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.
