Sanctions and Iran's LNG Export Plans

For a decade, in the face of increasing international sanctions to force Iran to halt nuclear developments than could be used for military purposes and to stop its support of international terrorism, Iranian government and company officials defiantly have announced nearly a dozen gas exports projects. These included both pipeline projects and liquefied natural gas (LNG) plants.
Following the June 9, 2010, imposition by the United Nations Security Council of its fourth round of sanctions against Iran’s nuclear program, both the United States and the European Union adopted sanctions that, in part, specifically target Iran’s oil and gas industry, including LNG technology.
Suddenly this month, Iran announced the suspension of development of several LNG plants. On August 7, National Iranian Oil Company Managing Director Ahmed Ghalebani announced that Iran was suspending some LNG projects, including Persian LNG. Three days later, Deputy Oil Minister Mohsen Khojastemehr stated that Iran would ice the Pars LNG project and “inject the gas from South Pars blocks 11, 13 and 14 into oil fields and in the national gas network. Khojastemehr said that “some countries had used a policy of lengthy negotiations and wasting time to impede the production of the South Pars projects.”
This blog will examine the potential effect of sanctions on Iran’s plans to export LNG; a subsequent blog will deal with Iran’s plans to expand its exports of natural gas via pipelines.
Iran’s Natural Gas Exports
Iran holds nearly 30 trillion cubic metres (1046 trillion cubic feet) or nearly 16 percent of global proved natural gas reserves, second only to Russia’s 44.4 tcm (1567 tcf). But failure to fully develop this resource left Iran with only 4.4 percent of 2009 natural gas production (131 bcm, compared with America’s 593, Russia’s 528 or Canada’s 161). Despite its huge proved reserves, Iran’s role in the international trade of gas is miniscule: it exports small amounts to Turkey and Armenia and imports gas from Turkmenistan, all via relatively small cross-border pipelines.
This failure to develop its extensive gas reserves particularly galls Iran because its huge South Pars gas field is the extension of Qatar’s undersea North Dome Field. The combined South Pars/North Dome gas condensate field is the world’s largest gas field, with an estimated 50 tcm of natural gas and some 50 billion barrels of condensates. North Dome Field was discovered in 1971 and Qatar began production in 1991. The field has fueled Qatar’s petrochemical and LNG plants at Ras Laffan and propelled Qatar to the position of the world’s largest LNG exports, ahead of Indonesia, in 2006. Last year Qatar exported nearly 50 bcm of LNG (and more than 17 bcm of pipeline gas). In 2011, when new trains at both RasGas and Qatargas come online, Qatar’s LNG export capacity will reach 77 million metric tones (about 104 bcm) annually. Further frustration for Iran comes from having missed a golden opportunity after Qatar in 2005 declared a moratorium on further North Dome Field development pending a full re-assessment of resources and potential markets; the moratorium is expected to end in three to four years.
This article will focus on Iran’s attempts to develop its natural gas resources for export as liquefied natural gas (LNG). A subsequent article will examine Iran’s plans for exports of natural gas via pipelines.

