported 2,100km to Nawab Shah in Pakistan, according to the APP report. Construction of the pipeline is expected to start in 2010, Bloomberg reported citing Iranian state television, with gas expected to start flowing to Pakistan in 2013. Iran claimed in December 2008 that it had already completed 18% of the domestic section of the pipeline. This would be ahead of the 2014 start-up schedule of the original IPI project. New cost estimates for the pipeline have not been released. The 2,600km IPI pipeline was originally expected to cost some US$7.23bn, but with the section from Pakistan to India not planned to be built in the medium term, costs will be reduced.

SAGE Subsea Export Pipeline (Proposed)

India is considering building an undersea gas pipeline system to gain access to Middle Eastern gas supplies. South Asian Gas Enterprise (SAGE) has been working on the project, which was originally proposed in the 1990s, for over three years, according to its director, Subodh Kumar Jain. A technical and commercial feasibility report was undertaken by INTECSEA in 2008, which found that the project would be technically feasible. SAGE is reportedly holding talks with Qatar and Iran over the supply of gas for the projects.

Gas for the US$3bn project would be sourced from Qatar, Iran and possibly Iraq, and transported to a gas-gathering system on the coast of the Arabian Peninsula from where deepwater gas pipelines would cross the Arabian Sea. The pipelines will reach a maximum depth of 3,500m with a total length of about 1,000km, according to Jain. The pipelines would each transport 226.5bcm over a 25-year period, suggesting an annual supply per pipeline of around 9bcm per year, according to media reports, but the number of pipelines planned to be built has not been released. Construction is expected to be completed by 2014, with the pipelines supplying just 0.9Mcm/d or an annualised 320Mcm in the project’s first phase.

Kuwait/Iran Pipeline (Proposed)

Kuwaiti and Iranian government delegations have signed an agreement in Tehran to build a natural gas export pipeline from Iran to Kuwait, Iranian news agencies reported on April 8 2010. The new agreement

Iran Oil & Gas Report Q3 2010

Iran calls for the construction of a 570km pipeline to transport gas from Iran's South Pars field to Kuwait. Export volumes would be equivalent to an annual 3.1bcm.

Gas Storage

The National Iranian Gas Company (NIGC) announced plans in April 2010 to build Iran’s first gas storage facility. The facility will be built at the Sarajeh reservoir at Qom, south of Tehran. Gas injection at a rate of 4.5mn cm/d will start in Q410, with the rate to be increased gradually to 9.5mn cm/d, according to a Reuters report citing NIGC’s managing director, Javad Oji.

Iran Oil & Gas Report Q3 2010

Macroeconomic Outlook

Weak Recovery Under Way

BMI View: Over the next five years, Iranian economic growth rates will not return to the levels seen during the oil boom. We project real GDP growth to come in at 2.1% in FY2010/11, and to average 3% throughout the forecast period.

We forecast real GDP growth to average 3% per annum over the course of our five-year forecast period (FY2010/11 to FY2014/15). This is considerably lower than the growth rates during the oil boom: real GDP expanded at an annual average pace of 6.6% from FY2003/04 and FY2007/08 (note: Iranian years end in March). However, after the dismal economic performance of the past two years, FY2010/11 will nonetheless mark the beginning of the recovery. Official real GDP data are way out of date – the most recent figures are for the first half of FY2008/09, effectively Q208 and Q308 – but at this time Iranian economic growth was already slowing sharply, even as oil prices were at all-time highs. We estimate that real growth came in at just 1.8% and 1% in FY2008/09 and FY2009/10 respectively. In FY2010/11, we see growth rising to 2.1%.

The oil sector will remain at the centre of the Iranian economy throughout the forecast period. Indeed, Iran is the fourth-largest oil producer in the world, and in FY2007/08, the hydrocarbon sector accounted for a sizeable 27.9% of nominal GDP. This figure should remain above 20% over the next five years. Moreover, oil export revenues provide over 50% of the government's total budgetary revenues. We see the OPEC Basket averaging US$83/bbl in 2010, which would represent the second highest annual average (nominal) oil price on record (after 2008). Thereafter, we see oil prices steadily rising to stabilise at an equilibrium level of US$90/bbl from 2012 onwards. Intuitively, a forthcoming period of sustained high oil prices should be positive for economic growth. However, our real GDP growth projections for the next five years are rather measured. Our outlook is based on a number of factors:

1. Stagnant Oil Sector. We project Iranian oil production to increase by just 4% from 2009 to 2014. As such, the oil sector will contribute little to real GDP growth – at least directly – during the forecast period. Iran's oil sector has suffering from underinvestment for years; this is unlikely to change over the next five years. Indeed, with the international diplomatic crisis over Iran's nuclear programme continuing to escalate, Western oil companies, under pressure from their governments, are unlikely to return to the Islamic Republic any time soon. Tehran may like to play up its recent oil deals with Chinese firms. However, these Chinese players are poor substitutes for the Western oil majors given that they are less technologically advanced. As a result, upside risks to our oil production forecasts are minimal.

Iran Oil & Gas Report Q3 2010

2. Government Spending Growth To Slow. Tehran's planned FY2010/11 budget is expansionary in nature and will therefore help to boost real GDP growth this year. However, we do not believe that highly expansionary budgets are sustainable for the remainder of the forecast period. Whereas in recent years, Tehran's large fiscal deficits have been financed by dipping into the Oil Stabilisation Fund (OSF), we maintain our long-held view that this resource is either empty, or very close to empty (the government does not provide official statistics on the state of the fund). Without recourse to an oil fund to finance its deficits, we believe that the government will be compelled to rein in fiscal expenditure growth. As a result, we do not see government spending being a major real GDP growth driver past FY2010/11.

3. Banking Sector Weakness To Impede Growth. The Iranian banking sector is close to crisis point, weighed down by a proliferation of non-performing loans (NPLs). There are no publicly available NPL statistics, but the extent of the problem can be gleaned from remarks by Central Bank of Iran governor Mahmoud Bahmani, who was quoted in Iranian newspaper Ettela'at in late January 2010 as saying: 'How would it be possible for the banking system to show any profit with US$48bn worth of loans in arrears?' Based on December 2009 data (latest available), this US$48bn worth of bad loans would equate to around 23% of the banking sector's aggregate loan book.

The NPL problem comes against the backdrop of a banking sector that is already highly leveraged. The sector's assets-to-equity ratio was 22.4% in December 2009, an extremely high figure by international standards. Worryingly, this figure has been steadily creeping up over recent months. Moreover, total bank capital in December was (only) US$21.2bn, meaning that an uptick in asset write-downs could lead to banks' capital buffers being wiped out, or at least considerably diminished, extremely quickly.

The implications for the wider economy are that banks will be reluctant to open up their loan books aggressively while exposed to high levels of NPLs. Total loan growth came in at 14.4% y-o-y in December 2009, up from the low of 10.4% in May 2009, but still well below the 30% plus growth rates witnessed throughout the 10 years prior to the oil price crash of H208. A period of conservative lending is necessary for banks to repair their balance sheets (and they may yet require government bailouts), but clients' reduced ability to access credit will nonetheless be negative for real GDP growth.

4. Subsidy Cuts Could Affect Private Consumption. The government's planned subsidy cuts bring with them upside inflationary risks which would, in particular, severely affect the private consumption component of real GDP by expenditure in particular. Indeed, the last time consumer price inflation spiked (in 2008), private consumption growth was hit hard. Resurgent price pressures would likely have a similar effect.

5. No End To International Isolation. Iran shows no signs of being prepared to give up its uranium enrichment programme. As such, the UN could impose a fourth round of sanctions on the Islamic

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Republic this year, which would put further pressure on its economy. That said, with China and Russia continuing to drag their feet, any UN resolution may well be so watered down as to have only a limited economic impact. Nonetheless, we would expect Western governments to continue to impose their own unilateral measures on Iran and to put increasing pressure on Western firms, as well as non-Western companies operating within their jurisdictions, to desist from investing in or dealing with Iran. This will weigh on real GDP growth.

Risks To Outlook The main upside risk to our growth forecasts would be a diplomatic resolution to the nuclear crisis. Indeed, a deal that was satisfactory to Washington DC could result in increased foreign investment inflows to Iran over the long haul. If the situation were to escalate into military conflict, however, Iranian economic growth could be severely hit, especially if crude exports were halted for a period. Further downside risks include the potential for a full-blown banking sector crisis. The government will likely do all it can to stave off this threat, possibly via capital injections into struggling banks, but we nonetheless warn that the stability of the banking sector is by no means guaranteed. In addition, a decline in oil prices considerably below our forecasts would put Iran's economy under serious stress. In such a case, real GDP growth rates would likely fall short of our projections.

Table: Iran – Economic Activity

2005 2006 2007 2008 2009e 2010f 2011f 2012f 2013f 2014f

Nominal GDP, 1,2 IRRbn 1831737 2224093 2882236 3485026 3513100 4097644 4716693 5424905 6147010 6899825

Nominal GDP, US$bn 1,2 202.8 243.2 310.8 364.3e 352.2 398.8 437.2 478.9 516.8 552.5

Real GDP growth, % change y-o-y 1,2 4.7 6.2 8.1 1.8e 1 2.1 3 3.5 3.3 3.3

GDP per capita, US$ 1,2 2866 3397 4290 4969e 4748 5312 5759 6237 6656 7036

Population, mn 3 70.8 71.6 72.4 73.3e 74.2 75.1 75.9 76.8 77.7 78.5

Unemployment, % of labour force, eop 1,4 12.2 12.1 11.9 12.5 14 13.5 13 12.5 12 12 e/f = estimate/forecast. 1 Year Begins in March (Iranian calendar); Sources: 2 CBI/BMI. 3 IMF/BMI; 4 Statistical Centre of Iran.

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Competitive Landscape

Executive Summary

! The main government vehicle is NIOC, which is responsible for all upstream oil and gas activities, although there is some small-scale participation by IOCs on a sub-contractor basis, under Iranian buyback deals. Almost all refining and oil distribution assets are also owned by the state, via NIORDC, except for one private oil refinery which opened in the Aras free trade zone (FTZ) in June 2008.

! The reluctance of IOCs to commit to invest in Iran offers opportunities to state-owned NOCs. State-owned Chinese companies in particular have positioned themselves to take advantage of IOCs’ unwillingness to invest in Iran. China is also positioning itself as a supplier of gasoline.

! Total has a 40% stake in Phases 2 and 3 of the South Pars gas project, although it has said it will no longer invest in South Pars Phase 11 gas field development. The company has a US$1bn buyback contract for the Dorood oil and gas field. In 2009, net production was 8 ,000b/d.

! Shell has a buyback contract for the development of the offshore Nowrooz and Soroosh oilfields. It also has a 51:49 JV that produces industrial lubricants. The firm has withdrawn its interest in Phases 13 and 14 of the South Pars development, which include LNG and gas-to-liquids (GTL) production.

! Iran has awarded Phase 12 of South Pars gas project to Indian and Angolan companies, replacing Austria's OMV. Indian companies ONGC and Hinduja Group, alongside Angola's Sonangol, will take 20% each in Phase 12, NIOC announced in December 2009. The remaining 40% will be held by Naftiran Inter-Trade Company. The deal practically ends OMV's participation in Phase 12.

! Eni is a partner in the Dorood oil field. It is also developing the fourth and fifth phases of the South Pars project. It quit the prospective onshore Darkhovin (Darquain) oil field in 2010. Net production in 2009 was 35,000b/d.

! Statoil has frozen investment in Iran. It holds a stake 37% of South Pars Phases 6-8 but its involvement in the project will end when it has recouped its costs, possibly in four years, and it will no long invest in Phases 11-12. The company has carried out preliminary studies relating to improved recovery from the Ahwaz, Marun and Bibi Hakimeh oil fields. Statoil also explored for oil in the Strait of Hormuz.

! Iran plans to spend US$70bn on the development of two offshore gas fields between 2010 and 2015 in order to exploit huge undeveloped reserves.

Iran Oil & Gas Report Q3 2010

! Iran is seeking investment from Chinese state oil companies to assist it in expanding and upgrading its refining capacity. Representatives from PetroChina, Sinopec and CNOOC were briefed in July 2009 on a number of refining projects in the country

! CNPC has agreed to develop the North Azadegan oil field. NIOC and CNPC have signed a buy-back deal for the field, under which CNPC will be required to hand back operatorship of the field to NIOC after the development phase and will then receive payments to cover its investment.

