There is no questioning Iran’s enormous potential in the natural gas game. The country is blessed with 27 Tcm of natural gas reserves, or roughly 18% of the total world proven assets. Its position becomes even more attractive when one considers that 52% of these reserves are located in nonassociated fields. Here, Siamak Namazi, managing director of Atieh Bahar Consulting in Tehran (www.atiehbahar.com) and editor-in-chief of Menas Associates’ Iran Energy Focus, writes about the choices open to Iran for converting this potential into actual projects.

 

Iran’s offshore South Pars field alone, which it shares with Qatar, accounts for close to half of its total reserves. Not to mention that its gas reserve to production ratio (R/P) is four times more than the world average, and it could supply gas to export markets for centuries to come.

 

But due to a combination of factors ranging from a general stall in the economic and infrastructural development of the nation for eight years following the Iraqi invasion of Iran in 1980 and the ensuing war between the nations, to poor management and planning, the country is nowhere near realising its deserved position in the global gas market. Despite its natural wealth, Iran presently claims a miniscule 5% share of world gas production, the equivalent of 313 MMcm/d of gas, most of which is for domestic consumption.

 

The National Iranian Oil Company (NIOC) has ambitious plans and wants to claim 10% of the global gas trade by 2020 while increasing domestic use as well. Although some positive steps have been taken in recent years, to achieve these goals the Iranians need to move faster and more efficiently, while also adopting more pragmatic commercial terms, harmonious with global realities, and improving international relations. But differences in opinion among the policy-makers about the wisdom of rushing to sell gas under current conditions are hindering such an effort.

 

The Islamic Republic’s oil and gas decision-making apparatus is notorious among international oil companies for being a complex, giant bureaucracy whose opaque structure moves at a snail’s pace, only to offer commercial terms under the buyback system that are not nearly as attractive as PSAs offered elsewhere. Nevertheless, once there is a convergence of opinion, things move rather rapidly.

 

In the natural gas game the common vision is over the need to increase its share in the domestic energy basket. The logic is simple: the more the country relies on natural gas to fuel its gigantic domestic energy needs, the less crude oil it would have to burn up, which can in turn be freed up for export earnings. This phenomenon explains why, despite surging growth in internal energy demand, the share of natural gas in the domestic fuel consumption basket rose from a mere 8.4% in 1978 (before the Revolution) to over 53% today. According to the Ministry of Petroleum, this difference translates to 1.3 million barrels/day of crude, available to fetch much needed hard currency earning for the country. Domestic gas is further used to enhance recovery rates of Iran’s ageing fields through injection.

 

When it comes to gas exports, there is no lack of plans in Iran, from pipelines to LNG and even gastoliquids (GTL). Iran aspires to become not only a major gas exporter, but also the most important global gas distribution hub, exporting its own gas and acting as the transit route for gas coming in from its other energy-rich neighbours. In this grand vision, Iranian planners envisage that their country would someday pipe its own gas along with that of its Caspian neighbours to southern Europe (through Turkey and Greece) and to northern Europe (through Armenia- Ukraine-Austria). It would also feed its southern neighbours such as the UAE and Kuwait, while also taking in gas from Qatar to merge with its own through an overland pipeline to India via Pakistan. But for now, the only operational pipeline is that which supplies Turkey, under an agreement signed in 1996 by the National Iranian Gas Company (NIGC) and Botas to eventually supply 10 Bcm/year, starting with 3 Bcm/year. Actual exports started in December 2001 and have proven very problematic, with the Turkish side constantly demanding renegotiations on pricing. The other projects are suffering from poor regional relations, such as India’s mistrust of Pakistan, as well as myriad other issues. Iran also has four LNG plants in mind, but is seriously lagging behind Qatar in this respect, having only recently signed one of these projects, Pars-LNG (with Total and Petronas investing 30% and 20% respectively), in the $1.7 billion plant.

 

The problem is that the decision-makers have major points of disagreement regarding the priority and wisdom of gas export plans, slowing the already cumbersome decision-making process further.