Foreign Assistance for LNG

The LNG business has been dominated by the major international oil companies because of their technical, and project management expertise, global marketing outreach, and not least, their ability to finance hugely capital intensive, expensive LNG projects, which included not only gas exploration, development, production, gathering and treatment, but also liquefaction, transport via specialized ships, and regasification facilities at the import end. A key part of the value chain is the process of liquefying natural gas at a temperature of about minus 260 degrees Fahrenheit (-162° Celsius). Four firms provide the technology used in most gas liquefaction plants worldwide: America’s Air Products and Conoco (the Phillips Cascade Technology acquired in the Conoco-Phillips merger), Anglo-Dutch Shell, and France’s Air Liquide.
Iran began bringing in foreign companies to help shape its LNG strategy a decade ago, with a tender for assistance on developing Iran LNG, the first Iranian LNG project. Also in 2001 Iran’s then Petroleum Minister Bijan Zanganeh created the National Iranian Gas Export Co. (NIGEC), with a focus on developing the countries LNG projects. At the time, it was believed that the domestically focused National Iranian Gas Co (NIGC) was too bureaucratic and ineffectual to lead the ambitious gas export portfolio. In this decade, officials from Iran’s government and various oil and gas entities have announced a deluge of deals for upstream gas development, LNG facility design and construction, and LNG exports.
Iran LNG. Based on gas from South Pars field, phase 12, Iran LNG was the first project developed. The National Iranian Oil Co. (NIOC) took 49% of the roughly US$ 4.5 billion project, with two Iranian oil industry pension funds taking 51%. The liquefaction and loading facilities are located at Tombak, on Iran’s west coast. With the three major purveyors of liquefaction technology in the U.S. and France blocked by sanctions, Iran reportedly turned to Statoil-Linde (Norway-Germany) to supply the liquefaction technology for the 10.8 million metric tons (MMT) annual capacity Iran LNG project. Linde supplied this technology for Statoil’s Snovit LNG plant in Norway and which experienced several years of startup problems. Other foreign companies involved in Iran LNG design and construction reportedly were South Korea’s Hyundai and Daelim, Italy’s Snamprogetti and APS Engineering, Germany’s Steiner-Prematechnik-Gastec, and China’s HuaFu Engineering Co. Iranian companies were involved in design and construction of both the plant and the jetty, offsite and utility plants. At least some of the foreign partners signed contracts with Iran’s Khatam-ol-Anbia Construction Headquarters, an engineering arm of Iran’s Islamic Republic Guards Corps. In April 2007, NIGEC signed an agreement with Austria’s OMV to ship 2.2 million metric tons (MMT) of LNG annually (term unknown) from Iran LNG to a terminal under construction in Croatia.
In August 2009, with insufficient internal funds for the $4.25 billion liquefaction facility, Iran planned to open 80% of the project to foreign investors to raise the $4 billion needed. When foreign offers were not forthcoming, in November 2009, Iran LNG tried to pressure two Indian firms to pay an advance of at least one billion U.S. dollars against the future supply of LNG to India. Talks between Iran and India on LNG supplies already had collapsed when Iran in July 2007 insisted that the contracted price of $3.215 be raised to $4.78. Earlier this year, the Mehr News Agency quoted Iran LNG Co. Managing Director Ali Kheyrandish as saying that costs for the project had risen to $5.5 billion, but that the project was 30% complete. First shipments from Iran LNG now are expected in the first quarter of 2012.
Pars LNG. In February 2004, NIOC engaged France’s Total and Malaysia’s Petronas to develop South Pars Field, phase 11, for the Pars LNG project. NIOC would hold 50%, Total 40% and Petronas 10%. Two years later, Pars LNG Co. entered into a preliminary agreement to export 3 MMT of LNG annually from Pars LNG to Thailand’s PTT Exploration & Production Co. starting in 2011. In January, 2008, the Fars News Agency reported that NIGEC Director of Investments and Participation Mohammad Javad Ahmadi Abhari suggested that half of Total’s shares be given to potential LNG buyers and gave Total until June to finalize the Pars LNG deal. Total appeared to drop plans in July 2008, a day after state media reported that the Iranian Revolutionary Guards had test-fired an updated version of the Shahab-3 missile, with a range of 2000 kilometres (1200 miles). Still, the project limped along until Iran, impatient with Total for not committing to development, handed Total’s share over to state-owned China National Petroleum Corp. earlier this year. Iran’s Deputy Oil Minister announced on August 10 that Iran would suspend the project and use the gas resources domestically.
Persian LNG. At about the same time it launched Pars LNG, NIOC brought in Shell and Spain’s Repsol for development of South Pars Field phases 13 and 14, to fuel Persian LNG. The $13 billion project would start with one 8.1 MMT train and add one more train in a second phase for a total export capacity of some 16.2 MMT annually. Earlier this year, Shell and Repsol dropped out of the project ahead of the June U.N. Security Council Sanctions. On August 7, NIOC Managing Director Ahmed Ghalebani announced that Iran was suspending Persian LNG.
North Pars LNG. In 2006, China National Offshore Oil Corp. (CNOOC) was proffered a role in the development of the North Pars field for an LNG project of some 20 MMT annual capacity. For its efforts, CNOOC also secures 25 years of LNG supply.
Golshan LNG. In December 2007, NICO offered Malaysia’s SKS Group half interest with NIOC in the $16 billion development of the Golshan and Ferdows fields in Bushehr Province for a 10 MMT LNG export project. ($5-6 billion for upstream development and $10-11 billion for the LNG plant and jetties.)
Others. There were two other LNG projects discussed. In August 2007, NIOC and the South Pars Oil & Gas Co. discussed development of South Pars Field, phases 19, 20 and 21 with Italy’s state oil and gas company Eni. Earlier that year, Germany’s gas giant Eon reported that it was in talks with Iran to buy LNG and one of Eon senior executives stated that Iranian LNG was necessary for European gas supply security. Finally, in February 2008, Poland’s PGNiG signed a letter of intent in Tehran with the Iranian Offshore Oil Co. to develop Iran’s Lavan gas field, with the possibility of LNG supplies.