Table: Key Players – Iranian Oil And Gas Sector

2008 sales % share of No. of Year Company (US$mn) total sales employees established Ownership

NIOC na 100 na 1979 100% state

Shell Overseas Services Iran na na na na 100% RD/Shell

Total Iran na na na na 100% Total

Eni Iran na na na 1957 100% Eni

na = not available. Source: BMI

Overview/State Role

Most of Iran’s oil and gas production, processing and distribution is carried out by four state-owned companies run directly by the Ministry of Petroleum, although foreign partners, particularly NOCs, are making a gradual entry into the Iranian energy sector. NIOC controls all upstream and downstream oil and gas activities. It is ranked as the world’s fourth-biggest oil company by reserves and second in terms of production. Refining and distribution activities are carried out under the control of state-run NIORDC, which was separated from NIOC in 1991. The company operates nine crude oil refineries, oil pipelines and more than 1,000 fuels retail outlets. Gas developments are carried out by the National Iranian Gas Company (NIGC), while petrochemicals production and distribution are the responsibility of the National Iranian Petrochemical Company (NIPC).

Licensing And Regulation

The Iranian constitution prevents IOCs owning equity stakes or concessionary rights to its oil interests. However, the 1987 Petroleum Law permits contracts between the ministry of petroleum, state companies and foreign entities. Under so-called ‘buyback’ contracts, the contractor funds all investments, receives remuneration from NIOC in the form of an allocated production share, and then transfers operation of the field to NIOC after the contract has been completed. This system has not proved especially popular with major IOCs. By offering a fixed rate of return (usually around 15-17%), NIOC bears all the risk of low oil

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prices. If prices drop, NIOC has to sell more oil or natural gas to meet the compensation figure. At the same time, companies have no guarantee that they will be permitted to develop their discoveries, let alone operate them.

One particularly unpopular aspect of the buyback contracts has been their short terms. Realising how unattractive they were, NIOC ceased awarding buyback contracts to foreign firms in February 2006. New contract terms were issued in February 2007 that significantly increased the length of the contracts, providing for a total contract length of up to 20 years.

In recent years Iran’s stance towards wavering foreign investors has hardened. In June 2009, the government replaced Total with China’s CNPC at South Pars Phase 11, owing to the French major’s reluctance to proceed with the project, which analysts attributed to the standoff with the US over Iran’s nuclear programme. This was followed in December 2009 by the removal of OMV from South Pars Phase 12 and its replacement by a consortium of Indian and Angolan companies.

Government Policy

Although US-led sanctions have had a significant impact on Iran’s energy policy, they have tended to reinforce existing trends in government policy. The two main impacts of sanctions have been to reduce foreign investment, leading to an increased role for domestic state-owned companies, and to raise fears of disruption to the supply of refined products through possible sanctions. Both of these effects have pushed Iran towards a closer relationship with countries that are less susceptible to US pressure such as Vietnam, Venezuela and China.

Iran is in the process of significantly expanding its refining capacity. The programme, which involves the construction of seven new refineries, fulfils three strategic purposes for Iran. First it helps to meet rising domestic demand for fuels (gasoline demand is growing at around 9% per annum) and will allow efficiency gains by allowing refineries to process a heavier crude slate. Second, it increases the security of Iran’s fuels supply, which has been explicitly threatened by proposed US sanctions. Third, it is also in line with the strategy pursued in other major regional producers such as Saudi Arabia to increasing the value added to oil exports through refining crude domestically and exporting refined products. As part of this policy, NIOC has set itself a target of also developing the petrochemicals industry and oil-based manufacturing. Long term, crude exports are at the bottom of the country’s priority list, with exports of refined products playing an increasingly important role.

The restrictions on foreign involvement in Iran’s oil and gas sector have also led to an increased role for local state-owned companies. NIOC’s strategic aims include the development of national technology in the oil sector through the promotion of local companies, such as NIOC subsidiary the North Drilling Company which constructed Iran’s first ever deepwater drilling rig in 2009. To date Iran had been

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reluctant to acknowledge that it needs foreign investment and technical expertise to enhance the development of its oil and gas sector. Iran’s search for foreign partners presents valuable opportunities for Asian and Russian NOCs. In December 2007, the then Iranian oil minister Gholam Hossein Nozari said that the country needed US$150-160bn of investment in its oil and gas sector in the period 2007-2014 in order to boost output and capacity. In seven years, Iran aims to reach oil production capacity of 5.6mn b/d from a claimed 4.3mn b/d in early 2010.

The figure of US$160mn was repeated in 2008 by NIOC’s director of planning, Abdolmohammad Delparish, although with a narrowed timeframe. In a December 2008 report seen by Reuters, Delparish said that Iran needs to invest some US$160bn in the oil and gas sector between 2009 and 2014. Although he did not state precise development targets, he said that Iran was planning to expand oil output capacity to 4.5mn b/d by 2010. Delparish said that relying completely on the resources of NIOC to meet this target would result in project delays. He said energy investment costs were rising, highlighting NIOC expenditure on Phases 9 and 10 of the South Pars development. The development of the South Pars gas field has been delayed by IOCs pulling out of various phases due largely to US pressure. Delparish also suggested that Iran may require the technological know-how of a foreign partner, stating that the absence of adequate capabilities and weakness of the contracting culture were preventing the implementation of infrastructure projects in the country’s oil sector.

Investment plans took a step forward in July 2009 when a senior Iranian oil official announced plans to spend US$70bn on the development of two offshore gas fields between 2010 and 2015 in order to exploit huge undeveloped reserves. The managing director of NIOC, Seyfollah Jashnsaz, said Iran would invest US$40bn in the South Pars field and US$25bn in developing North Pars for oil and LNG exploitation. Jashnsaz did not say how Tehran would finance the investments, nor where the remaining US$5bn would come from. Iran is looking to Asia to provide funding. NIOC senior executive Hojjatollah Ghanimifard told Reuters in July 2008 that Iran was in talks with Asian banks over a EUR1bn (US$1.40bn) bond to finance the development of South Pars. In addition, Iran plans to issue US$12.3bn of foreign currency and rial-denominated bonds over the next three years to finance South Pars.

Iran said in July 2008 that it was planning to spend US$28bn on LNG projects. Iran intends to invest US$6bn a year in LNG investments though 2013. Despite holding the world’s second largest gas reserves, Iran’s plans to become a significant exporter of LNG have been undermined by US-led sanctions against Tehran’s nuclear programme, underinvestment, rising costs and domestic political disagreements.

International Energy Relations

Western IOCs have frozen investment in Iran, depriving Tehran of billions of US dollars of investment, technical expertise, project management skills, and much-needed state revenues. In 2008 the remaining IOCs active in Iran all deferred operations, effectively severing development. Anglo-Dutch major Royal

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Dutch Shell and Spain’s Repsol YPF announced in July 2008 that they were quitting Phase 13 of the South Pars LNG project. French major Total followed suit by announcing it was curtailing its investment in South Pars Phase 11, with Norway’s state-controlled Statoil then announcing in August of that year that it would make no new investments in Iran’s energy sector after Washington DC threatened to investigate its investments in the US. Other companies, however, based in countries less susceptible to US sanctions, have benefited from this relative lack of competition from the majors. China and Venezuela have both signed deals to supply gasoline to Iran, and Chinese companies are involved in the country’s large refinery expansion programme.

UN Sanctions

The UN Security Council (UNSC) in June 2010 voted for a new round of sanctions on Iran following the country's refusal to halt its uranium enrichment activities. Given the relative weakness of the resolution, as well as Iran's adroitness at handling increasing restrictions on its trade and investment, BMI does not expect this new resolution to have a material impact on Iran's energy sector.

The latest resolution targets military purchases, trade and financial transactions by the powerful Iran Revolutionary Guards Corps (IRGC), which controls Iran's nuclear programme and has a wide range of investments in the Iranian economy. The resolution includes sanctions against 15 companies tied to the IRGC, such as the Khatam al-Anbiya (KAA) conglomerate, and freezes the assets of 40 other companies close to the Iranian military. The US sought tougher rules on Iranian banking and commerce, but this was watered down in order to win Russian and Chinese support. A provision in the resolution calling for vigilance in dealing with Iran's central bank has been left vague in the current resolution, but may allow the US and EU to further pursue restrictions against Iranian banking in the future.

Perhaps most importantly, no new concrete measures have been taken against investments in Iran's energy sector, owing to Russian and Chinese opposition. Additionally, no new restrictions against imports of refined products have been implemented. Although many commodity traders and oil companies have halted shipments of products such as gasoline to Iran in recent months, Iran has demonstrated its ability to use shell companies, third-party traders and even disguised vessels in order to continue importing petroleum products, and continue other commercial activities, in spite of international pressure.

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Relations With The US Iran’s deputy oil minister Hussein Noghrehkar Shirazi indicated Tehran’s willingness to work with US companies on oil projects in Iran, according to an April 2009 report in Chinese news agency Xinhua. Shirazi’s statement is intriguing but as yet symbolic, given that US companies are barred from operating in Iran, with Washington even successfully exerting pressure on non-US IOCs to curtail or postpone operations in the country. In BMI’s view, Western IOCs would welcome the chance to return to Iran.

Shirazi said the Iran was ready to talk with US oil companies about oil projects, according to the government-controlled media outlet IRNA. Shirazi added NIOC had never barred US companies from operating in Iran. Intriguingly, Norwegian services company Global Geo Services (GGS) revealed in February 2009 that an unnamed US-based company has displayed interest in acquiring a proprietary seismic data survey of acreage offshore Iran. GGS’s Persian Carpet-2000 seismic survey was commissioned by NIOC in 2000 and covers over 100,000sq km of the Iranian section of the Persian Gulf and Oman Sea.

Iran’s vast reserve potential is unlikely to have been lost on US companies, which had to leave the country in 1980 but are likely to be keen to return to Iran’s upstream segment. However, Shirazi’s statement could also be interpreted as an effort to pressure NOCs into agreeing deals rapidly with NIOC, by making Asian and Russian NOCs aware that the window of opportunity created by the absence of Western IOCs from Iran could be about to close.

BMI had believed that the election of Barack Obama could alter US/Iranian relations, but such prospects are waning. The tone of his speech in Turkey in April 2009 represented a seismic shift from the US diplomatic orthodoxy of the Bush administration. With the Iranian economy feeling the pinch of lower reduced earnings from oil exports and reduced foreign investment, pragmatism could push Tehran away from bombastic rhetoric towards the negotiating table. The deadlock over the nuclear issue and the mid- 2009 post-election violence has tempered hopes for a steady rapprochement. Obama’s willingness to negotiate could still prompt change in the later years of his term in office.

The looming threat of US-imposed gasoline import sanctions would inflict an additional financial burden on the Iranian government, further damaging its ambitious energy expansion plans. Despite having the world’s third largest oil reserves, Iran has struggled to meet growing domestic fuel demand owing to burdensome subsidies and inadequate refining capacity.

The idea of imposing restrictions on Iranian gasoline imports in response to its nuclear programme was first floated by Obama in October 2008, when he said during a presidential debate that the measures would start ‘changing [Tehran’s] cost-benefits analysis’. The proposal appears to have been gathering support since, with an Israeli official telling Reuters in August 2009 that Tel Aviv was discussing the

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feasibility of a fuel import ban with Washington. News in September 2009 that Iran is developing a second, underground nuclear facility has led to calls for even more severe sanctions.

Relations With Asia With Western IOCs steering clear of investing in Iran, partnerships with Asian NOCs represent Tehran’s best chances of securing the levels of investment needed to meet domestic products demand and reduce dependence on fuel imports.

Iran is seeking investment from Chinese state oil companies to assist it in expanding and upgrading its refining capacity. Representatives from PetroChina, Sinopec and CNOOC were briefed in early July on a number of refining projects in the country by a delegation of Iranian officials visiting Beijing. Following the meeting, the managing director of NIORDC, Nureddin Shahnazizadeh, said he hoped MoUs worth up to US$6bn would be signed between Iran and China. In January 2009, CNPC signed an agreement for the development of Iran’s North Azadegan oil field.

Sino-Iranian relations developed further in September when Chinese NOCs started selling gasoline via intermediaries to Iran, according to a report in the FT, at a time when other foreign oil companies have been moving to reduce gasoline sales to Iran following US pressure. According to the report, Chinese companies are supplying 30,000-40,000b/d of gasoline to Iran, around a third of the country’s total petrol import needs.

Relations With Latin America Iran is looking to cement relations with other international partners. During the visit of Venezuelan President Hugo Chávez to Iran in September 2009, Tehran and Caracas broadened their energy cooperation by signing three deals. Under the agreements, Iran and Venezuela will swap US$760mn of investment in each other’s projects. State-run Petróleos de Venezuela (PdVSA) will supply Iran with 20,000b/d of gasoline to a value of US$800mn starting in October 2009. Although, in BMI’s view, the deals have limited commercial utility for either country, they are a significant political statement. According to the oil ministry’s website, Iran’s oil minister Masoud Mirkazemi and his Venezuelan counterpart Rafael Ramírez have signed an MoU for PdVSA to finance 10% of Phase 12 of the South Pars gas field development for a total value of US$760mn. South Pars phase 12, operated by Iranian state- run company Petropars, aims to produce 28.4bcm of gas per annum and 110,000b/d of condensate.

