Time to reconsider Iran's LNG future

16 July 2015 | Ludovic Aldersley and Aura Sabadus

The long-term Joint Comprehensive Plan of Action (JCPOA) announced on 14 July by Iran and the so-called EU3+3 (France, Germany, UK, US, China and Russia) in Vienna, puts Iran on a firm reintegration path with the global economy.

It comes a week after the export arm of Iran’s gas incumbent, NIGC, announced talks with a floating LNG vessel producer for the purchase of FLNG equipment.

Despite the country’s vast energy reserves and significant oil and gas production, it currently exports very little. Iran produced 173 billion cubic metres (bcm) of natural gas in 2014 and consumed 170bcm, according to the latest BP Statistical Review.

Gas reserves at the end of 2014 were recorded by BP at 34 trillion cubic metres, placing it above Russia and neighbouring Qatar as the world’s biggest reserve holder.

Domestic gas consumption is large but in order to fully monetise its reserves Iran will once again look to export its surplus gas to a range of countries via pipelines and LNG.

The landmark diplomatic deal this week paves the way for some preliminary discussions for the next development stages of the South Pars gas field, but, in material terms, little will happen until the International Atomic Energy Agency (IAEA) submits a report by the end of this year.

Only once the IAEA has verified that Iran has held up its end of the bargain the effective removal of sanctions will begin. Nonetheless, the implications of this week’s deal are far-reaching and could impact gas consumers and other regional producers through a flurry of projects. Some which were abandoned are likely to be resurrected while new projects may could also enter the fold.

Global markets have moved on since Iran first tried to expand exports beyond Turkey, Armenia and Azerbaijan. Subject to the IAEA’s final report, Iran faces a number of challenges in the supply, and particularly demand, for its gas.

The LNG export potential

Development of the South Pars gas field started many years ago. Work on phases 15-19 are the next part in the field’s continuing development, according to FACTS Global Energy consultant Siamak Adibi.

The only domestic sector that could absorb extra gas volumes is electricity generation. The alternative domestic market, underpinned by an extensive network for gas as a heating fuel, is already saturated. The surplus gas from South Pars therefore can be significant, Adibi said.

Iran had already intended to use earlier phases of the South Pars development for LNG export, having sunk $2.5bn of investments into what is now a semi-built export plant. Although two liquefaction trains designed to export 10.8mtpa were never built due to trade restrictions on key technology, state-owned Iran LNG has built storage tanks, prepared port facilities, and started operations at an adjacent gas-fired power plant at the port of Tombak.

Aside from gaining access to technology and finance through the expected lifting of sanctions, the key to the development of this now brown-field project is thought to be an expected equity divestment to an experienced international LNG operator. Bringing new partners can take time, Adibi said, suggesting at least four-five years before first LNG could conceivably be exported.

Given Iran is sitting on vast reserves, however, the country could equally work to accommodate a much larger LNG export project or even several standalone projects.

But there are two reasons blocking Iran’s path to becoming a major LNG exporter in the short-to-medium term.

Firstly on the demand side, a number of global LNG export projects are competing to capture limited demand. Competition from East African and North American export projects to secure long-term sales and purchase agreements from the early 2020s could crowd Iran out of a buyers’ market. Notwithstanding price sensitivities, global LNG markets may be unable to absorb much Iranian LNG in the first half of the next decade.

Secondly on the supply side, the Iranian government may prioritise the amelioration of regional ties before looking at global LNG exports. It could export gas directly to existing liquefaction facilities in Abu Dhabi or Oman for onward LNG export or it could supply the surging regional demand in the domestic markets across it neighbours; from Iraq in the west to Pakistan in the east.

The regional export potential

With land-based LNG import projects proposed in Kuwait and Fujairah witnessing delays before final government approvals, the prospect of Iranian pipe gas could make those projects less attractive.

Land-based terminals, as opposed to temporary floating regasification infrastructure already in place in Kuwait and Dubai, are more expensive and tend to warrant a commitment to long-term LNG. The possibility of cheaper Iranian gas, however, may now call into question the economics of those land-based projects.

However, while a long-term deal for Iranian gas should be more economic than long-term LNG, in a region where geo-political tensions can flare and memories of Iranian threats to close the Straits of Hormuz are not distant, the question of trust and security of supply are still paramount.

Iran has concluded a sales agreement to supply 1.5bn cubic feet (bcf)/day of gas to Iraq, and through this could well secure further custom in Kuwait. But in the UAE, some buyers may demonstrate more caution in light of long disputed gas deliveries to the Emirate of Sharjah - to the north of Fujairah. The dispute which originated over gas prices is under arbitration in the Hague.

Nonetheless, with the pipeline infrastructure up to the Sharjah border said to be complete, once a way forward is identified and endorsed, supplies could flow relatively quickly, ICIS understands.

Iran has also built a pipeline up to the Pakistani border but Pakistan has had problems paying for the planned 780km pipeline to be built on its side of the border.