 

Some of Iran’s oil and gas policy-makers are sounding alarm bells, arguing that unless the country moves quickly and adopts drastic moves such as amending its legal structure to accommodate much more attractive commercial terms for foreign companies to invest in its gas sector, it will permanently lose out on global gas trade. This school of thought further says that because the Qataris are so far ahead of the game, they will end up taking more than their share of the giant South Pars field the field which Iran has earmarked for nearly all of its export projects (see story on page 8). To them, the gas export business is a zero sum game which Iranis rapidly losing out on.

 

Yet other policymakers in the system have not come to accept the nature of global gas pricing. They find the markets inflexible and limited. With only a handful of countries currently consuming LNG and GTL and the high costs and political risks of laying long pipelines, the gas purchasing countries tend to have much more say over pricing than the Iranians believe is fair. This group believes that more time is needed for the gas markets to mature and for a more suitable pricing system to be put in place. They appreciate, however, that the situation is not aided by Qatar’s fast-paced development of its share of the South Pars fields, which it is doing on very favourable terms in order to secure a lion’s share of today’s limited market, and understand that this trend poses a threat to Iranian reserves in the shared field. Nevertheless, they offer other solutions to address thisproblem: bilateral agreements and gas-intensive industries.

 

If Iran is worried that its southern neighbour might take more than its fair share of the South Pars field, they argue, it must come to terms with Qatar in much the same way as some western countries have done in the North Sea. Tehran needs to convince Doha to sign a bilateral accord establishing each country’s share of the field and limiting its production and take from South Pars to that quota. Through such co-operation, each country can develop at its own pace without the need to give away such favourableterms to the benefit of the international oil companies and consuming nations. Needless to say, it is uncertainhow successful Iran’s diplomatic apparatus could be in convincing the Qataris on this point, particularly given that the presence of the US troops in the region assures Doha that Tehran could not use its military superiority as a negotiation enhancer.

 

Still, proponents of delaying gas exports have another solution if Iran needs to develop its South Pars underground gas reserves: use the cheap, bountiful fuel to develop energy-intensive industries such as steel, aluminium, cement, electricity, etc. After all, Iran has an abundance of raw minerals, butends up exporting its energy and raw goods, only to import much more expensive end-products. They further argue that while foreign investment in the oil and gas sector evokes historic sensitivities, it wouldbe much easier to offer attractive deals in these integrated projects. Not to mention, given the Kyotoagreement, many industrial nations are forced to export some “dirty” industries to countries that haveexcess quotas. So, instead of selling its gas cheap to keep up with the Qataris, these decision-makersprescribe for Iran to use this fuel to produce valueadded goods for domestic consumption as well as export earnings, and to create much-needed jobs in the process.

 

For those foreign companies who have worked in Iran, the major flaw of this otherwise brilliant plan is obvious. In a country where it has proven immensely difficult, if not impossible, to get two subsidiary companies of the NIOC – namely the POGC which is in charge of signing upstream deals involving the South Pars fields and NIGEC which is responsible for downstream LNG and GTL projects and the ultimate export of the gas – to act in concert to sign an integrated deal, how would a project involving a number of different ministries and governmental companies turn out?

 

In the final tally, Qatar’s behaviour has created a limited sense of urgency for the Iranians, despite the arguments of those who favour developing gasintensive industries instead. This trend can be seen in the recent signing of the Pars LNG deal, a number of MoUs for the sale of LNG to China, and reports of movement on NIOC LNG and South Pars Phase 11 deals. Iranian officials are also promising major oil development contracts to countries who sign big LNG purchase deals, while the Ministry of Petroleum is trying to get permission to enhance the terms of gas development projects. Yet, for now, with such differing views, it is no wonder that the Islamic Republic’s expediency machine has not kicked in toadjust its commercial terms and expedite the attraction of foreign capital for the development of gas for exports. For now the prospect for a fast-track, concerted effort to catch up with Qatar is faint, yetplenty of other opportunities exist for foreign companies bold enough to venture through the bureaucratic maze and reach out for integrated, value-adding, gas-intensive projects.