Relations With The Middle East In November 2009, Iranian parliamentarians called for a 2001 contract to supply gas to the UAE to be cancelled, following a longstanding dispute over pricing. According to a statement by the Iranian parliament’s energy committee spokesperson, Emad Hosseini, cited by Iran’s student news agency ISNA, several parliamentarians think the contract should be revoked and the international ramifications accepted. The news comes as no surprise, with Iran having said as far back as September 2008 that the deal was not in its national interest. With its gas export options currently restricted by limited existing

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pipeline routes and no access to technology to develop LNG infrastructure, Iran has been looking to supply its Middle Eastern neighbours, striking deals with Oman in August 2008 and Bahrain in October 2008. Plans to export to the UAE have been in limbo for years, however, owing to the two sides’ inability to agree on a mutually acceptable gas pricing formula.

During his visit to Tehran in August 2009, the ruler of Oman, Sultan Qaboos, continued talks to secure a deal for his country to develop the Kish gas field in Iran and to re-export the field’s output via Omani LNG export facilities.

In October 2008, Iran and Bahrain agreed on a framework deal that will see Iran export 10.3bcm of gas to Bahrain, according to Gholamhossein Nozari. The gas will be sourced from Iran’s South Pars field, former oil minister Nozari said.

Relations With Europe

EU diplomats have begun drafting proposals for a new round of sanctions against Iran, Agence-France Presse (AFP) reported in June 201, days after the UNSC imposed a fourth round of sanctions. The new EU sanctions, if enacted, could act as a greater hindrance towards Iran's energy goals than UN sanctions approved on June 9 2010. According to draft sanctions proposals seen by AFP, the EU may target Iran's oil and gas sector, prohibiting new investment and transfers of technology, equipment and services to the sector. Additional elements of the proposed EU sanctions include restrictions on the activities of Iranian banks in the EU, and the freezing of assets held by individuals and organisations linked to IRGC. The language, if approved and enacted, would clearly be far more specific than that adopted on June 9 by the UN, and could potentially end any prospect of fresh EU investment in, or trade with, Iran's oil and gas sector.

The Turkish and Iranian governments have announced a number of energy cooperation deals following a visit by Turkish Prime Minister Recep Tayyip Erdoğan to Tehran in early November 2009. The deals include an agreement to construct a US$2bn refinery in northern Iran, plus the establishment of a JV to manage for the transit of gas from Iran to Europe via Turkey. The volumes are expected to come from Phases 6 and 7 of the South Pars gas field, being developed by the Turkish Petroleum Corporation (TPAO). Turkey signed a preliminary deal with Tehran in November 2008 to invest US$3.5-4bn in developing the two phases of the giant project.

Production from these phases is expected to reach 35bcm, half of which would be available to Turkey to re-export to Europe. It was not clear whether the gas would be shipped via the EU-backed Nabucco pipeline project. While some Nabucco supporters have argued that Iran’s participation is essential for the project’s feasibility, others are sceptical owing to the geopolitical situation. Allegedly on request from

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Erdoğan, Iran has extended TPAO’s deadline to finalise its investment plan for South Pars from November 2009 to February 2010, according to an ISNA report quoted by Upstream.

Although these deals are merely indicative at present, they demonstrate Turkey’s willingness to expand diplomatic and commercial ties with Tehran, which flies in the face of efforts by the US to discourage international investment in the country. Although the balance of power between Turkey and Iran would be severely upset in the event of Iran gaining nuclear weapons capability, Ankara is keen to maintain its role as a bridge between western and eastern interests and is unwilling to antagonise the Iranian government by too strongly supporting the US and EU.

NIGEC’s director told the Fars News Agency in September 2009 that it will start exporting gas to Switzerland before March 20 2010, the end of the Iranian calendar year. NIGEC and Swiss utility Elektrizitaets-Gesellschaft Laufenburg (EGL) signed a 25-year supply deal for the delivery of 5.5bcm per year in early 2008, with the contract allegedly worth US$13bn. According to NIGEC, the deal has been finalised. In BMI view the deal appears decidedly speculative as there are no pipeline connections between the two countries.

Table: Key Upstream Operators – Iran Oil And Gas Sector

Oil production Gas production Company (000b/d) Market share (%) (bcm) Market share (%)

NIOC 4,050e 94 110 95 Total Iran 8 0.2 na na Shell Overseas Services Iran na na na na Eni Iran 35 0.6 na na Petronas* 23.6 0.5 5.8 5 Gazprom na na na na

na = not available; *Financial year ending September 31 2009. Source: 2009 company data

Table: Key Downstream Operators – Iran Energy Sector

Company Refining capacity (000b/d) Market share (%) Retail outlets Market share (%)

NIORDC 1,451 100 1,100 100

Source: BMI

Iran Oil & Gas Report Q3 2010

Company Monitor

National Iranian Oil Company (NIOC) Company Analysis Address Wholly state-owned and with little hope of privatisation, NIOC is one of the ! NIOC – National Iranian Oil Company world’s biggest oil companies by production. It has the challenge of Central Building No.1 delivering increased oil volumes, raising productive capacity, minimising Ministry of Petroleum Hafez Crossing, Taleghani products imports and exploiting the state’s gas resources. It cannot form oil Ave production sharing ventures with IOCs because of the constitution, but has Tehran Iran brought in a number of companies to work on a sub-contractor basis. ! Tel: +98 (21) 615 2929 Genuine partnerships have been created in the fledgling gas segment, and ! Fax: +98 (21) 615 3886 vast export volumes provide medium- to long-term growth potential for the ! www.nioc.com country and NIOC. Production Statistics SWOT Analysis ! Oil production: 4.05mn b/d (2008) Strengths: Dominant domestic oil and gas producer ! Gas production: 110bcm (2008) Unrivalled access to exploration acreage

Controls oil export facilities Weaknesses: Limited financial or operational freedom

Cost and efficiency disadvantages

Unable to provide PSAs for IOC involvement

Rising investment requirement

Opportunities: Considerable untapped gas export potential

Rising domestic/regional energy consumption

Large areas of under-explored territory

Threats: Long-term fall in domestic oil production

Changes in OPEC/national energy policy

Punitive financial or trade sanctions by the UN

Iran Oil & Gas Report Q3 2010

Market Position

Following the nationalisation of Iran’s oil and gas reserves in 1980, NIOC was granted sole control over all upstream operations and activities of the petroleum industry. The company claims 561.9bn bbl of oil and 26.74tcm of gas reserves (includes probable and possible reserves), ranking it among the top four global oil companies. It claims productive capacity of over 4mn b/d of oil alone and in 2008 accounted for about 95% of total oil and gas production. Its main producing assets are located in the south-west of the country, around the Khuzestan region, close to the country’s main export routes.

NIOC is under pressure to realise the potential of Iran’s vast oil and gas reserves but is presiding over a ‘natural’ decline in oil production of 500,000b/d every year. This is caused by the depletion of mature fields, with the prospects of future growth dependent on large new projects coming onstream to replace declining output. However, Iran’s investment in E&P has been hampered by disputes with foreign operators over costs and by the ongoing friction over its uranium enrichment programme. Investors are therefore approaching Iranian development opportunities with caution and many IOCs have frozen or delayed investment.

Since the formation of subsidiary NIORDC in 1991, NIOC has been able to focus primarily on being an upstream company, although it retains some downstream exposure through its transport subsidiaries such as the National Iranian Tanker Company and National Iranian Oil Terminals Company. To fulfil Iran’s role as one of the world’s largest exporters of oil, NIOC operates modern loading jetties on the islands of Kharg, Lavan and Siri.

Strategy

NIOC has a 12-point strategy designed to increase reserves and production, as well as to integrate production better with industrial requirements. The strategy emphasises the need to bring newly discovered large reservoirs onstream as quickly as possible in order to maintain national oil production levels. It also stresses the need to increase production efficiency, both through improved planning and through applying new technology to increasing recovery rates.

According to a March 2009 Bloomberg report citing NIOC Managing Director Seifollah Jashnsaz, the company’s budget for the calendar year starting March 20 2009 has been cut by a third because of the fall in oil prices. Jashnsaz said Iran needs US$24bn to complete oil projects this year and the lack of sufficient investments is challenging.

Iran’s failure to decide on a strategy for its South Pars gas field projects – prioritising exports or providing feedstock for the development of downstream value-added industries – has left NIOC denuded of a potentially lucrative revenue channel. This contrasts sharply with Qatar, which shares the South Pars/North Field gas field in the Persian Gulf. It made a strategic decision 20 years ago to invest in gas for

Iran Oil & Gas Report Q3 2010

export. Where Doha is now reaping the rewards with billions of dollars worth of gas revenues, Tehran is not. The development of South Pars is likely to suffer from IOC decisions to cancel project phases. Nevertheless, Iran’s gas potential is unmatched in the region, with reserves that are estimated to be the world’s second largest at 28.13tcm.

Latest Developments

In February 2010 NIOC subsidiary North Drilling Company (NDC) began drilling Iran’s first ever well in the Caspian Sea. According to Reuters, the exploration well is the first of three to be drilled in the Iranian section of the Caspian Sea. NDC’s CEO Hedayatollah Khademi told IRNA that the drilling was taking place at a depth of 1,550m but he did not specify whether this depth referred to a particular target zone or the total eventual depth of the well. The well is being drilled using the semi-submersible Amir Kabir rig, which can operate at water depths of up to 1,030m. The deepest point of the Caspian Sea is around 1,025m.

In August 2009, Iran’s then oil minister Nozari announced that the country had discovered 5.83bn bbl of possible in-place reserves at the Sousangerd field. He further stated that the discovery was thought to be the largest oil find in the past five years. No further details on the discovery have been released. We view this figures with a high degree of scepticism.

In July 2009, Shana reported that NIOC had signed an MoU with CNPC on the development of the South Azadegan oil field, which is expected to produce 260,000b/d at full capacity. Shana said that under the terms of the MoU, CNPC will take a 70% stake in the field in return for covering 90% of its development costs. An earlier Shana report claimed the project needed US$2.5bn of investment. In an effort to boost Chinese investment in the Iranian energy sector, NIOC said in early July that it would offer Chinese investors policy sweeteners such as a 5% discount on domestic raw materials purchases and an eight-year tax holiday for investments made in free trade zones.

In April 2009, Iran announced that it expected to finalise two gas development deals worth US$7bn in the near future, according to a statement by Mahmoud Zirakchian-zadeh, the managing director of Iranian Offshore Oil Company (IOOC). Zirakchian-zadeh told IRIB that his company was holding negotiations over the financial aspects of two gas development contracts with one European company and India’s state-owned ONGC. Without specifying which European company IOOC was engaged in negotiations with, he said that the European company had submitted a development plan for the offshore Lavan gas field, while ONGC was looking to develop the Farzad gas field.

In March 2009, three Chinese companies signed a US$3.3bn deal to help develop LNG from the South Pars gas field, according to Iranian state-funded Press TV. A consortium of the three companies, which were not named, will help develop and finance sections of South Pars Phase 12 and another unspecified

Iran Oil & Gas Report Q3 2010

block of South Pars. The project will be carried out in two stages, each of which will be completed in three years, according to the report. The news appears to reflect Chinese state-owned companies’ ability to take advantage of IOCs’ unwillingness to invest in Iran.

Iran officially launched Phases 9 and 10 of the South Pars gas field in March 2009. Phases 9 and 10 will produce some 50Mcm/d, or 18.25bcm, annually. The projects were developed under service contract by South Korea’s LG Engineering & Construction in partnership with two domestic state-run outfits. Another South Korean engineering company GS Engineering and Construction (GS E&C) was awarded a KRW1.6trn (US$1.37bn) EPC deal to sweeten gas from Phases 6-8 in October 2009.

Iran signed an MoU with Turkey in November 2008 covering the joint development of Phases 22-24 of the South Pars gas field and set out plans to transport gas from Iran through Turkey into Europe. Iran’s Pars Oil and Gas Company – a subsidiary of NIOC – and TPAO signed a preliminary agreement in 2007 providing for TPAO to pump 20.4bcm of natural gas from South Pars, which has now been finalised. The specific details of the MoU have not been published and media reports are contradictory, with some stating that the agreement covers only Phases 23 and 24 and not Phase 22. According to a statement by former Iranian oil minister Gholam Hossein Nozari quoted by state-controlled media outlet Shana on November 17, under the terms of the MoU half the gas produced by Phases 23 and 24 would be sold to Turkey.

In January CNPC signed an agreement for the development of Iran’s North Azadegan oil field, according to Iranian media sources. The deal has not been confirmed by CNPC, but it has been reported by Chinese news agency Xinhua. The field is currently entirely owned and operated by NIOC, which has been looking for a foreign partner to help financially and technically with the development of the field. According to media reports, NIOC and CNPC have signed a buyback deal for the field, under which CNPC will be required to hand back operatorship of the field to NIOC after the development phase and will then receive payments to cover its investment.

