Iran Nuclear Deal: Implications for LNG

The nuclear deal Iran signed with the Permanent Members of the United Nations Security Council, including the United States, and Germany this month clearly could deepen a global oil glut, but what about the global gas market?

Iran has said it hopes to quickly double its oil exports from current levels to 2.3 million barrels per day.  U.N. sanctions increasingly starved Iran’s oil industry of capital, technology and export markets.  The lifting of sanctions could mean that foreign firms previously engaged in Iran’s oil sector could return.  Several of these firms reportedly have held discussions with Iranian oil officials over recent months.

Past LNG Plans

The sanctions stifled not only Iran’s oil industry, but also its gas development plans.  According to BP’s 2015 Statistical Review of World Energy, Iran holds the world’s largest proved natural gas reserves at 1201 trillion cubic feet, beating out the Russian Federation with 1153 tcf and more than triple the U.S. reserves of 345 tcf.   But Iranian production last year was 16.7 billion cubic feet per day compared with America’s 70.5 bcf/d and Russia’s 56 bcf/d.

In terms of liquefied natural gas (LNG), Qatar is the world’s largest exporter, using production from its offshore North Dome Field to sell 2.6 tcf in 2014.  The extension of that field in the Persian Gulf is what Iran calls the South Pars gas field.  Iran developed plans for a number of LNG export projects to exploit South Pars.  In Dec. 2007, Iran LNG Company Managing Director Ali Kheir-Andish told a Tehran International Oil & Gas Conference that his country would produce 22 million metric tons (1.1 tcf) in 2015, 44 MMT (2.2 tcf) in 2018 and about 88 MMT (4.3 tcf) in 2022, with first deliveries in 2010.

In fact, facing the grip of escalating sanctions, in 2010 Iran suspended development of all of its LNG projects:  Iran LNG (10.8 MMT or 525 bcf), Pars LNG (10 MMT or 485 bcf, previously involving France’s Total SA and then China National Petroleum Corp.), Persian LNG (16.2 MMT or 787 bcf, previously with Royal Dutch Shell and Spain’s Repsol), North Pars LNG (20 MMT or 970 bcf, with China National Offshore Oil Corp.) and Golshan LNG (10 MMT or 485 bcf, with Malaysia’s SKS Group).

Future Prospects

A number of factors mitigate against a rapid return to Iranian LNG development plans:

--Iran will focus on oil development and export as a quicker road to resuming hydrocarbon exports with a higher return.  In addition, some gas fields, including South Pars blocks 11, 13 and 14 were converted from LNG projects to inject gas into oil fields for enhanced oil recovery.

--Terms for foreign firms.  Iran already has hinted that it realizes it must offer better terms to attract foreign firms back to oil exploration and development in place of the prior buy-back contracts with short cost recovery times.  The same applies to gas development. 

--Domestic demand.   In addition to increased gas demand from the oil industry for enhanced recovery, domestic demand is artificially high due to highly subsidized gas pricing.  In 2011, then President Mahmoud Ahmadinejad raised prices some 10-fold from 40 cents per MMBtu. At the time, LNG fetched more than $12/MMBtu in Asia and $8/MMBtu in Europe.  Domestic natural gas prices still lag global LNG prices.

--Changes in markets.  Outside of the U.S., most LNG export contracts are priced with an indexation to global crude oil prices.  The drop in oil prices from more than $100 to less than $60 per barrel already will hurt Iran in terms of the revenue from stored crude and oil production over the next few years.  For LNG projects with price tags of $5 billion apiece and up, the margins on LNG, which has dropped in Asian spot markets from more than $12/MMBtu to less than $7/MMBtu, may be too thin.  In addition, since Iran started LNG planning 15 years ago, a huge growth in LNG supply projects planned and under construction in Australia and North America means that Iran will face a much more competitive market.

Conclusion

The world’s largest proved gas reserves make monetizing them an Iranian imperative.  Still, as Iran emerges from the sanctions regimes, it must prioritize spending and rank the best export earning alternatives.  This implies that oil exploration, development, production, refining and export will take the top spot in hydrocarbon sector spending in the short- to mid-term. 

LNG development in Iran can use the start from the 2001-2010 period in terms of project siting; allocation of specific field reserves to specific LNG projects; and discussions with foreign firms on financing, technology, project management, and marketing.  Nonetheless, Iran is unlikely to join the ranks of major LNG exporters for another decade.