Asystem dynamics model to investigate the mismanagement share of
sanction effects on Iran’s oil and gas projects: A case study of South
Pars field
Mehdi Moghadam Manesh Golamreza Eslamifar
EMSD student PhD student at Tehran University
moghadam_manseh@yahoo.com eslamifar.reza@gmail.com
Keywords: Rework Cycle, Oil and Gas Production, Project Management, Sanction, Mismanagement,
System Dynamics, South Pars gas field, Iran
In Iran’s oil and gas industry, there are two cases which have long been open to dispute between two
main political parties of Iran (Left and Right parties); “Crescent Contract” and “South Pars Project”. In
the South Pars project the contractor (Khatam) claims that the main reason for its huge cost and time
overruns had been sanctions and “he has done everything to manage this problem properly”. Yet,
Iran’s Oil Ministry (employer) asserts that a high percentage of these overruns had been due to
“mismanagement”, not sanctions.
Time of Project Cost of Project
Pees a
x 8 108
e $
°
70 ° B 30 7% 00
Months Months:
=—=After Sanctions Work Really Done ——After Sanctions Total Cost of Project
+»»«, Before Sanctions Work Really Done +«»+: Before Sanctions Total Cost of Project
Before Sactions: 36.6 months Before Sactions: 6.37B $
After Sanctions: 95.6 months After Sanctions: 17.3B $
Cost & Time Overruns in South Pars Project
Assuming that this case would be examined in a hypothetical court, we develop a system dynamics
simulation model to explore how much could mismanagement really have affected project
performance.
The basis of the model is Ken Cooper's “rework cycle” model, and the model is composed of
two main loops; the reinforcing loop of growth and the balancing loop of rework. In normal
conditions, the government allocates some percentage of oil income to invest oil & gas projects and
increase production capacity. Indeed, the more oil income means the more governmental investment
and budget, & the more budget leads to providing needed materials more on time and the faster
implementation rate, breeding the more production capacity & income (Growth Reinforcing Loop).
Yet, Sanctions affect the projects in five ways: (1)interrupting foreign Investment (2) decrease in
incomes of export oil and gas (3) having to procure technology, materials and equipment more
expensive (4) increasing delay in providing row materials & (5)depriving Iran from prime foreign
contractors: none of experienced well-known contractors and companies like Total and Shell no
longer continued their cooperation with Iran, so inexperienced inner contractors took their place,
which lead to a lot of reworking rooted in lack of knowledge and “mismanagement. (It is worth
mentioning that we assume that the contractor has no problem with hiring enough qualified staff,
and its main challenge is procuring materials, equipment, and technology. Indeed, in most cases, Iran
has not enough capability in developing required technologies and it is forced to import these
technologies and materials. So, after sanctions, inner contractors faced serious problems regarding
procurement. Lack of needed materials and technologies slowed down the progress of the projects,
and contractors had to buy them several times more expensive, from black market, with a long delay
for finding suppliers.)
Sanction
effect 1
: Foreign
Sanction Investment
effect 3
Price of
Materials
: Bud Governmental
Expenditure dmvestereat
Sanction %
effect 4
Sacti
se ee ee ee Income")
Materials "
= Production
Capaci
Error Rate Implementation ana
Ke
Quality of
Cntractors
Sanction’
effet 5
In short, sanctions weaken the reinforcing loop of production capacity, by increasing delay in
“providing materials”, and by decreasing “income” and “budget”. On the other hand, the balancing
loop of reworking undermines the mentioned positive loop as well; after implementation it will
appear that some percentage of done works are lake of enough quality and need reworking, the more
error rate means the more material should be bought, which in turn, increase expenditure of project
and put more pressure on budget. Finally, after modeling and simulating the case we found that the
claim of Iran’s Oil Ministry is true and mismanagement could have caused about 3.6 billon dollar and
30 months overruns.
Acknowledgement: We thank Birgit Kopainsky and Bergen University for support & guidance
References:
1;
Oo ew
Sterman JD. 2000. Business Dynamics: Systems Thinking and Modeling for a Complex World.
Irwin/McGraw Hill: Chicago, IL., THE DYNAMICS OF PROJECT MANAGEMENT, P.5S5
Eslamifar, Gh., and Shirazi, A., and Mashayekhi, A. (2012). A system dynamics model to achieve
sustainable production of oil in Iran. The 30th International Conference of the System Dynamics
Society, Conference Proceedings, ISBN 978-1-935056-10-2
http://www.iran-newspaper.com
www.bbc.com/persian
https://wikipedia.org
www.amar.org.ir
