A flexible pipeline dream: Iran’s LNG goals

Introduction

Recent years have seen an unpredictable expansion in global LNG trading, led by smaller producers like Qatar and countries like Malaysia, whose geographical position makes it difficult to think in terms of pipelines. Iran does not fit quite comfortably into either group. The market as certainly been crippled by the last decade of sanctions, yet it has the potential to outrank any OPEC nation in capacity. Its geographical position certainly provides few obstacles technically, yet politically, it finds itself in a region in turmoil, and most pipeline plans are forced to make giant detours in order to avoid chaos, war, and rival political influence. Both of these situations, among others make the prospect of LNG development and transport an exciting one for Iranian policy makers seeking to consolidate the progress made with the 5 + 1 agreement, which will see Iran re-enter the global energy market very soon. It is little surprise that the agreement equally buoyed its European delegates. The European market—the largest in the world—is desperate to secure any viable alternative to Gazprom, especially since the Ukrainian Crisis. For Iran, Europe would make the ideal market to begin trading with as soon as possible. This means plotting various oil and gas pipelines in the long term. In the short term, however, it means developing the necessary resources to deliver LNG supplies by boat.

This article attempts to explore the potential forks in the road Iran may encounter in this endeavor, while clarifying the greater context behind the country’s desire to overcome these obstacles.

Iran energy profile

Iran holds the world’s fourth-largest proven oil reserves, and according to BP’s last Statistical Review of World Energy, holds the world’s largest gas reserves at 33.6 trillion cm³. Despite these massive pools of potential resources, the sector has developed almost exclusively toward its domestic market. To demonstrate, in 2010, natural gas accounted for around 59% of Iran’s total domestic energy consumption, while oil consumption accounted for 39% of total energy use.

The energy sector in Iran: The fifth 5-year development plan

After the end of the Iran-Iraq War, Iran began to recover and redevelop her destroyed economy with the Five Year Development Plan, launched under the government of Hashemi Rafsanjani. The first Five Year Development Plan was implemented between 1989 and 1993. The major objectives of the Islamic Republic’s First Plan included:

Rapid movement toward a balanced and well-developed economy,

While endeavoring to achieve these objectives, however, the government had to spend a good portion of the country’s financial resources to satisfy the basic needs of the people in the form of subsidies and other state aids. According to the statistics available, during the First Five Year Social and Economic Development Plan wrought the following changes:

Gross domestic product (GDP), on the basis of 1988 factor prices, increased by 7.3%

The Fifth Five Year Development Plan was implemented between 2011 and 2015. According to Article 125 of this plan, the Ministry of Petroleum was allowed to develop oil and gas fields with the aim of increasing 1,000,000 bpd oil production capacity and also to increase 2,500,000,000 cm³ natural gas capacity per day by developing current fields. Fields shared with the country’s neighbors were given specific priority. ² According to the Fifth Five Year Development Plan, The National Iranian Gas Company (NIGC) has aimed to increase its export capacity to 328 million cm³ via both pipelines and LNG. Negotiations with consumer countries such as Kuwait, Bahrain, Jordan, India, and the European market continue regarding pipelines to export gas through Europe and Pakistan (the former, regarding the second phases of the Assaluyeh Field up to Bazargan on the Turkish border (1818 km long, 110 million cm³ daily), the later from Shehr to Pakistan (255 km long, 21.5 million cm³ daily)). ³

Iran energy policy post-sanctions era

Iran has declared its intentions to increase oil production and export capacity on countless occasions. The Ministry of Oil has recently presented a two-fold plan to achieve this; both short- and long-term. The short-term program first aims to mitigate the effects of sanctions and get the country’s industry and infrastructure back into shape, by using all means to:

Recover crude oil production capacity to that of 2005,

These goals are to be achieved in order to give the Oil Ministry a springboard by which to attempt a more ambitious set of long-term objectives, which are namely to make the country:

The region’s top oil and gas producer.

More bluntly then, the strategic objective of the Iranian oil and gas industry in the next two decades is to dramatically increase its share in the global energy market. This means maximizing the benefits of the international energy markets and increasing dependency on other countries, thus finding a strategic position for Iran in the global energy market. The maximization of oil income will require the adaption of coordinated measures, increasing export volume and stability, or increasing the price of oil.

The National Iranian Oil Company (NIOC) must become an international name, and its operations ought to expand beyond Iran’s geographical borders whilst at the same time maximizing its income domestically. It should invest and take part in global oil upstream projects and so obtain prosperity for the country and preserve and guarantee Iran’s interests; such as the stability of oil, natural gas, and LNG markets in the long term. ⁴

Iran’s natural gas plans

Export is still lower on Iran’s list of priorities than injection into the industry, stabilizing domestic consumption, and floating gas-based industries. Yet, joining the world gas market had previously been a much low priority, given economic considerations, and now that it finds its way onto the lips of more and more policy makers of late, has benefitted from the momentum gained thanks to the early successes of the country’s new international relations strategy. By launching the gas export plan, there have been attempts to create special zones for the development of gas-intensive industries, publicity of gas-based industries such as steel, cement, petrochemicals, etc., and the promotion of integrated gas projects and a diversification policy. ⁵ According to BMI’s Iran Oil & Gas Report, “large-scale exports from Iran will take at least five years to materialize (2016–2021). Such an increase depends on a significant ramping-up in production and the building-up the necessary export infrastructure.” The report also predicts that:

Gas trade with Iraq could begin in 2016 if the security the situation in sufficiently improved.