In November 2008, NIOC signed a development plan for Iran’s North Pars gas field with CNOOC, according to an NIOC board member quoted in Dow Jones Newswires. CNOOC and NIOC had planned to sign the US$16bn deal in February 2008, but the agreement was left in limbo after CNOOC officials cancelled their trip to Tehran. At the time, tensions between Iran and the US were escalating. CNOOC signed an initial accord with Tehran to develop the North Pars project in May 2007. The North Pars field contains some 2.3tcm of natural gas reserves and each phase of development could have a productive capacity of 12.4bcm per year, according to the Iranian oil ministry.

Gazprom, NIOC and Qatar Liquefied Gas Company (Qatargas) plan to set up a JV to produce and sell Iranian natural gas, according to an unnamed government source quoted by Russian business daily Kommersant. The report says that an agreement was made during cooperation talks held in Doha on

Iran Oil & Gas Report Q3 2010

November 12 2008. According to the report, the JV will commit to building a pipeline from Iran’s South Pars field to an LNG terminal at Ras Laffan in Qatar, where the gas will be liquefied for export. The three partners will each hold 30%, while the remaining 10% interest will be reserved for a trading partner or a major customer, with potential candidates being CNPC and South Korea’s Kogas.

Iran announced the discovery of a new oil field with 525mn bbl of in-place reserves in late July 2008. The news follows the announcement on July 14 of the discovery of a significant oil field in the oil rich province of Khuzestan, which is said to hold 1.1bn bbl of in-place reserves. Then oil minister Nozari said that a few other fields had also been discovered and that further announcements were imminent. The announcements contradict a statement in May by the head of NIOC, Seikfollah Jashnsaz, who said that Iran did not expect to discover any more major oil fields, but instead planned to raise output by developing small fields and increasing the return from the ones already under production. Jashnsaz said Iran was aiming to boost its oil output to 4.3mn b/d by March 2009.

Iran planned to invest US$4.6bn in oil and gas development in the financial year ending March 20 2008, according to the president of NIOC, quoted in the Tehran Times. In order to continue producing at its current rate, the country needs to add up to 500,000b/d of new output per annum, according to the then oil minister, Kazem Vaziri-Hamaneh, before his dismissal in August 2007.

Pars Oil and Gas Company and Malaysia’s SKS Ventures signed a US$16bn contract to develop two Iranian gas fields in December 2007. The contract allocates US$6bn for offshore and US$10bn for onshore development over a 25-year period. The feasibility of these sums, however, is questionable, in our view.

After an agreement between a Japanese consortium, led by Inpex, and NIOC to develop the Azadegan oil field fell through in 2006, NIOC is now the sole developer of the field. Without an official foreign operator, development of the giant oil field is progressing slowly. According to Iranian sources the field produced 20,000b/d in February 2008, contributing to a gradual rise in the country’s overall oil output. Azadegan was originally expected to be pumping 20,000b/d from the first six wells, but volumes now look set to emerge higher. The field on the border with Iraq is one of the biggest undeveloped deposits in the Middle East with oil reserves estimated at around 26bn bbl. CNPC signed an agreement to develop the North Azadegan oil field in January 2009 and South Azadegan in July 2009, according to Iranian media sources. Azadegan is thought to have been pumping 25,000b/d by the end of 2008.

Iran Oil & Gas Report Q3 2010

National Iranian Oil Refining and Distribution Company (NIORDC)

Company Analysis Address ! National Iranian Oil Refining and Distribution Dramatic expansion of Iran’s refining sector is necessary to avoid further Company (NIORDC) costly growth in gasoline imports. As a result NIORDC has embarked on a No.140 Nejatollahi St 15989 Tehran large expansion programme that, according to official estimates, could almost Iran double national refining capacity by 2015. An expansion of this scale poses a ! Tel: +98 (21) 880 1001 huge challenge to NIORDC, which is expected to invest heavily in capacity ! Fax: +98 (21) 615 2138 upgrading and expansion while foreseeing only modest returns. The company ! www.nioc.org has sole responsibility for the downstream oil segment, although it has already begun to share the responsibility by seeking external participants in Operating Statistics ! Refining capacity: 1.45mn new refinery projects. Chinese involvement in particular could yield benefits b/d (2008) for NIORDC in progressing towards achieving security of refined products ! Retail outlets: 1,100 (2008) supply. In the long term, however, the rapid development of the Middle Eastern refining sector, particularly in Saudi Arabia, could provide a challenge to the company’s aim of becoming a major fuel exporter.

SWOT Analysis

Strengths: Near monopoly on refining

Controls fuels distribution segment

Major pipeline infrastructure system

Weaknesses: Limited financial or operational freedom

Cost and efficiency disadvantages

Rising investment requirement

Opportunities: Rising domestic energy consumption

Refined products export potential

Long-term potential to export refined products

Threats: Need for ongoing high-level investment

Changes in national energy policy

Strong regional competition

Iran Oil & Gas Report Q3 2010

Market Position

Refining and distribution activities are carried out under the auspices of NIORDC, which was separated from NIOC in 1991. The company operates nine crude oil refineries located in Tehran (220,000b/d), Tabriz (100,000b/d), Isfahan (284,000b/d), Abadan (350,000b/d), Kermanshah (25,000b/d), Shiraz (40,000b/d), Bandar Abbas (232,000b/d), Shazand e Arak (170,000b/d) and Lavan Island (30,000b/d), as well as 14,000km of crude oil and oil product transfer pipelines. Abadan is the largest refinery, with an installed capacity of 350,000b/d. NIORDC produces and distributes around 250mn litres of oil products per day, of which 60mn litres are exported. Petroleum products, including gasoline and LPG, are distributed through a network of 1,060 service stations, as well as thousands of private retailers.

The threat of sanctions from the UN looms large over NIORDC’s operations. Any sanctions are likely to be implemented gradually, with one option being to block gasoline supplies to the country. According to an IEA report, Iran currently imports 30-40% of its gasoline from Europe, and as such would certainly be affected if those countries agreed to participate in sanctions, mainly because of the higher costs of imports resulting from having to engage alternative suppliers. However, Iran could then retaliate by halting oil exports to participants in the sanctions.

Strategy

NIORDC has a big job on its hands to combat Iran’s growing oil products import requirements. The group has significant financial resources but, like NIOC, may struggle to attract international partners for its proposed refinery projects due to political considerations. Iran still imports some 30-40% of its gasoline needs because of limited refining capacity, and this figure is unlikely to decrease over the short to medium term. To combat this situation, NIORDC has started work on seven new refineries across the country and is also carrying out an expansion of its flagship refinery at Abadan. BMI is sceptical, however, as to whether the company will succeed in bringing any of these projects onstream, with the exception of the Persian Gulf Star refinery, by 2014.

One element of NIORDC’s recent strategy has been to increase the involvement of partner companies. Two of the seven planned refineries involve a major element of private participation, and reports in mid- 2009 suggested that Chinese companies would be allowed to take part in the refinery-building programme. With China less susceptible to US pressure over Iran, we could see NIORDC increasing the level of Chinese involvement.

Latest Developments

According to state media reports in August 2009, Iranian officials have signed new deals on the back of MoUs agreed with Chinese companies to develop the Iranian refining industry. The deals were allegedly the culmination of a visit to Beijing by an Iranian delegation headed by managing director of NIORDC Nureddin Shahnazizadeh in the last week of July. A report in Shana claims that NIORDC signed deals

Iran Oil & Gas Report Q3 2010

with Sinopec to expand the Abadan refinery by 210,000b/d and to construct the new Hormuz refinery in the south of the country. The Mehr News Agency, however, reported that the deals concerned the Abadan and the Persian Gulf Star refineries. Both the Hormuz and Persian Gulf Star plants are part of Iran’s refining industry expansion programme that envisions the construction of seven greenfield plants and the expansion of existing facilities.

NIORDC said in December 2008 that the country plans to invest US$27bn in its programme to build a further seven oil refineries. According to Seyed Noureddin Shahnazizad, once the refineries are onstream the country’s production capacity in gasoline and gasoil will increase by 190mn litres per day (1.2mn b/d) and 180mn litres per day (1.13mn b/d), respectively. Iran is looking to secure investment for a major expansion of its refining capacity as the government proceeds with the gradual elimination of gasoline and gasoil subsidies by 2012.

In June 2008, NIORDC announced an ambitious refinery expansion schedule as it seeks to boost crude refining capacity by at least 1.5mn b/d. Aminollah Eskandari, a director at NIORDC, said the construction of seven refineries had already begun, with EUR15bn invested in the project. In 2006, NIORDC pledged to expand the country’s refining capacity to 3.2mn b/d by 2010 with an investment schedule that it said could amount to US$18bn. Eskandari said that all seven refineries would be completed by 2012. Iran’s lack of refinery capacity has forced it to store crude in vessels in the Persian Gulf.

In June 2008, Iran announced plans for NIORDC to build five refineries in Asia in an effort to boost regional cooperation and to position itself to take advantage of growing demand in the region and shift its supply base from the West. Iran will assist in the construction of the five refineries, with a combined refining capacity of 1.1mn b/d, in China, Indonesia, Malaysia, Singapore and Syria, and will provide crude for feedstock. At present, NIORDC is involved in only one refinery project in Asia, with a 16% interest in India’s Chennai Petroleum Corporation.

In October 2007, NIORDC and India’s Essar Group announced plans to begin constructing a 300,000b/d refinery, known as the Hormuz refinery, in southern Iran in 2008. The project, which will cost some US$8-10bn, will be located at the southern port of Bandar Abbas. It will process heavy crudes such as Soroush and Iran Heavy. A NIORDC spokesperson said it would take three to four years to build. Essar will hold a 60% equity stake in the project with Iran taking the remainder.

According to Senegal’s energy ministry in August 2007, NIORDC will acquire a stake in Senegal’s state- owned refinery Société Africaine de Raffinage (SAR) and Iran has agreed to supply the refinery with crude oil at preferential credit terms over a one-year period. This deal is yet to be finalised.

Iran Oil & Gas Report Q3 2010

Eni

Company Analysis Address ! Eni Agip Division 225 Mirzaye Shizaye Although companies with a significant US shareholding are under pressure to Avenue freeze investment in Iran, the absence of US oil company involvement Tehran Iran continues to present an opportunity for European groups, and Eni has been ! Tel: +98 (21) 871 9098 one of the most active participants. However, though returns on its oil project ! Fax: +98 (21) 871 2306 investment are limited, good long-term potential is provided by major gas ! www.eni.it field developments. Unless terms are changed appreciably, Eni is likely to shift its entire Iranian focus from oil field development to gas production and Financial Statistics (Group) exports, where the scope for volume, revenue and earnings growth is clearly Net sales: superior. Difficult relations between Tehran and the West have interrupted ! EUR87.2bn (2009) ! EUR108.1bn (2008) Eni’s Iranian ambitions. With the Italian government appearing to exert ! EUR87.3bn (2007) pressure on the company in February 2010 to reduce its exposure to the ! EUR86.1bn (2006) country, Eni could struggle to maintain its position in Iran. ! EUR73.7bn (2005) Net profit: SWOT Analysis ! EUR10.0bn (2009) ! EUR8.8bn (2008) Strengths: Role in key oil buyback projects ! EUR10.0bn (2007) Share of major gas field developments ! EUR9.2bn (2006) ! EUR8.8bn (2005) Strong near- to medium-term volume growth

Good relationship with NIOC Operating Statistics Weaknesses: No equity ownership of oil ! Year established: 1957

Modest current oil volumes Oil production: Rising investment requirement • 35,000b/d (2009) • Opportunities: Considerable untapped gas export potential 28,000b/d (2008) • 26,000b/d (2007) Large areas of under-explored territory • 29,000b/d (2006) Threats: Long-term fall in domestic oil production • 35,000b/d (2005) Italian government pressure to reduce Iranian activities

Competition in regional LNG supply

Changes in OPEC/national energy policy

Iran Oil & Gas Report Q3 2010

Market Position

Italy’s Eni first entered Iran in 1957, establishing a 50:50 JV with NIOC known as Société Irano- Italienne des Pétroles (SIRIP). SIRIP was awarded several exploration licences in the offshore Persian Gulf, the onshore Zagros mountain area and the onshore Mekran desert, discovering a number of fields. In 1980, all of Eni’s Iranian interests were nationalised without compensation. The Italian producer then re-entered Iran’s upstream sector in 1999, signing the first of several buyback contracts. Eni, together with Total, signed a contract with the NIOC to increase the productive capacity of the giant Dorood oil field, near the Kharg Island.

The Dorood oil field is operated by Total’s subsidiary Elf Petroleum Iran (55%) and the partners expect to increase the field’s reserves from the current 600mn to 1bn bbl of oil. In 2000, Eni and domestic producer Petropars were chosen to develop the fourth and fifth phase of the giant South Pars gas and condensates field. Eni has a 60% share in the development as well as operator status, while Iranian state- controlled company Petropars holds 20% and Naftiran Intertrade (NICO) holds the remaining 20% on behalf of NIOC. NIOC will take over as operator when production commences. The firm announced in April 2005 the successful completion of Phases 4 and 5. South Pars 4 and 5 are Eni’s main producing fields, accounting for some 88% of its Iranian output in 2007.