Energy-hungry Pakistan has welcomed this week’s diplomatic breakthrough while cautioning that it will not have an immediate impact on the gas pipeline project that it was forced to shelve last year.

“We will wait for the phase when sanctions on gas are gradually removed to restart the process where it was stopped last year,” Pakistan’s petroleum and natural resources minister Shahid Khaqan Abbasi told ICIS.

The minister said the Pakistani side of $7.5bn pipeline project could be completed in April 2017 but will only connect with Iran “when sanctions on gas sales are lifted.”

With the gas pricing contract underpinning eventual flows to Pakistan already signed some years ago, there would be no need for further commercial negotiations. Oil prices at $100/bbl would equate to a delivered price of natural gas from Iran to Pakistan of $12.00/MMBtu, the minister said.

The price is understood to be higher than the more recent agreement between Iran and Iraq which is thought to have an 11-12% slope indexation to oil.

Turkey and Europe

Iran’s largest current export market is Turkey which takes the lion’s share of approximately 1bcf/day of exports, some of which heads to Armenia and Azerbaijan.

Talks about ramping up exports have been postponed over the years due to the geo-political landscape but plans for a 35bcm/year pipeline to Turkey could be resurrected.

The IGAT-9 pipeline would source gas from the South Pars field and could also feed northern Iran which has so far relied on Turkmen imports to bridge a gap as domestic demand has risen 66% between 2005 and 2014.

The Turkish energy ministry welcomed developments this week noting that the lifting of sanctions could unlock investments and joint energy projects.

In 2014, the Turkish government said it had awarded incentives amounting to Turkish Lira 13.8bn ($5.2bn) to build a 1,720km pipeline that would bring Iranian gas to its market and further to Europe. The pipeline is likely to connect with IGAT-9 at the border.

Nevertheless, with a flurry of regional gas projects on the table, and weakening gas demand, Turkey and Europe are expected to be acutely price-sensitive with regard to further imports.

If Turkey were to need more volumes, deciding to ship them either through a new Iranian pipeline or through the Trans-Anatolian Pipeline (TANAP) that will carry Caspian gas westward, it will most likely condition any additional exports on the renegotiation of existing Iranian import prices.

The pricing of Iranian gas to Turkey has been a long-standing issue. Turkey has repeatedly sought to negotiate for better terms but has invariably met fierce opposition.

At one point Turkey was paying around $600/thousand cubic metres (almost $17/MMBtu), possibly the highest price ever paid by a gas consuming country in Europe.

Iran has repeatedly refused to lower the price not only because it offered a steady source of income at a time when its revenues were severely curtailed because of sanctions, but also because the Turkish export contract had became a benchmark when Iran negotiated other projects.

“Initially [when the gas export contract was signed in 1996], Iranian gas exports to Turkey were linked to fuel oil prices which were quite cheap,” Abidi said. “Over the years, [fuel oil] prices had gone up and the Turkish gas price became a benchmark.”

Challenges and opportunities

Iran has a number of export opportunities. Although endowed with abundant reserves it still faces numerous challenges on both the supply and demand for its gas. While sunk investments in both LNG readiness and international pipeline connections could bring brown-field infrastructure online quicker than comparable greenfield projects, the key parts of respective projects are missing and will take time to be brought together.

Last week’s announcement about FLNG could be seen as an attempt to fast-track Iran’s LNG ambitions but the high risks and implicit small production capacity of FLNG projects appear incongruous with the country’s export potential.

The most fast-track LNG option appears to be supplying feedgas to existing plants in Abu Dhabi and Oman. Abu Dhabi’s 8mtpa plant at Das Island is due to stop exporting in 2019 unless it can find fresh supplies to underpin new sales and purchase agreements.

Iran has the upstream capacity to supply these plants as well as to finish its own planned 10.8mtpa project but the bigger question is whether there is sufficient global gas demand. The difficulties experienced by some export projects that have needed to postpone final investment decisions may push Iranian authorities to concentrate first on supplying regional gas demand.

About ICIS

ICIS is the world's largest petrochemical market information provider and has fast-growing energy and fertilizer divisions. Our aim is to give companies in global commodities markets a competitive advantage by delivering trusted pricing data, high-value news, analysis and independent consulting, enabling our customers to make better-informed trading and planning decisions. We have more than 30 years' experience in providing pricing information, news, analysis and consulting to buyers, sellers and analysts.

With a global staff of more than 800, ICIS has employees based in Houston, Washington, New York, London, Montpellier, Dusseldorf, Karlsruhe, Milan, Mumbai, Singapore, Guangzhou, Beijing, Shanghai, Yantai, Tokyo and Perth. Some 350 of ICIS’s staff are journalists engaged in reporting market prices and news, and ICIS is fully committed to upholding the highest journalistic principles of verification, corroboration and authentication. ICIS has a compliance framework that along with its methodologies and business processes adheres to the requirements of the IOSCO PRA Principles.

ICIS is a division of Reed Business Information, part of Reed Elsevier Plc.

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