Factors Impeding Iran’s LNG Development
As recently as December 2007, Iran LNG Company Managing Director Ali Kheir-Andish was quoted in the Tehran Times as telling a Tehran International Oil and Gas Conference that Iran would produce 22 MMT of LNG in 2015, 44 MMT in 2018 and about 88 MMT in 2022, with first deliveries in 2010. Now it appears Iran will find it a challenge to hit 11 MMT of LNG exports by 2015 and beyond that is pure speculation.
Clearly sanctions imposed by the United Nations’ Security Council, but more importantly, additional U.S. and European Union sanctions targeting Iran’s oil and gas industries, have impeded Iran’s LNG development. As stated above, LNG projects require a level of technology; project management financing; and upstream, shipping and marketing integration that have won major roles for the international oil companies in the global LNG business. But sanctions alone cannot account for the decade-long disaster of Iranian LNG development. Other factors hampering Iran’s plans to export LNG, beyond sanctions, include:
• Iran’s terms for foreign partners. Due to its constitution, Iran offers only buy-back contracts for oil and gas exploration and development, while international oil companies prefer production-sharing agreements. Buy-backs do not allow IOCs to book reserves discovered; Iran’s in particular have had short time frames, as little as four years, to recover costs; and Iran’s buy-backs have offered rates of return less than some international investors sought.
• use of gas to cover domestic demand. Demand for domestic natural gas—as for oil products—is artificially increased by massive subsidies. The internal Iranian price for natural gas is less than 40 cents per million British thermal units, compared with current spot LNG prices of some $12/MMBtu in Asia and $8/MMBut in Europe.
• internal opposition by some elements to gas exports. The internal conflicts about foreign access to Iranian oil and gas resources can lead to protracted and difficult negotiations with potential foreign partners.
• growing amounts of gas used to boost Iranian oil production. According to an October 2009 report by the Financial Times, to maintain pressure in its oil fields, Iran reinjects as much gas as Qatar exports.
• planning and construction on LNG export projects worldwide slowed in 2006-7 due to rapidly rising costs associated with supply constraints on materials, equipment, and design, engineering and construction crews.
• The 2008-9 global financial crisis and following recession dropped gas imports in major LNG importers—Asia, Europe and the U.S. In addition, the huge and rapid jump in shale gas production in the U.S. during 2008-2010 stifled LNG import demand in the U.S. to the extent that several U.S. terminals sought permission to re-export LNG. This glut further softened prices.

Iran’s LNG Future

Clearly international sanctions stymied Iran’s LNG program. In announcing the suspension of Pars LNG, Deputy Oil Minister Khohastemehr noted that pipeline “gas exports are cheaper and can be done faster, while exports of LNG not only require huge investments and complicated technology but are also time consuming.” Without the sanctions, Iran’s LNG projects would not have been as time consuming and foreign partners such as Total, Shell, Petronas and others with LNG experience could have supplied the investments and technology. Absent the sanctions, it is very possible that by now Iran LNG would be up and running and that Persian LNG or Pars LNG or possibly both would be moving toward completion.
Germany, France, Spain, Italy and other European countries would have liked to access Iranian LNG to reduce their overdependence on gas from Russia. China, India and other Asian countries see Iranian LNG as a way to reduce their dependence on imported oil and/or lower the rate of growth of coal combustion and its attendant local, national and global pollution problems.
Some countries support Iran’s efforts despite the sanctions. In May 2010, Iranian state tanker company executive director Mohammad Suri announced that Iran had placed an order with China for Iran’s first LNG tanker. Suri estimated that Iran would have to spend some $1.2 billion for the five ships needed for Iran LNG. Delivery of the first ship from China is expected in four years. Suri noted that China would pay 90% of the financing for construction of the tanker and that Chinese companies charge 10% less than South Korean companies. Although France and Norway have considerable experience building LNG tankers, South Korean and Japanese firms dominate the LNG tanker market. South Korean and Japanese companies have, respectively, some three and four decades experience. Hudong Zhonghua Shipyard built China’s first LNG tanker five years ago. An LNG ship building contract with Iran would have boosted China’s global role, but NIOC has since failed to approve the preliminary agreement with China for an LNG carrier and the deal is cancelled. As mentioned above, China Offshore Oil and Gas Co. and China National Petroleum Corp. remain active in Iranian oil and gas development.
It may be fortunate to have the gas originally planned for Persian LNG and Pars LNG available for oil field reinjection. Over the past four years, oil and gas prices have diverged considerably. Current LNG prices are less than $5/MMBtu in the U.S., about $8/MMBtu in Europe and some $12/MMBtu in Asia. And note that these are landed prices, i.e. liquefaction and shipping costs are included. Compare this with the roughly $80 per barrel or $13/MMBtu prices that oil commands and evidently Iran gains by reinjecting its gas—which it can produce later—to sell higher priced crude. This may be something of a false dichotomy, however, considering that with the huge size of Iran’s proven gas reserves, it could both reinject gas for enhanced oil production, export LNG and export gas via pipelines.
All this means that Iran LNG should be able to find long-term markets—probably in Asia—for its 11 MMT output by the time it comes onstream in 2012 or possibly later. But Iran is unlikely in this decade to reach the ranks of major LNG exporters.
The next blog will look at Iran’s planned natural gas pipeline export programs.