In June 2001, Eni, NICO and NIOC signed an agreement for the development of the onshore Darkhovin (Darquain) oil field in the Awhaz oil region. The overall buyback contract is worth around US$1bn. Eni, with a 60% stake, will act as the operator during the development phase, while NICO’s wholly owned subsidiary holds the remaining 40%. Eni and NICO announced in July 2005 that they are to begin oil production at the Darkhovin field at a projected level of 50,000b/d. Total investment in the project should reach US$1.26bn. During the second phase expansion, production increased to around 160,000b/d (14,000b/d net to Eni) in 2009.

Strategy

In April 201 Eni said it will hand over operations at the Darkhovin oil field to local partners, according to Reuters. The announcement, which was made in the company's annual 20-F filing to US authorities, came as the company expressed concerns that it could be affected by new US sanctions targeting companies dealing with Iran. Coincidentally, Darkhovin is also the site for a planned nuclear reactor that Iran has stated will be operational by 2016.

Eni may find its involvement constrained by policy changes by the Italian government over investment in Iran. In February 2010 Italian foreign minister Franco Frattini claimed that Rome would block any additional investment by Italian companies in Iran. Italian President Silvio Berlusconi claimed that Eni had pulled out of talks to develop the Darkhovin field, though this was subsequently denied by Iranian

Iran Oil & Gas Report Q3 2010

authorities. Any pressure brought to bear on the company by the Italian government could have a major effect on Eni’s future prospects in Iran.

Latest Developments

In May 2009, Eni was reportedly preparing to sign a US$1.5bn deal with Iran for the development of the third phase of the Darkhovin (Darquain) oil field, according to Press TV. According to an official from NIOC, quoted by Press TV on May 19, Eni has submitted a feasibility study for the third development phase. Eni signed a US$555mn development deal for the field with NIOC in 2001. Eni has not confirmed whether it has submitted a development plan for the field.

Iran’s Darkhovin oil field has doubled its output to 100,000b/d, according to an Iranian official in January 2008. Arvandan’s managing director Salbali Karami has said that the companies were looking to boost output to 160,000b/d by Q308.

Iran Oil & Gas Report Q3 2010

Total Iran

Company Analysis Address ! Elf Petroleum Iran 56 Esfandiar Avenue Total is in a broadly similar position to that of Eni, having extensive 19686 Tehran involvement in the oil buyback schemes and an important role in the Iran ! Tel: +98 (21) 201 5190 exploitation of Iran’s gas resources. It has successfully completed its first ! www.total.com buyback contract and was making good progress with the others, even though the terms were less than ideal. Total’s relationship with NIOC has, however, been strained by its decision to put plans for a major gas production/export Operating Statistics scheme on hold. Oil production: • 8,000b/d (2009) SWOT Analysis • 9,000b/d (2008) • 15,000b/d (2007) Strengths: Role in key oil buyback projects • 20,000b/d (2006) Share of major gas field developments • 23,000b/d (2005)

Strong near- to medium-term volume growth

Weaknesses: No equity ownership of oil

Modest current oil volumes

Rising investment requirement

Opportunities: Considerable untapped gas export potential

Large areas of under-explored territory

Threats: Long-term fall in domestic oil production

US-led pressure against operating in Iran

Changes in OPEC/national energy policy

Iran Oil & Gas Report Q3 2010

Market Position

Similarly to many of the other international oil majors, Total’s predecessor companies had a presence in pre-revolutionary Iran. The French oil major re-entered the country in 1995, with the signing of the offshore Sirri oil field buyback contract. Work on the Sirri contract was completed in 2000.

Total is involved in several key projects including Phases 2-3 of the South Pars gas field, as well as the Balal and Dorood oil fields. Total has a 40% stake in the second and third phases of South Pars and operator status, in partnership with Russia’s Gazprom (30%) and Malaysia’s Petronas (30%). The partners will invest over US$2bn in the project’s development and expect to achieve a production plateau of 56Mcm/d of gas. Total’s predecessor company Elf, together with Eni, was awarded a US$1bn buyback contract for the Doroud oil and gas field in March 1999, where the partners boosted output from around 136,000b/d up to 205,000b/d by 2004. Total has a 55% stake in the project, with Eni holding the remainder. Doroud contains about 1.5bn bbl of reserves. Total had been in the running to develop the Bangestan oil field, but it was awarded to Petro Iran Development in March 2005.

Strategy

Similarly to Eni, Total will continue to benefit from the absence of other Western oil firms in this hydrocarbons-rich country. However, the threat of UN sanctions is a cause for concern. In July 2008, Total announced that it will not invest in Phase 11 of the South Pars gas field development – a project to use gas from the South Pars field to feed an LNG export terminal.

Although political reasons were clearly the overriding force in this decision, technical factors may have played a role. Prior to abandoning its stake, Petronas carried out engineering surveys around the site (along with Total), without subsequently announcing any particular reason for optimism. Initial projections saw Pars LNG Phase 11 producing 21bcm for export by 2010, although this looks unlikely. The continuing controversy over Iran’s alleged nuclear weapons programme and the threat of UN sanctions has also put a damper on already limited IOC involvement in the country’s energy sector.

Total’s CEO Christophe de Margerie has been an outspoken critic of political restrictions to Iran’s massive conventional oil and gas reserves. On February 15 2009, Margerie told the FT that political sanctions and political pressure would limit future oil and gas output. Of the IOCs operating in Iran, the Paris-based major appeared to be one of the most reluctant to bow to US-led pressure and according to sporadic media reports maintain dialogue with Iran. In July 2008, Total announced that it had suspended investment in Phase 11 of the South Pars gas field development. The French major was the last remaining Western energy group to delay its Iranian South Pars phase.

Iran Oil & Gas Report Q3 2010

Latest Developments

In June 2009, it was reported in the Iranian media that NIOC has signed a deal with CNPC to replace Total in the development of phase 11 of the South Pars gas field because of the French major’s foot dragging over spending. Total told Reuters that it considered the report to be a market rumour and offered no further comment. The deal with CNPC could be worth up to US$4.7bn, according to IRNA, citing NIOC’s director, Seifollah Jashnsaz. Jashnsaz further said that Total may continue negotiations over its involvement in the field’s downstream sector. On March 20 2009, Total missed the latest deadline to sign the development deal for South Pars Phase 11, but according to an October 2009 reports in the Iranian media was still negotiating to return to the project. Total’s potential investment in Phase 11 has been put at US$5-8bn. Following the expiration of the initial deadline in April 2008, in July 2008, Total’s CEO Christophe de Margerie told the FT that investment in Iran had become politically too risky, making it highly unlikely that the firm will develop South Pars Phase 11.

In September 2007, Iran’s former oil minister Kazem Vaziri-Hamaneh stated that Total had, thus far, failed to deliver a cost estimate for the planned South Pars LNG project that is acceptable to the government, according to a local press report. The news, which comes after an interim deadline for agreement on the project had passed, suggests that further delays or more fundamental changes to the specification of the project may occur.

Iran Oil & Gas Report Q3 2010

Shell Development Iran

Company Analysis Address ! Shell Development Iran Etelaat Newspaper Building Shell was an obvious choice of partner for Iran in gas field development and South Naft Ave., Mirdamad LNG/GTL projects, given its wealth of experience in such schemes. It has, Bvd 15499-51199 Tehran however, been forced to limit its exposure, given the continuing US concerns Iran regarding Iran. However, the presence in oil buyback projects, gas ! Tel: +98 (21) 222 5554 development and lubricants supply represents a balanced portfolio, providing ! Fax: +98 (21) 222 4448 longer-term upside potential from rising gas volumes, without contributing ! www.shell.com too much risk to the group portfolio. There must be a question mark over future buyback deals, given the group’s desire to generate higher upstream returns and raise oil reserves/production.

SWOT Analysis

Strengths: Role in key oil buyback projects

Share of major gas field developments

Strong near- to medium-term volume growth

Major role in local lubricants supply

Weaknesses: No equity ownership of oil

Modest current oil volumes

Rising investment requirement

Opportunities: Considerable untapped gas export potential

Large areas of under-explored territory

Threats: Long-term fall in domestic oil production

Changes in OPEC/national energy policy

Iran Oil & Gas Report Q3 2010

Market Position

Shell signed a buyback contract with NIOC in November 1999 for the development of the offshore Nowrooz and Soroosh oilfields in the Persian Gulf. The Anglo-Dutch major farmed out a 20% stake in January 2003 to a Japanese consortium led by Japan National Oil Corporation (JNOC). Members of the consortium included JNOC (33.33%), Japex (41.67%) and Inpex (25%). Field developments costs totalled approximately US$1.1bn, with the two fields producing some 190,000b/d in 2004.

Shell set up a 51:49 JV with the local refiner Pars Oil Company in early 2003 that produces a range of industrial lubricants for Iranian manufacturers. The firm was working towards interests in Phases 13 and 14 of the South Pars development, which included LNG production and GTL developments, respectively. Shell signed preliminary deals with NIOC in 2007 to develop Phases 13 and 14, but in May 2008 opted against developing the US$10bn project. It is likely to continue to act in an advisory role on Phase 13, according to reports. Shell had also acquired a 20% participation option in Phases 6-8 in South Pars through its acquisition of Enterprise Oil, but declined to exercise its option over concerns about the rate of return on investment. The stake was subsequently acquired by Statoil.

Following the February 2004 signing of the US$2-3bn Azadegan oil field development deal between a Japanese consortium and NIOC, Shell was offered a participation stake, but apparently has no plans to exercise the option, owing to concerns about the project’s profit levels. Shell served as a technical advisor to the Japanese group, but is not a signatory to the current agreement. The agreement between the Japanese consortium and NIOC collapsed however in 2006, leaving NIOC as the sole owner and operator.

Strategy

Shell has maintained a presence in Iran despite US pressure on the company to cut economic ties with the Iranian state. The worsening political relationship between Washington and Tehran has prompted many Western-based firms to exit the region, including BP, which ruled out investment in the region in early 2005.

In relation to the South Pars development the company has said it will now look at developing future, as yet undecided, phases of the project, a stalling tactic adopted by IOCs keen not to burn bridges. If the geopolitical situation is resolved, we should see Shell’s future plans for the country more clearly. The company is in no hurry to go ahead with its South Pars’ phases, leading to its replacement with local firms in early 2010.

Iran Oil & Gas Report Q3 2010

Latest Developments

In what seems a last ditch attempt to push IOCs to commit to Iranian projects, Tehran told Shell and Repsol YPF in April 2009 that they had until May 20 2009 to clarify their involvement in the South Pars LNG project. Jashnsaz had warned at the time that if the companies failed to do so within the given timeframe, Iran would begin talks ‘directly with Chinese [companies]’. Iran now appears to have followed through on this threat on Phase 11, although it remains to be seen whether Chinese state-owned companies have the managerial and technological capability to design and build LNG export terminals. Iran had set the original deadline of June 2008 to reach an agreement with Shell over the development of South Pars Phase 13. Shell had signed a preliminary agreement in late January 2007 to produce LNG from the South Pars field, with exports starting in 2011 or 2012.

In May 2008, Shell and Repsol YPF quit the delay-plagued Phase 13 of Iran’s South Pars gas project. The FT reported that the consortium would no longer develop Phase 13. The pair said they may still be involved in other phases of the South Pars development. The companies are likely to continue to act in an advisory role on Phase 13, according to reports. Iran has held talks with Shell and Repsol regarding switching South Pars development Phases 13 and 14 for others that are due to be developed at a later date. Iran is considering whether to swap these with Phases 15, 16, 20 or 21, according to then oil minister Nozari.

Repsol YPF had previously said that the companies were keen to swap their participation in Phase 13 for a role in Phases 20 or 21, owing to rising development costs. The development cost of Phase 13 is estimated at more than US$10bn. However, what is more likely to be the reason for the swap is that the companies want to delay their active involvement in Iran. Phases 20 and 21 are not expected to become operational for at least a decade, while Phase 13 is likely to be developed much sooner.

Iran Oil & Gas Report Q3 2010

China National Petroleum Corporation

Company Analysis Address ! CNPC Apt. 17, No. 2 Opp. Super As China’s main oil company, CNPC is at the forefront of Beijing’s push into Dakkeh. Iran. Occupying the spaces left by hesitant IOCs, CNPC positions itself as an Ayatollah Sadr Exp. Way Tehran, Iran alternative to Western investment. Its efforts are paying off, with the ! Tel: +98 (21) 2593 320 company securing a majority stake in both sections of the giant Azadegan oil ! Fax: +98 (21) 2590 531 field and a 30% stake in South Pars Phase 11. With little prospect of ! www.cnpc.com.cn Beijing’s voicing strong criticism over Iran’s nuclear programme, CNPC’s position in the country is set to expand further if the current political status Operating Statistics quo holds. Should a rapprochement with the West eventually materialise, ! Year established: 2004 however, its relative technological backwardness may put it in a competitive disadvantage when the IOCs return.

