x Abu Dhabi, UAEFriday 28 July 2017

Gas plan is more than just hot air

Iran has been laying the framework for extensive gas export deals, but will it have any gas to sell?

Iranian workers make repairs to a unit at Tehran's oil refinery. An Iranian oil ministry official said the country would scrap a number of LNG projects and focus on exporting gas by pipeline instead.
Iranian workers make repairs to a unit at Tehran's oil refinery. An Iranian oil ministry official said the country would scrap a number of LNG projects and focus on exporting gas by pipeline instead.

A flurry of government announcements in the past month suggest Iran is trying to lay the groundwork for a gas export push. But huge questions remain about how long it will take the holder of the world's second-biggest gas reserves to develop enough excess output to sell. On Tuesday, the Iranian oil minister Gholamhossein Nozari said the country had reached a consensus with Russian and Qatar to form a "gas Opec".

Alexei Miller, the chief executive of the Russian state-controlled gas exporter Gazprom, said the three countries, which hold more than half the world's gas reserves, formed a "gas troika" for joint exploration and production. "We have agreed to create a technical committee, and one of its missions will be to review projects that can be implemented in a trilateral way," he said. Other agreements recently announced by Tehran include a "framework deal" to export one billion cubic feet a day (cfd) of gas to Bahrain, an agreement with Oman for joint development of an Iranian offshore gasfield and Iranian access to Oman's spare gas liquefaction capacity, a gas-for-electricity deal with neighbouring Armenia, and a deal to export more gas to Turkey.

Iran also offered to co-operate with Saudi Arabia and Kuwait on joint development of the disputed Arash gasfield in Gulf waters, which could clear the way for Iranian gas exports to meet the needs of the two other Gulf states. Earlier this month, Iran firmed up plans to build a major export pipeline to carry gas from its giant South Pars offshore field to its border with Turkey. Last week, it held talks with Pakistan to consider a deal to speed up planned gas exports to its southern neighbour.

But at the same time, Iran has dropped plans to supply gas to the stalled Nabucco pipeline project, which would export gas from Central Asia and the Middle East to Europe. Some other Iranian gas-export projects, including an unconsummated deal with the UAE and a proposal discussed since 1994 to supply gas to India, remain stalled. Most significantly, an Iranian oil ministry official said the country would scrap planned liquefied natural gas (LNG) projects and would instead expand its capacity to export gas by pipeline.

From all these announcements a coherent gas strategy is emerging, based on pragmatism in the face of falling oil export revenues and continued US efforts to isolate Iran and hinder its access to advanced oil and gas technology. To get around these difficulties, the Islamic republic hopes to use more mundane, globally available technology to pursue its goal of diversifying its energy exports. It also will be more selective in the projects it pursues and will attempt to strengthen relations with Muslim neighbours including Pakistan, Turkey and some Gulf states to compensate for its political deadlock with the West.

Still, it faces formidable obstacles to implementing its plan, and those could take years to overcome. One stems from the type of deal Iran is prepared to offer foreign investors in its gas sector. "Iran has a lot of plans, but the problem with the contracts they want to sign is that they are insisting on buy-back deals that are totally unsuited to the gas market," said Mehdi Varzi, the president of the London-based consulting firm Varzi Energy.

Buy-backs resemble fee-for-services contracts in their failure to offer investors long-term incentives for improving gas production. The contracts were poorly understood, even within Iran's energy bureaucracy, so few officials were available to negotiate definitive deals, Mr Varzi said. Unless it moved away from such deals, the country would continue to have trouble attracting foreign investment and would face protracted delays in signing gas-project agreements, he argued.

The second big problem is US sanctions and their corollary: US political interference aimed at blocking Iranian trade. "The US is trying by hook or by crook to prevent Iran from developing additional sources of export revenue," Mr Varzi said. For instance, Washington pressured the EU to block Iran's proposal to supply gas to the Nabucco project. The Americans have also been leaning on the governments of India and Pakistan to drop longstanding plans to import Iranian gas through a proposed pipeline to link the three countries. Some analysts suggest Washington made its recent agreement to support India's civil nuclear power programme conditional on New Delhi distancing itself from Tehran.