Iran trades small amounts of natural gas at the regional level by pipeline and is a small net exporter of natural gas to Turkey (about 3.0 billion cubic meters (bcm) in 2014). Iran imports gas from Turkmenistan and the majority of its exports go to Turkey. Iran notably relies on gas imports during the winter when residential demand peaks due to the cold weather. OPEN IN VIEWER

With the launching of the new South Pars phases (15, 16, 19,…); Iran will reduce its need for gas imports, enabling it to have greater export capacity. Iraq and Turkey to be the main benefactors to this, with Turkmenistan losing out greatly. ⁶

The Iran Oil & Gas Report looks at the country’s gas production, taking into account production levels after completion of the latest phases of the South Pars in late 2015 (phases 15 and 16), and later in 2016 (19). After the lifting of sanction, Iran will be able to access significant financial and technological support to speed up the development of the South Pars fields. However, it should be noted that Iran has a huge level of domestic consumption, especially for power plants designed for the generation of electricity. It is expected that a majority of the additional production over the coming years will be consumed domestically. Long-term, net export will also be highly dependent on the level of investments into the sector made post sanctions. ⁷ Iran sees LNG exports to the EU as an immediate priority, and thus, gaining investors is a key current objective. Even if this is the case, however, although exports to immediate neighbors such as Iraq, Pakistan and Oman will begin soon, BMI believes that due to problems in natural gas infrastructure, Iran will be unable to export gat to Europe before 2024. Nevertheless, LNG still remains the most viable and flexible option in order to significantly increase Iranian natural gas exports and there is a strong demand within Iran to move in this direction. Given the low price of gas production to boot, major LNG production will be greatly beneficial to Iran.

South pars field

The South Pars is the world’s largest gas field. Located in the Persian Gulf and shared by Iran and Qatar, the South Pars contains around 8% of the world’s proven gas reserves and more than 50% of Iran’s natural gas reserves. Development of the field has been divided into 29 phases, in order to secure the drilling, production, and transit of its 40 trillion cubic meters (tcm) of natural gas spread out over an area of 9700 square kilometers. This field contains 12 tcb of gas and 18 billion of Condensate. Iran is planning to have streamed all 23 phases of development by 2018. ⁸

Iran energy sector projects

Iran LNG plan

By 2014, LNG share of world natural gas market is 31%, but during the coming years this is expected to increase. About 70% of LNG trade is in Asia and the Middle East. Yet Iran has the potential to increase this drastically. At present, there are 60 LNG terminals in Asia. And at present, 40 new LNG terminals are under construction. ¹⁶ According to National Iranian Oil Company plans, Iran has five LNG projects mentioned in Tables 1. Iran has to produce 75 million tons of LNG by the end of 2015 according to planned LNG projects. But due to EU and US sanctions over Iran’s planned nuclear program, all foreign companies—such as Shell, Petronas and other major players in the industry—withdrew from the country’s LNG sector and Iran was unable to use its potential. If all projects come to stream, Iran will certainly become the world’s foremost LNG exporter. At present, Qatar produces about 77 million tons of LNG, making it the current front-runner. Long-term sanctions over Iran’s energy sector, as well as more general problems related to energy project management, have either delayed or stopped all previous attempts to develop this industry. ¹⁷

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Table 1.

Iran LNG Projects.

Project name	Project shareholders	Project objectives	Feed and field
Pars LNG	NEGEC NIOC (%50) Total Co (%40) PETRONAS (%10)	10 million tons of LNG	Phase 11 of South Pars gas field
Persian LNG	NIGEC NIOC (%50) Shell (%25) Repsol (%25)	11 million tons of LNG	phase 13.14 of south Pars gas field
Iran LNG	NEGEC NIOC (%49)	11 million tons of LNG	South Pars Phase 12
Golshan and Ferlowsi LNG	Malaysian Pertofild %100 investment	10 million tons of LNG	Golshan and Ferdowsi gas fields
North LNG	Chinese CINOOK	20 million tons of LNG	North Pars gas field

Global LNG outlook

According to the Wood Mackenzie report, after 2015, construction of new LNG facilities around the world will decrease at present with 31 new LNG project under construction. Thus, LNG production capacity looks to decrease in the coming years. It is expected that a decrease in new LNG facilities construction will begin in North America and spread to other regions. A decrease in investment in North America will be begin by 2019, and develop further from then. Between 2019 and 2021, only 10–15 huge LNG projects are set to be constructed around world annually. Future natural gas markets also have an important effect on construction new LNG facilities around world. Decrease in demand for construction of new LNG facilities will thus result in an oversupply of LNG. Due to such conditions, international investors will logically put off investment in such projects. ²⁵