SWOT Analysis

Strengths: Role in a major oil development

Strong cash position

Good relationship with the state

Weaknesses: No equity ownership of oil

Large investment required

Technology gap with IOCs

Opportunities: Investment opportunities along the whole energy chain

Weak competition from IOCs

Fuel supply deals

Potential for involvement in refinery capacity expansions

Threats: Political volatility

Further international sanctions

Tougher OPEC quota enforcement

Iran Oil & Gas Report Q3 2010

Market Position

CNPC has been in Iran since 2004 and has since acquired exploration contracts for the MIS oil field and Block 3 (Kuhdasht Block) in the Zagros Basin in the south. The real breakthrough for the company, however, came in 2009 when it clinched development deals for both sections of the giant Azadegan field. The Azadegan field is located 80km west of Ahvaz, close to the Iraqi border, and is estimated to hold around 42bn bbl of oil, with NIOC estimating the field’s recoverable oil reserves at 5.2bn bbl. The field is divided into northern and southern sections. CNPC and NIOC signed the contract to develop the North Azadegan field in January 2009, with a deal for South Azadegan following in September 2009.

Under the buyback deals, CNPC will be required to hand back operatorship of the field to NIOC after the development phase and will then receive payments to cover its investment. The Chinese company will own a 70% stake in both the North and South Azadegan fields, alongside NICO with 20% and Japan’s Inpex with the remaining 10%. The Chinese company, however, will contribute 90% of the project costs. Azadegan is thought to have been pumping 25,000b/d by end-2008.

CNPC is seeking to establish a presence throughout Iran’s energy value and has been branching out from oil projects. The company’s subsidiaries provide comprehensive oil field services in the country and supply it with gasoline from Chinese refineries. In June 2009, CNPC made an entrance into the gas sector, apparently replacing Total in South Pars Phase 11. Western companies’ reluctance to commit investment or even to import oil product has clearly presented an opportunity for Chinese state-owned companies.

Strategy

The North Azadegan field will be developed in two phases, with the second phase depending on the successful submission of a comprehensive development programme that will need to be approved by the NIOC. It is planned that in the first phase, lasting four years, output will reach 75,000b/d. In June 2010, it was announced that CNPC was planning to start drilling operations at North Azadegan in 2010. According to an August 2009 report in China Daily, South Azadegan will need investment of US$2.5bn. The report further indicated that the field would produce 260,000b/d of oil, with 150,000b/d in the first phase and 110,000b/d in the second phase.

CNPC has reportedly reached an agreement over the development of Phase 11 of the South Pars gas project. Media reports cited an official close to CNPC as saying that the company plans to start its drilling programme at the project as early as March 2010. The official said that the news illustrates CNPC’s strategy of expanding its presence overseas in countries that hold large reserves of hydrocarbons, with Iran and Iraq ‘among the top [of] the list’.

Iran Oil & Gas Report Q3 2010

Latest Developments

In February 2010 Iran’s deputy oil minister Seifollah Jashnsaz stated that production capacity at the Azadegan oil field had increased by 13,000b/d to reach 40,000b/d. He said that the field has the potential to reach 50,000b/d following the completion of additional wells.

Jashnsaz and a CNPC counterpart signed a contract for the development of Phase 11 in Beijing in June 2009. An IRNA report added that the agreement with CNPC meant that CNPC has replaced Total at Phase 11. The deal with CNPC could be worth up to US$4.7bn, according to IRNA, citing Jashnsaz.

In October 2008, reports emerged that CNPC was negotiating the acquisition of a 25% stake in the Pars LNG project with the Iranian government. Under the terms of the deal French major Total would see its stake in Pars LNG reduced from 40% to 25%.

In June 2005, CNPC signed a buyback agreement with NIOC covering Block 3 (Kouh-Dasht, Kuhdasht) concession. Minimum investment was put at US$18mn. In 2007, first exploration well on the block, BAB-1, flowed at 1,250b/d. The discovery was deemed as commercial by CNPC and its preliminary reserve estimates for the field are 730mn bbl.

Iran Oil & Gas Report Q3 2010

Statoil – Summary

Norway’s Statoil ended its involvement in the South Pars Phases 6-8, transferring control of its projects to the NIOC when the project came onstream in 2009. CEO Helge Lund said in 2008 that the company had no further plans for investment in the country for now. The company is negotiating a service contract that would give it operator status over the project for a set time in order to ensure an orderly handover of the project. Once the third of the phases is complete, total production from the three phases will rise from the current 20.7bcm to 31bcm.

Statoil’s decision to freeze investment in the country followed the US State Department’s decision in June 2008 to launch a review of the company’s activities in Iran. The review was to determine if the Norwegian NOC had breached the Iran Sanctions Act, which prohibits investments of more than US$20mn in the country’s oil and gas sector. Another case was launched in 2006 to investigate a reportedly suspicious contract with US service company Horton in Iran. The latter case was dropped in November 2009.

The company, which is 63% owned by the Norwegian government, said it had always kept US administrations informed of its activities in Iran. Thus far, Statoil had avoided US retribution for its activities in Iran but, with political tensions rising, the prospect of a State Department investigation appears to have forced its hand. Statoil was also reportedly considering developing the Azar oil field in the Anaran Block in Iran, one of the bigger oil discoveries of recent years.

Statoil is the development operator and holds a 37% stake in Phases 6, 7 and 8 of the South Pars gas and condensate field. Production began in 2008 at the US$2.7bn Phase 8 section of the South Pars gas project, with peak output expected in 2009. Statoil handles the offshore part of the project, which had been due to start operating in 2006.

Inpex/Japex – Summary

In April 2003, Inpex and Japex acquired a joint interest in JJI S&N, which owns a 20% interest in the Shell-operated Soroosh and Nowrooz oil field developments. The two fields are producing 190,000b/d. The key Inpex interest was the US$2bn Azadegan oil development project, with up to 26bn bbl of crude reserves. However, Inpex was forced to hand over the project to Iran after talks failed in 2006. Inpex remains a junior partner, with a 10% stake.

Lukoil – Summary

In September 2003, Russia’s Lukoil was granted approval to explore for oil in the Anaran Block along the border with Iraq. Statoil is currently in charge of the project. April 2004 saw Lukoil get the go-ahead for

Iran Oil & Gas Report Q3 2010

development of three oil prospects in Iran, namely the North Azadegan, Kushk and Hosseinieh fields. The Russian group is said to be seeking a role in the Azadegan project, now that Inpex has relinquished operatorship and control.

CNOOC – Summary

In November 2008, China’s CNOOC and NIOC signed a development plan for Iran’s North Pars gas field. CNOOC and NIOC had planned to sign the US$16bn deal in February 2008, but the agreement was left in limbo after CNOOC officials cancelled their trip to Tehran. At the time, Iranian tensions with the US were escalating. CNOOC signed an initial accord with Tehran to develop the Iranian North Pars gas project in May 2007. The North Pars field contains some 2.3tcm of natural gas reserves and each phase of development could have a productive capacity of 12.4bcm per year, according to the Iranian oil ministry.

The original deal, which was due to be signed in February 2008, stated that CNOOC would purchase approximately 3mn tpa, or 4.1bcm, of LNG. This figure has not been included in the latest reports of the signed deal, but it seems that the agreement that was signed is the same as the one that was due to be signed in February. While the two sides have now signed an agreement, it has not been finalised and the price of gas remains an outstanding issue. Mohammad Ali Emadi, NIOC’s director of research and development, has said that the price of the gas and other outstanding terms may be agreed within a month, allowing the deal to be finalised. The outstanding issues, primarily over gas prices and a timeframe, indicates just how uncertain the deal still is.

PTTEP – Summary

Thailand’s PTT Exploration & Production and CNPC in June 2005 signed buyback contracts with NIOC for oil blocks in northern and western parts of the country. PTTEP will carry out exploration and development work at Saveh, pledging to invest a minimum of US$14.5mn on the site, while CNPC will commence work on the Kouh-Dasht concession, with a minimum of US$18mn agreed upon.

OVL – Summary

In April 2009, it was reported that ONGC Videsh Limited (OVL), the overseas arm of India’s state-run Oil and Natural Gas Corporation (ONGC), holds an exploration licence for the Farsi Block with a 40% stake, in partnership with two more Indian companies, Indian Oil Corporation (IOC, 40%) and Oil India Ltd (OIL, 20%). The block is located in the Persian Gulf and covers an area of around 3,500sq km in water depths of 20-90m. The consortium is looking to develop the block’s gas reserves (which were pronounced to be commercial in May 2007), but over 2009 there have been several conflicting reports in the media on whether a development contract for the block has yet been submitted and awarded or not. It had seemed that the companies submitted a US$3bn development plan for the block in early 2008 and later that year it was reported that the awarding of the development contract was imminent. However,

Iran Oil & Gas Report Q3 2010

according to a September 2009 report in India’s Economic Times, it seems that a development plan had only been submitted then. Under the master development plan that the partners have now apparently submitted, the companies plan to invest US$5bn over a seven- to eight-year period.

The Farsi Block is estimated to hold recoverable reserves of 362.5bcm of natural gas. The Lavan gas field is estimated to hold gas reserves of around 283.1bcm. The field, which was discovered in 2003, would be used as a gas source for LNG exports. IOOC’s Director Zirakchian-zadeh has said that under the development plan, the field would provide 4mn tpa of LNG, or 5.5bcm of gas. The development of the Lavan field is estimated to cost around US$4bn. In 2006, following the original discoveries at the block it was estimated that it holds 1bn bbl of oil reserves. Further tests, however, have shown high sulphur content and density, and the Indian consortium declined to develop Farsi’s oil reserves in its development plan that was allegedly submitted in autumn 2009.

In June 2008, OVL, IOC and OIL announced plans to invest US$3bn to bring oil and gas discoveries onstream at the Farsi Block. At that point, the partners have invested a total of US$90mn in the block, and under the terms of their current service contract they face a return on their exploration investment of 35%, even if they are not awarded the development contract. Should Iran grant them development rights too, the Indian consortium is hoping for a 15% return on development, but this will be subject to negotiation. In March 2008, ONGC and UK-based Hinduja Group announced a deal with NIOC to develop the Farsi Block in Iran. OVL announced the discovery of significant oil and gas reserves in the Farsi field in May 2007. ONGC and Hinduja have also expressed their interest in Iran’s South Pars Phase 12 and in the Azadegan oil field. Without an official foreign operator, development of the giant Azadegan oil field is progressing slowly. The field on the border with Iraq is one of the biggest undeveloped deposits in the Middle East.

In February 2010 Iran awarded Phase 12 of the giant South Pars gas project to OVL parent ONGC and India’s Hinduja Group. Phase 12 is expected to produce over 10mn tpa (13.8bcm) of gas for export via the planned Iran LNG plant. ONGC also received a 20% stake in the Iran LNG project. The Indian companies will invest around US$10bn in total in the upstream and liquefaction stages of the South Pars Phase 12 project. In return Iran will sell ONGC 6mn tpa of LNG to help meet India’s growing energy demand. No gas pricing details have been provided. Iran estimates the costs of the upstream section of Phase 12 at US$7.5bn.

OMV – Summary

Austria’s OMV has been active in Iran since 2001, when it acquired a 34% stake in the Mehr oil block. Mehr is located in the Zagros Fold Belt close to the Iraqi border. OMV drilled the first exploration well at Mehr in early 2005, and in February 2007 pronounced the finds on the block to be commercial, holding 150mn bbl of recoverable oil reserves.

Iran Oil & Gas Report Q3 2010

OMV made its entrance into the gas segment in April 2007, when it signed an MoU with NIOC to acquire a 10% stake in South Pars Phase 12. The deal provides for the construction of an LNG plant and gas purchases by OMV. According to former oil minister Nozari, OMV will purchase 14bcm of LNG from it annually. The MoU is worth US$18bn, but Iranian sources estimate its long-term value would be around US$30bn. The deal has been feted by Iran, where state television called it the republic’s biggest-ever contract with a European firm. OMV has underplayed the significance of the MoU, however, by emphasising its non-binding nature. Further discussions over terms will be held, with a final decision yet to be announced.

In June 2009, OMV announced that it would defer capex in Iran until global oil markets stabilise. Its director of upstream business, Helmut Langanger told Reuters that OMV would rather be dropped from Phase 12 than cave in to Tehran’s demands to begin the investment programme immediately. Like other Western oil companies, OMV has been hesitant about investing in Iran’s energy sector owing to the country’s controversial nuclear energy programme. ‘If [the authorities] wanted, they could replace us... they are proceeding with the project on their own without us,’ Langanger said.

In February 2010 OMV was replaced in the South Pars 12 project by India’s ONGC and Hinduja Group, alongside Sonangol and NIOC subsidiary Naftiran Inter-Trade Company. The deal with Indian and Angolan companies practically ended OMV’s participation in Phase 12.