So, even with its large-scale pipeline projects, which Iran has the technical ability to pursue on its own, the nation's international isolation would make implementation difficult, said Samuel Ciszuk, the Middle East energy analyst for the business intelligence firm IHS Global Insight. "Apart from relatively small expansions to supply deals with some of its neighbours, the risk is that Iran's pipeline export projects will remain rhetorical ideas, used as political tools."

Indeed, Tehran portrayed its decision to halt efforts to support Nabucco as a protest against the US and European campaign to refuse Iran a role in supplying gas to the project. "We have nothing to do with the Nabucco pipeline, and since the European Union announced it does not need Iran's gas, we have designed a new plan independent of Nabucco," Akbar Torkan, the head of planning for Iran's oil ministry, said last week.

Mr Torkan also unveiled a new plan to build offshoots from its proposed US$4 billion (Dh14.69bn) Persian Pipeline - the alternative project for moving gas to Europe via Turkey - to supply South Pars gas to Pakistan, India and China. But although Tehran is no doubt keen to strengthen trade ties with China, the second-largest buyer of its oil, the scheme to unblock progress on an India-Pakistan gas-export deal by bringing China into the project is probably a pipe dream. The economic viability of building a pipeline across the Tibetan plateau and the Himalayas had yet to be proven, Mr Ciszuk said.

Certain Iranian government factions are staunchly opposed to increasing the country's minuscule existing gas exports until its domestic needs are fully met, and pose a third obstacle to the state's gas export schemes. Iran's domestic gas shortage, which in turn constrains the country's electricity supply and the speed with which it can pursue gas-consuming refining and petrochemical projects, may be one factor holding up a deal to export to Sharjah through an undersea pipeline that was completed in 2006. Other factors are Iran's hawkish pricing policies towards gas exports, long delays in completing Iranian infrastructure for the project, and possibly a lack of enthusiasm in Tehran for improving trade ties with the UAE while a jurisdictional dispute over three Gulf islands remains unresolved.

But the shambolic state of Iran's economy, exacerbated by the recent slide in oil prices, presents the biggest hurdle to gas development. During Mahmoud Ahmadinejad's three years as Iran's president, the country's inflation rate has nearly tripled to 30 per cent, due the president's propensity for printing money to finance spending on infrastructure projects to boost his domestic popularity. Unemployment has also soared.

As one of the biggest beneficiaries of the years of rising oil prices that preceded the big drop, Iran's treasury should have been sitting on plenty of cash, but there were many troubling signs that it was not, said Manouchehr Takin, an expert on Iran at the London-based Centre for Global Energy Studies. A failed attempt by Tehran to introduce a value-added tax on retail sales, which prompted bazaar workers in the Iranian capital to go on strike earlier this month, is among the latest.

Another is Tehran's evidently mounting concern over oil prices. In the run-up to Friday's emergency Opec meeting, Iranian officials were among the group's most vociferous in calling for Opec to cut crude production by as much as three million barrels per day. "With oil prices widely believed to have fallen below the Iranian budget's break-even point, the country's energy sector and gas export policy is increasingly being scrutinised," Mr Ciszuk said. Limited resources could ultimately throw all Iran's gas export schemes into question, he said.

Mr Takin is more optimistic, taking the view that Iran is ready to develop gasfields to supply the pipeline projects it has announced. But that has not been the experience of Crescent Petroleum, which has been waiting three years for Iranian gas to fill its empty pipeline. Still, Saudi pressure on Tehran to contribute to Opec production cuts could open an opportunity for Iran, the second-biggest Opec oil exporter, to re-allocate development resources from oil to gas.

Offering a carrot while Saudi Arabia wields a stick, Turkey's enthusiasm for importing more gas from its south-eastern neighbour, both for domestic consumption and for transit to foreign buyers, could provide a further welcome economic stimulus for gas development. Turkey and Iran recently failed to hammer out details of a gas trade agreement, but Mr Takin said the political will to conclude the deal was intact, and had not been hurt by US and European pressure on Turkey to shun Iranian imports.

"They are working out the details of a contract," he said. "When I was in Turkey a couple of weeks ago, the Turks were very keen to have this gas." @Email:tcarlisle@thenational.ae