By 2016, with aim of becoming world’s largest LNG exporter, the US will begin to stream its new LNG facilities; Cheniere’s Sabine Pass project includes six liquefaction trains, with production capacity about 4.5 MTPA. Australia is also planning to come to stream its new LNG project with Chevron’s Gorgon, the largest LNG project in the world, aiming to supply the whole of Western Australia. Australia is planning to become an LNG exporter by 2019 and play key role in the global market. Shell in Canada has also invested heavily in the B.C. LNG project. Similarly, Eni has declared its interest in African construction for Coral FLNG and Mozambique’s LNG facilities. ²⁶ According to the International Energy Agency, there are six LNG projects in Australia, at a cost about $200 billion, which may struggle to break even due to falling oil prices, and has little prospect of having the third of its planning stages going ahead. As Fereidun Fesharaki, Singapore-based energy forecaster stated, the economics of the planned LNG projects in Australia are a “tragedy” because the over-optimistic expectations of Asian consumers mean they will continue to pay incredibly high prices. While the majority of Australian LNG will be supplied into Asia in accordance with long-term contracts, the deals are directly indexed against current oil prices, meaning a change in oil prices hit LNG prices 3–6 month later. ²⁷

LNG pricing

The drop in oil prices has had a negative impact on LNG prices. By the end of 2015, JKM spot priced the LNG market to find East Asia was trading $7.28 per million btu (MMBtu) for December shipments, down nearly two-thirds from early 2014. It should be noted that the majority of LNG exporters have their cargoes signed up under long-term fixed-price contracts. But usually not all of a given supplier’s capacity secures buyers. It is expected that an additional 14–15 million tons may become surplus annually by 2016. Oversupply has decreased in demand too, with Japan and South Korea representing two major LNG importers in Asia who decreased their orders in November 2015. Japan’s net LNG imports dropped by 12.8% in November 2015, and South Korea’s level of imports have similarly fallen to their lowest levels in 6 years. ²⁸ For 2016, some forecasts call for LNG prices of around $6 for MMBtu and falling to the $5 for the next 2 years. However, slowing increasing demand from consumer markets such as Asia, which accounts for two-thirds total global LNG demand, mean prices could easily dip and stay in the range of around $4 MMBtu range. This is a dismal projection for such huge cape intensive LNG projects as those in Australia, although US LNG project costs are expected to remain lower. However, even relatively low cost US-based LNG projects will enter a rough supply market until at least 2020. ²⁹

Conclusion

The effects of long-term sanctions against the Iranian energy sector, problems in energy management, and a shortage in financial and technological resources are all factors delaying Iran’s ability to stream the majority of its oil, gas, and LNG projects. Due to sanctions against its energy sector, Iran’s neighbors such as Qatar, were able to exploit the country’s weakened position to secure their own place as the world’s foremost LNG exporter. Both countries share the South Pars field, and it is no coincidence that most of Qatar’s exports in LNG are sourced from this area. If Iran’s natural gas sector no longer suffers economic sanctions in the near future, the country will sooner or later be able to export natural gas to European and East Asian markets via massive pipeline projects.

Before sanctions were introduced, Iran had six LNG projects with a 75 million tons production capacity. Some European companies such as Shell, and companies from China and Malaysia, had signed agreement to complete Iran’s LNG projects, but all halted activities, bringing the projects to naught. Since the lifting of sanctions, Iran has expressed interest in completing its first LNG facilities, and needs $4 billion to complete its current stream marking 60% of its total plans. The country has invited all foreign companies to invest in its LNG projects. In the long term, the country is interested in exporting gas to Europe, but in the short term, exporting LNG to EU is its first priority. Iran is in negotiation with some EU countries such as Spain to discuss the terms of its future LNG exports. As Iran’s deputy of Oil minister made clear, British companies are already known to be taking an interest in some of the LNG proposals. ³⁰

In the coming years, there will be extensive challenges facing the LNG market the world over. After prices plunged last year the LNG market all but collapsed, and so is going to have to modify itself for greater international competition aimed at increasing both demand and supply. After all LNG projects in the US and other regions come to stream, oversupply will be in favor of demand. In the meantime all suppliers will have to sell LNG at knock down prices. However, many of Iran’s LNG projects are small scale and aim to supply domestic demand. After completing its LNG projects the country may be faced with problems such as oversupply and low prices, and Iran will undoubtedly be up against great competition with other suppliers, but this may prove to be an advantage. It is expected that LNG prices may decrease to $4, with Iran having to produce LNG at low prices and sell with low prices to find stable market. For its part, the EU is evidently trying to reduce its dependency on Russian gas, and LNG will be the best alternative for achieving this. Iran also has the chance to complete its LNG project and sell to European consumers, but due to oversupply of LNG, Iran needs to use foreign policy and energy diplomacy wisely in order to find a stable demand market.