BP – Summary

In January 2005, BP ruled itself out of any oil and gas deals with Iran to protect its relationship with the US, the biggest source of its net production. In an interview with Bloomberg, then CEO Lord Browne said frankly that to ‘do business with Iran at the moment would be offensive to the US and therefore against BP’s interests. We are very heavily influenced by our American position.’ We do not expect to see any activity by BP in Iran while the stand-off over its uranium enrichment programme continues.

Sinopec – Summary

Asia’s biggest oil refiner, state-controlled Sinopec, signed a US$2bn agreement with Tehran to develop Iran’s Yadavaran oil field in December 2007, following on the MoU on the matter signed in 2004. According to Iranian estimates, the Yadavaran field has in-place reserves of 18.3bn bbl of oil and 354bcm of gas, of which 3.2bn bbl of oil and 76bcm of gas are recoverable. The field will produce 85,000b/d in four years’ time and a further 100,000b/d during the second phase, three years after that. The plan for the first development phase of Yadavaran was approved in November 2009. According to the Tehran Times International Daily, Sinopec started work on the buyback project in September 2008.

Iran Oil & Gas Report Q3 2010

Crescent Petroleum – Summary

NIOC and Sharjah-based Crescent Petroleum signed a 25-year deal in 2001 for the supply of 16.9Mcm/d, or 6.2bcm per annum, of gas from Iran to the UAE. Exports were supposed to begin at end- 2005 from the offshore Salman field. The deal came under fire over the export price, however, with the Iranian daily Sarmayeh saying it was just 20% of the price Turkey pays for Iranian gas. Negotiations over the price of gas exports have therefore been ongoing since 2006 and Iran has yet to complete testing facilities at Salman required prior to the start of exports. Crescent claims that the two sides conditionally agreed on a new price formula in September 2008 but that there has been no progress since. While Iran has been threatening to annul the contract for some time, Crescent has argued that the deal is internationally binding and said in July 2009 that it was pursuing international arbitration. Whether this route is pursued or not, the dispute demonstrates the difficulties that Iran is having boosting its gas exports, even to its near neighbours.

Gazprom – Summary

In a move to maintain its control over European gas imports, Russia’s state-run Gazprom confirmed its interest in joining the Iran-Pakistan pipeline in May 2009. Russian daily Kommersant quoted a Moscow official as saying that ‘this project is advantageous to Moscow since its realisation would carry Iranian gas toward South Asian markets so that in the near future it would not compete with Russian gas to Europe’. According to Kommersant, Gazprom could serve as pipeline operator and/or participate in its construction. The political momentum and know-how Gazprom would bring to the project could drive the construction of the IP pipeline forward more quickly than previously expected.

In December 2008, Gazprom Neft, the oil arm of Gazprom, reportedly expressed an interest in developing the Azadegan oil field in southern Iran, according to Press TV. The news follows an earlier agreement between Gazprom Neft and NIOC. The companies signed an MoU in April 2008 for the development of Iran’s Shoroum, Rig and Dudrou oil fields. Collectively known as the Central Zagros fields, the three fields lie in the Zagros Mountains and hold estimated reserves of up to 274mn bbl of oil, according to NIOC. Further, in June 2008, a group of senior officials from NIOC met Gazprom Neft representatives in Tehran to discuss the joint development of a number of oil fields also located in southern Iran.

In July 2008, the Iranian oil ministry’s Shana website announced the agreement between NIOC and Gazprom following a meeting on July 13 between President Ahmadinejad and Gazprom CEO Alexei Miller. At the meeting the two also discussed the strengthening of ties between gas-exporting nations and the potential creation of a gas exporters’ forum, seen by many as an attempt to create an equivalent in gas to OPEC. Other issues covered in the co-operation agreement include the possible IP pipeline

Iran Oil & Gas Report Q3 2010

participation, assisting Iran to improve field recovery rates and the development of the North Azadegan and Caspian Sea oil fields.

During talks between Miller and Iran’s then oil minister Gholam Hossein Nozari in February 2008, it was agreed that the two sides will jointly develop two or three phases of the South Pars field. According to Bloomberg, Iran and Gazprom are looking to set up a joint energy company, alongside a third partner country, though no details of which country may participate were revealed. Gazprom is already involved in the development of Phases 2 and 3 of South Pars with a 30% interest, alongside Total (40%) and Petronas (30%). The partners will invest over US$2bn in the project and expect to achieve a production plateau of 56Mcm/d of gas.

Others – Summary

Brazil’s Petróleo Brasileiro (Petrobras) announced in November 2009 that it was retuning its only concession in Iran, the Tusan Block, to the government, and was considering pulling out of the country completely. The company stated that the decision was based on poor exploration results rather than any political motivation. As Petrobras has decided to focus its activities domestically rather than overseas, a decision to leave Iran would make strategic sense. Petrobras signed a service contract with NIOC in 2004 for the Tusan Block, spending US$178mn on fulfilling the minimum exploration programme, which involved the drilling of two wells. In February 2008, the company announced a discovery but said that the find was not commercial. The service contract expired in July 2009. In 2007, Petrobras held talks with Iran over a deal to explore two blocks in the Caspian Sea but an agreement was never finalised.

Iran Oil & Gas Report Q3 2010

Oil And Gas Outlook: Long-Term Forecasts

Regional Oil Demand

A strengthening of the 2010-2014 oil demand trend is predicted for the 2014-1019 period, reflecting the underdeveloped nature of several key economies, plus ongoing wealth generation thanks to robust energy prices and rising export volumes. The region’s oil consumption is expected to increase by 11.4% in 2014- 2019, up from the 8.8% growth achieved in the period 2009-2014. Over the extended 2010 to 2019 forecast period, Qatar leads the way, with oil demand increasing by an estimated 69.0%, followed by Iraq’s impressive 61.4% growth. Israel lags the field, as a result of greater market maturity and the lack of hydrocarbons income that stimulates economies elsewhere in the region.

Table: Middle East Oil Consumption (000b/d)

Country 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f

Bahrain 46 48 49 51 52 54 55 57

Iran 1,812 1,867 1,923 1,980 2,020 2,060 2,102 2,165

Iraq 975 1,024 1,075 1,129 1,185 1,244 1,307 1,372

Israel 288 292 296 301 305 310 314 319

Kuwait 317 330 339 353 367 376 388 403

Oman 74 78 82 86 90 95 99 104

Qatar 117 124 131 139 148 156 166 176

Saudi Arabia 2,616 2,708 2,762 2,845 2,930 3,018 3,108 3,202

UAE 515 533 552 571 591 612 633 656

BMI universe 6,760 7,002 7,209 7,454 7,688 7,925 8,172 8,453 other ME 5,388 5,415 5,442 5,469 5,496 5,524 5,552 5,579

Regional total 12,148 12,417 12,651 12,923 13,185 13,449 13,724 14,032

f = forecast. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Regional Oil Supply

A 20.0% gain in Middle Eastern oil production during the 2014-2019 period represents an acceleration from the 8.9% rate of expansion seen in 2010-2014, and owes much to the likely gains delivered by OPEC member states. Iraq is by far the biggest contributor to growth, with output forecast to rise by 73.0% between 2010 and 2019. Its nearest rival, at 43.7%, is Kuwait. In Qatar, liquids output should rise by 39.1%, with gas liquids volumes moving higher as a result of increased dry gas volumes.

Table: Middle East Oil Production (000b/d)

Country 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f

Bahrain 65 70 75 81 90 95 100 100

Iran 4,300 4,350 4,380 4,450 4,500 4,550 4,615 4,650

Israel na na na na na na na na

Kuwait 2,630 2,720 2,850 3,050 3,125 3,300 3,450 3,600

Oman 820 835 820 795 756 718 682 648

Qatar 1,670 1,717 1,822 1,946 1,970 2,101 2,131 2,161

Saudi Arabia 10,150 10,330 10,700 11,000 11,250 11,550 11,850 12,100

UAE 2,800 2,875 2,915 3,025 3,150 3,200 3,350 3,500

BMI universe 22,435 22,897 23,562 24,348 24,841 25,514 26,178 26,759

Iraq 2,600 2,850 3,010 3,350 3,500 3,750 4,000 4,300

Syria 352 335 318 302 287 273 259 246

Yemen 270 257 249 241 234 227 220 214 other ME 36 37 38 39 41 42 43 44

Regional total 25,693 26,376 27,177 28,280 28,903 29,805 30,700 31,563

f = forecast. na = not applicable. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Regional Refining Capacity

The Middle East is set for an 70.9% increase in crude distillation capacity between 2010 and 2019, dominating the expansion of the world’s over-stretched refining industry. Cheap and plentiful local crude supplies make it the region of choice for refinery investment. Iraq, Oman and the UAE have particularly ambitious plans. The region’s importance as a net exporter of refined products will rise, as capacity growth is more rapid than the expansion of domestic oil markets.

Table: Middle East Oil Refining Capacity (000b/d)

Country 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f

Bahrain 262 262 302 302 302 302 302 302

Iran 2,000 2,000 2,250 2,400 2,650 2,650 2,800 2,800

Iraq 1,000 1,150 1,300 1,300 1,450 1,650 1,650 1,800

Israel 320 320 320 320 320 350 350 350

Kuwait 990 1,150 1,150 1,415 1,415 1,615 1,615 1,765

Oman 235 235 235 300 300 300 300 300

Qatar 650 650 650 750 750 750 810 810

Saudi Arabia 2,630 2,630 3,450 3,450 3,750 3,750 3,750 4,000

UAE 1,000 1,150 1,250 1,500 1,500 1,700 1,950 1,950

BMI universe 9,087 9,547 10,907 11,737 12,437 13,067 13,527 14,077 other ME 803 843 886 930 976 1,025 1,076 1,130

Regional total 9,890 10,390 11,793 12,667 13,413 14,092 14,603 15,207

f = forecast. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Regional Gas Demand

Gas demand growth could slow between 2014 and 2019, when compared with the 28.7% rate expected for the 2010-2014 period. There is still likely to be some 25.7% gas market expansion in the region in the final five years of the period. Expansion of gas consumption is expected to be at its greatest in Kuwait, Iraq, Israel and Bahrain.

Table: Middle East Gas Consumption (bcm)

Country 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f

Bahrain 12.0 12.6 13.2 13.9 14.6 15.3 16.1 16.9

Iran 140.0 146.3 152.2 158.2 163.0 169.5 174.6 182.4

Iraq 6.0 6.6 7.3 8.0 8.8 9.7 10.6 11.7

Israel 3.0 3.2 3.5 5.0 5.5 6.0 6.5 7.2

Kuwait 20.0 22.0 23.8 26.1 28.7 31.3 33.8 37.2

Oman 16.0 16.5 17.0 17.5 18.0 18.5 19.1 19.7

Qatar 28.5 31.3 35.1 38.9 42.4 45.8 49.5 53.4

Saudi Arabia 93.0 99.3 106.9 109.1 110.9 113.1 115.2 117.0

UAE 69.0 74.2 79.0 84.1 89.6 94.1 98.8 103.7

BMI universe 387.5 411.9 437.9 460.9 481.6 503.3 524.2 549.3 other ME 49.5 52.0 54.6 57.3 60.2 63.2 66.3 69.6

Regional total 437.0 463.9 492.5 518.2 541.7 566.5 590.6 619.0

f = forecast. All forecasts: BMI.

Iran Oil & Gas Report Q3 2010

Regional Gas Supply

A production increase of 27.4% is forecast for the Middle East region in 2014-2019, representing a significant deceleration compared with the 39.8% predicted during the 2010-14 period. Qatar’s explosive growth in the first half of the forecast period is not sustainable, although its volumes could still rise 14.9% in 2014-2019, compared with 23.8% in 2010-2014. Oman is likely to see gas production in decline over the 2014-2019 period, while Bahrain volumes are set to rise appreciably.

Table: Middle East Gas Production (bcm)

Country 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f

Bahrain 11.0 13.0 15.0 16.0 18.0 20.0 21.0 21.0

Iran 160.0 180.0 210.0 230.0 255.0 265.0 280.0 290.0

Iraq 15.0 17.0 20.0 23.0 27.0 30.0 35.0 37.0

Israel 1.5 1.5 3.0 5.0 5.5 6.0 6.5 7.2

Kuwait 18.1 18.5 19.1 22.0 22.3 25.1 25.8 26.5

Oman 33.0 35.0 35.0 35.0 32.0 30.0 30.0 28.0

Qatar 145.0 147.8 156.6 165.4 168.9 172.3 176.0 179.9

Saudi Arabia 93.0 99.3 106.9 109.1 110.9 113.1 115.2 117.0

UAE 75.0 80.0 85.0 90.0 93.0 100.0 110.0 120.0

BMI universe 551.6 592.1 650.6 695.5 732.6 761.5 799.5 826.6 other ME 6.0 6.6 7.2 7.9 8.7 9.6 10.6 11.6

Regional total 557.5 598.6 657.8 703.4 741.4 771.1 810.1 838.2

f = forecast. na = not applicable. All forecasts: BMI.

