Plan to Cut Spending on Oil Rigs, Upstream Sector

Plan to Cut Spending on  Oil Rigs, Upstream SectorPlan to Cut Spending on  Oil Rigs, Upstream Sector

Iran plans to curb lavish spending in its resurgent oil industry by cutting down on hefty costs of leasing foreign drilling rigs and improving efficiency in exploration and production.

"The country spent $160,000 a day to lease foreign drilling rigs under the sanctions regime, but costs have halved after some sanctions against the country were lifted in January," Rokneddin Javadi, a deputy oil minister and head of the state-run National Iranian Oil Company, was quoted as saying by Mehr News Agency.

Sanctions barred Iran from doing business with international companies, forcing the government to turn to expensive brokers to cautiously sidestep trade embargos for getting access to much-need equipment for oil production. The Persian Gulf nation has the world's fourth-largest proven oil reserves after Venezuela, Saudi Arabia and Canada. It holds an estimated 157 billion barrels of proven reserves, or 9% of the world's reserves.

The government is spending big to tap into its massive hydrocarbon resources.

According to Javadi, Iran splashes some $25 billion every year to develop its oil industry, but he said measures should be taken to put a cap on costs. But the massive investment comes as little surprise as the country's economy has hinged on oil revenues for decades and the government is short of plans to diversify its sources of income.

Iran's oil-dependent economy is bearing the brunt of sluggish oil prices that have fallen to their lowest levels in more than a decade. Oil traded at a $115-per-barrel high in mid-2014 but has since fallen to $30-per-barrel range.

"This money ($25 billion) is a lot for a year. It is more than the whole budget of some countries," Javadi said. "This cost-saving can be implemented all across the oil industry."

He added that at least $2.5 billion can be saved in annual costs if efficiency in upstream sector, i.e. exploration and production, improves by 10%.

  Tenders for Iranian Rigs

The government is taking steps to put out to pasture foreign drilling rigs in favor of more cost-effective leasing deals with Iranian contractors.

The state-owned Iranian Offshore Oil Company has signed a deal to lease a drilling rig owned by the North Drilling Company to be used in Salman Oilfield–a joint field with the UAE in the Persian Gulf.

Saeed Hafezi, executive director of IOOC, said the contract was signed after a tender was put out exclusively for domestic contractors of oil rigs. This rig would be the second to on stream in months, with a third leasing contract expected to be sealed in the near future.

According to reports, foreign oil rig count stands at 16, mainly provided by Japanese, Chinese and Indian contractors. Iran's battered oil industry descended into chaos last year after media reported an $87-million drilling rig, which was purchased in 2011 under the tenure of former president Mahmoud Ahmadinejad, had never been delivered to the country.

Iran's judiciary and Oil industry launched an investigation into the so-called "missing rig" case, but the government has yet to unearth where the money went to and how the rig reportedly ended up in a far-flung offshore field in Mexico. Iran has vowed to raise production capacity to its pre-sanctions level of 3.6 million barrels a day in 2016. The country plans to ramp up output primarily from its more than dozens of joint fields with Arab neighbors.

Sanctions were a thorn in the side of Iran's oil sector. The country was cut off from the global banking system and billions of dollars of its petrodollars were blocked overseas, stripping the country of a vital economic lifeline.

But the lifting of sanctions has paved the way for the Islamic Republic to attract foreign investment to upgrade its aging oil infrastructure, as the country is planning to reclaim lost ground in the competitive global market.