Iran Country Overview

Iran Oil & Gas Report Q3 2010

Methodology And Risks To Forecasts

In terms of oil and gas supply, as well as refining capacity, the projections are wherever possible based on known development projects, committed investment plans or stated government/company intentions. A significant element of risk is clearly associated with these forecasts, as project timing is critical to volume delivery. Our assumptions also take into account some third-party estimates, such as those provided by the US-based Energy Information Administration (EIA), the International Energy Agency (IEA), OPEC and certain consultants’ reports that are in the public domain. Reserves projections reflect production and depletion trends, expected exploration activity and historic reserves replacement levels.

We have assumed flat oil and gas prices throughout the extended forecast period, but continue to provide sensitivity analysis based on higher and lower price scenarios. Investment levels and production/reserves trends will of course be influenced by energy prices. Oil demand has provide itself to be less sensitive to pricing than expected, but will still have some bearing on consumption trends. Otherwise, we have assumed a slowing of GDP growth for all countries beyond our core forecast period (to 2012) and a further easing of demand trends to reflect energy-saving efforts and fuels substitution away from hydrocarbons. Where available, government and third-party projections of oil and gas demand have been used to cross check our own assumptions.

Iran Oil & Gas Report Q3 2010

Glossary Of Terms

AOR additional oil recovery KCTS Kazakh Caspian Transport System APA awards for predefined areas km kilometres API American Petroleum Institute LAB linear alkyl benzene bbl barrel LDPE low density polypropylene bcm billion cubic metres LNG liquefied natural gas b/d barrels per day LPG liquefied petroleum gas bn billion m metres boe barrels of oil equivalent mcm thousand cubic metres BTC Baku-Tbilisi-Ceyhan Pipeline Mcm mn cubic metres BTU British thermal unit MEA Middle East and Africa capex capital expenditure mn million CBM coal bed methane MoU memorandum of understanding CEE Central and Eastern Europe mt metric tonne CPC Caspian Pipeline Consortium MW megawatts CSG coal seam gas na not available/applicable DoE US Department of Energy NGL natural gas liquids EBRD European Bank for Reconstruction and Development NOC national oil company EEZ exclusive economic zone OECD Organisation for Economic Co-operation and Development e/f estimate/forecast OPEC Organization of the Petroleum Exporting Countries EIA US Energy Information Administration PE polyethylene EM emerging markets PP polypropylene EOR enhanced oil recovery PSA production sharing agreement E&P exploration and production PSC production sharing contract EPSA exploration and production sharing agreement q-o-q quarter-on-quarter FID final investment decision R&D research and development FDI foreign direct investment R/P reserves/production FEED front end engineering and design RPR reserves to production ratio FPSO floating production, storage and offloading SGI strategic gas initiative FTA free trade agreement SoI statement of intent FTZ free trade zone SPA sale and purchase agreement GDP gross domestic product SPR strategic petroleum reserve G&G geological and geophysical t/d tonnes per day GoM Gulf of Mexico tcm trillion cubic metres GS geological survey toe tonnes of oil equivalent GTL gas-to-liquids conversion tpa tonnes per annum GW gigawatts TRIPS Trade-Related Aspects of Intellectual Property Rights GWh gigawatt hours trn trillion HDPE high density polyethylene T&T Trinidad & Tobago HoA heads of agreement TTPC Trans-Tunisian Pipeline Company IEA International Energy Agency TWh terawatt hours IGCC integrated gasification combined cycle UAE United Arab Emirates IOC international oil company USGS US Geological Survey IPI Iran-Pakistan-India Pipeline WAGP West African Gas Pipeline IPO initial public offering WIPO World Intellectual Property Organization JOC joint operating company WTI West Texas Intermediate JPDA joint petroleum development area WTO World Trade Organization

Iran Oil & Gas Report Q3 2010

BMI Methodology

How We Generate Our Industry Forecasts

BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling. The precise form of time-series model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. For example, data for some industries may be particularly prone to seasonality, meaning seasonal trends. In other industries, there may be pronounced non-linearity, whereby large recessions, for example, may occur more frequently than cyclical booms.

Our approach varies from industry to industry. Common to our analysis of every industry, however, is the use of vector autoregressions. Vector autoregressions allow us to forecast a variable using more than the variable’s own history as explanatory information. For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity.

When forecasting for some of our industry sub-component variables, however, using a variable’s own history is often the most desirable method of analysis. Such single-variable analysis is called univariate modelling. We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA). In some cases, ARMA techniques are inappropriate because there is insufficient historical data or data quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting.

Human intervention plays a necessary and desirable part of all our industry forecasting techniques. Intimate knowledge of the data and industry ensures we spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.

Energy Industry

A number of principal criteria drive our forecasts for each energy indicator.

Energy Supply Supply of crude oil, natural gas, refined oil products and electrical power is determined largely by investment levels, available capacity, plant utilisation rates and national policy. We therefore examine:

! National energy policy, stated output goals and investment levels;

! Company-specific capacity data, output targets and capital expenditures, using national, regional and multinational company sources;

Iran Oil & Gas Report Q3 2010

! International quotas, guidelines and projections, such as OPEC, the International Energy Agency (IEA) and the US Energy Information Administration (EIA).

Energy Consumption A mix of methods is used to generate demand forecasts, applied as appropriate to each individual country:

! Underlying economic (GDP) growth for individual countries/regions, sourced from BMI’s estimates. Historical relationships between GDP growth and energy demand growth at an individual country are analysed and used as the basis for predicting levels of consumption;

! Government projections for oil, gas and electricity demand;

! Third-party agency projections for regional demand, such as the IEA, EIA and OPEC;

! Extrapolation of capacity expansion forecasts, based on company- or state-specific investment levels.

Cross checks

Whenever possible, we compare government and/or third party agency projections with the declared spending and capacity expansion plans of the companies operating in each individual country. Where there are discrepancies, we use company-specific data as physical spending patterns to ultimately determine capacity and supply capability. Similarly, we compare capacity expansion plans and demand projections to check the energy balance of each country. Where the data suggest imports or exports, we check that necessary capacity exists or that the required investment in infrastructure is taking place.

Oil And Gas Ratings Methodology

BMI’s approach to our Oil & Gas Business Environments Ratings (BER) is threefold. First, we disaggregate the upstream (oil/gas E&P) and downstream (oil refining and marketing, gas processing and distribution), enabling us to take a nuanced approach to analysing the potential within each segment, and the different risks along the value chain. Second, we identify objective indicators that may serve as proxies for issues/trends that were previously evaluated on a subjective basis. Finally, we use BMI’s proprietary Country Risk Ratings (CRR) to ensure that only those risks most relevant to the industry have been included. Overall, the ratings system, which is integrated with those of all industries covered by BMI, offers an industry-leading insight into the prospects/risks for companies across the globe.

Conceptually, the new ratings system is organised in a manner that enables us clearly to present the comparative strengths and weaknesses of each state. As before, the headline Oil & Gas BER is the principal rating. However, the differentiation of Upstream/Downstream and the articulation of the

Iran Oil & Gas Report Q3 2010

elements that comprise each segment enable more sophisticated conclusions to be drawn, and also facilitate the use of the ratings by clients, who will have varying levels of exposure and risk appetite for their operations.

Oil & Gas Business Environment Ratings This is the overall rating, which comprises 50% Upstream BER and 50% Downstream BER:

Upstream Oil & Gas Business Environment Ratings This is the overall Upstream rating which is composed of limits/risks (see below);

Downstream Oil & Gas Business Environment Ratings This is the overall Downstream rating which comprises limits/risks (see below).

Both the Upstream and Downstream BER are composed of limits and risks sub-ratings, which themselves comprise industry-specific and broader country risk components:

Limits Of Potential Returns Evaluates the sector’s size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development;

Risks To Realisation Returns Evaluates both Industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of expected returns being realised over the assessed time period.

Iran Oil & Gas Report Q3 2010

Table: Structure Of BMI’s Oil And Gas Business Environment Ratings

Component Details

Oil & Gas BER Overall rating

Upstream BER 50% of O&G BER

Limits of potential returns 70% of Upstream BER

Upstream market 75% of Limits

Country structure 25% of Limits

Risks to realisation of returns 30% of Upstream BER

Industry risks 65% of Risks

Country risk 35% of Risks

Downstream BER 50% of O&G BER

Limits of potential returns 70% of Downstream BER

Upstream market 75% of Limits

Country structure 25% of Limits

Risks to realisation of returns 30% of Downstream BER

Industry risks 60% of Risks

Country risk 40% of Risks

Source: BMI

Iran Oil & Gas Report Q3 2010

Indicators

Overall, the rating uses three subjectively measured indicators, and 41 separate indicators/datasets.

Table: BMI’s Upstream Oil And Gas Business Environment Ratings – Methodology

Indicator Rationale

Limits of potential returns

Upstream market

Resource base

– Proven oil reserves, mn bbl To denote total market potential. High values are given a better score.

– Proven gas reserves, bcm As above.

Growth outlook

– Oil production growth, 2009-2014 Proxy for BMI’s market assumptions, with strong growth given higher score.

– Gas production growth, 2009-2014 As above.

Market maturity

Used to denote whether industries are frontier/emerging/developed or mature – Oil reserves/ production markets. Low existing exploitation in relation to potential gets higher scores.

– Gas reserves/ production As above.

– Current oil production vs peak As above.

– Current gas production vs peak As above.

Country structure

Used to denote opportunity for foreign NOCs/IOCs/independents. Low state State ownership of assets, % ownership scores higher.

Used to denote market competitiveness. Presence (and large number) of non-state Number of non-state companies companies scores higher.

Risks to realisation of returns

Industry risks

Subjective evaluation of government policy towards sector against BMI-defined Licensing terms criteria. Protectionist states are marked down.

Subjective evaluation of government industry orientation. Protectionist states are Privatisation trend marked down.

Country risk

Rating from BMI’s Country Risk Ratings (CRR). Evaluates constraints imposed by Physical infrastructure power, transport and communications infrastructure.

Long-term policy continuity risk CRR. Evaluates risk of sharp change in broad direction of government policy.

Rule of law CRR. Evaluates government’s ability to enforce its will within the state.

CRR, to denote risk of additional illegal costs/possibility of opacity in Corruption tendering/business operations affecting companies’ ability to compete.

Source: BMI

Iran Oil & Gas Report Q3 2010

Table: BMI’s Downstream Oil And Gas Business Environment Ratings – Methodology

Indicator Rationale

Limits of potential returns

Downstream market

Market

Denotes existing domestic oil processing capacity. High capacity considered – Refining capacity, 000b/d beneficial.

– Oil demand, 000b/d Denotes size of domestic oil/gas market. High values are accorded better scores.

– Gas demand, bcm As above.

– Retail outlets/1,000 people Indicator denotes fuels retail market penetration; low penetration scores highly.

Growth outlook

– Oil demand growth, 2009-2014 Proxy for BMI’s market assumptions, with strong growth accorded higher scores.

– Gas demand growth, 2009-2014 As above.

– Refining capacity growth, 2009-2014 As above.

Import dependence

– Refining capacity vs oil demand, %, Denote reliance on imported oil products and natural gas. Greater self-sufficiency is 2009-2014 accorded higher scores.

– Gas demand vs gas supply, %, 2009- 2014 As above.

Country structure

Used to denote opportunity for foreign NOCs/IOCs/independents. Low state State ownership of assets, % ownership scores higher.

Indicator used to denote market competitiveness. Presence (and large number) of Number of non-state companies non-state companies scores higher.

Data from BMI’s Country Risk team. Indicators used as proxies for overall market Population, mn size and potential.

Nominal GDP, US$bn As above.

GDP per capita, US$ As above.

Risks to realisation of returns

Industry risks

Subjective evaluation of government policy towards sector against BMI-defined Regulation criteria. Bureaucratic/intrusive states are marked down.

Subjective evaluation of government industry orientation. Protectionist states are Privatisation trend marked down.

Country risk

Short-term policy continuity risk CRR. Evaluates the risk of sharp change in broad direction of government policy.

CRR. Evaluates vulnerability to external economic shock, the typical trigger of Short-term economic external risk recession in emerging markets.

Short-term economic growth risk CRR. Evaluates current growth trajectory and state’s position in economic cycle.

Rule of law CRR. Evaluates the government’s ability to enforce its will within the state.

Iran Oil & Gas Report Q3 2010

Table: BMI’s Downstream Oil And Gas Business Environment Ratings – Methodology

Indicator Rationale

CRR, to denote risk of additional illegal costs/possibility of opacity in Legal framework tendering/business operations affecting companies’ ability to compete.

CRR. Evaluates constraints imposed by power, transport and communications Physical infrastructure infrastructure.

Source: BMI

Sources

Sources include those international bodies mentioned above, such as OPEC, the IEA, and the EIA, as well as local energy ministries, official company information, and international and national news agencies.