The threat of sharply rising gas prices and supply failures increases as Europe heads into winter without the reassurance of abundant cheap gas from Russia. Such gas supplies may halt completely if the European Union (EU) gives the final approval to a cap on gas prices from Russia at its meeting on 24 November. Russia's state-owned gas behemoth, Gazprom, has stated that if the EU introduces this gas price cap, it will suspend all exports of its gas to EU countries. Gas imports from Russia made up around 40 percent of the EU's gas supply in 2021. Cognisant of multiple opportunities to exploit this situation in favour of itself and its key ally, Russia, Iran last week made it clear that it is ramping up its gas production operations at the supergiant South Pars natural gas field, with a focus on its controversial Phase 11. According to the chief executive officer of the National Iranian Oil Company (NIOC), Mohsen Khojastehmehr, last week: "The activities of the South Pars phase 11 development project are underway, and this winter gas from phase 11 will be available." This comment echoed the recent statement of Iran's Oil Minister, Javad Owji: "With the initiative of our colleagues in the National Iranian Oil Company, we promise that the first phase of gas production from South Pars Phase 11 development project, which was exchanged only on paper between different domestic and foreign contractors for 20 years, will start this winter." Owji had said in August that South Pars Phase 11 is expected to produce 10 to 11 million cubic metres per day (mcm/d) in the first phase of development.
From this starting point, with Russia's help, the gas output from Phase 11, and from all other 23 phases of South Pars, will be increased dramatically, a senior oil industry figure who works closely with Iran's Petroleum Ministry told OilPrice.com last week. With an estimated 14.2 trillion cubic metres (tcm) of gas reserves in place plus 18 billion barrels of gas condensate, South Pars already accounts for around 40 percent of Iran's total estimated 33.8 tcm of gas reserves (mostly located in the southern Fars, Bushehr, and Hormozgan regions) and about 80 percent of its gas production. The 3,700-square kilometre (sq.km) South Pars sector of the 9,700-square km basin shared with Qatar (in the form of the 6,000-square km North Dome) is also critical to Iran's overall strategy to sustain natural gas production across the country of at least 1 billion cubic metres per day (bcm/d).
Phase 11's original target production capacity was 57 mcm/d and this is still the output goal, according to Owji. The first phase of the current development program, according to Iran's lead developer on the project, Petropars, involves the drilling of 30 wells plus the fabrication and erection of two production platforms, each containing 15 wells, with the aim being to produce 2 billion cubic feet (56.6 mcm/d) of gas per day as well as 80,000 barrels of liquefied natural gas (LNG). This will require construction of additional liquefied natural gas (LNG)-related installations and two 32-inch pipelines, totalling 270 kilometres (km) in length. The second phase of the development program will address the likely fall in pressure during the first three years of full production, with the graduated installation of the pressure equipment related to different enhanced gas recovery techniques.
The problem Iran had faced in moving Phase 11 ahead, and to a lesser extent all other South Pars Phases, was its inability to put the right equipment, technology, processes, and people in place on the project and to keep them there. Several high-level international companies had been involved at one stage or another in Phase 11 of South Pars, only to withdraw due to the toughening up of sanctions in 2011/2012, or the reimposition of sanctions in 2018. Given the size and scope of Phase 11, it became a focal point of U.S. attention in the aftermath of its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and during the active re-imposition of sanctions toward the end of that year. At that time, French supermajor, then-Total (now TotalEnergies), held a 50.1 percent stake in the US$4.8 billion Phase 11 project, and had already invested around US$1 billion into it.
According to the Iran source spoken to exclusively by OilPrice.com: "On the eve of the signing of the next wave of financing for Phase 11, the U.S. Treasury Department telephoned senior bankers at the bank that was organising the money and told them that if the financing went ahead then the U.S. would instigate a full historic investigation of all of the bank's dealings since 1979 to every country that had been blacklisted by the U.S., and it told the French government the same thing." Understandably, France withdrew from Phase 11, at which point, China National Petroleum Corporation (CNPC) automatically took over Total's stake (of 50.1 percent) - as automatically occurred in the terms of the contracts - to add to its existing 30 percent stake. The remaining 19.9 percent stake was held by Petropars.
CNPC, in turn, was all set to continue with the development of Phase 11, given the enormously beneficial terms that it was offered by China, as analysed in depth in my latest book on the global oil markets, and the value of the South Pars field. The present value at that time was US$116 billion, shortly after it jumped to US$135 billion, and now it is higher again, according to the Iran source. Crucially, though, the U.S. ramped up pressure on China in the Trade War under the unpredictable former President, Donald Trump. This, together with the fact that China was already locked into the new supercharged 25-year deal with Iran, as exclusively broken by me in September 2019, prompted Beijing to adopt a lower public profile on high-visibility Iranian oil and gas fields wherever possible. Top of this list was Phase 11 of South Pars, so CNPC publicly withdrew from the project in October 2019.
The key difference now is Russia's unfettered involvement in Iran's gas projects. The foundations for this were laid just before the visit to Tehran in July of Russian President, Vladimir Putin, with the signing of a US$40 billion memorandum of understanding (MoU) between Russian gas behemoth, Gazprom, and the National Iranian Oil Company (NIOC). Among other deals contained in the MoU, Gazprom pledged its full assistance to the NIOC in the US$10 billion development of the Kish and North Pars gas fields with a view to the two fields producing more than 10 mcm/d. The MoU also pledged a US$15 billion project to increase pressure in the supergiant South Pars gas field on the maritime border between Iran and Qatar. Gazprom will additionally be involved in the completion of various liquefied natural gas (LNG) projects and the construction of gas export pipelines.
These deals were designed by the Kremlin to give it even more control over future gas supplies coming out of Iran that might have found a home in southern Europe initially, before being transported north, to take advantage of the gas supply crunch in European countries. There may well be several interested buyers in Europe for gas originating in Russia or Iran but being sold on through other intermediaries as, perhaps gas from the unsanctioned Iraq. In Europe, Iran has used this method of 'rebranding' to sell its own oil as Iraqi oil through decades of sanctions in order to move it into some of the less rigorously policed ports of southern Europe. These have included those of Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia and from these the oil was easily moved into Europe's bigger oil consumers, including Turkey. Hiding cargoes on ships has been another successful method by which Iran has been able to move its oil to anywhere it wishes as well over the year, and there is no reason that both methods cannot be equally successful for LNG shipments when Iran and Russia decide the time is right to begin them.
By Simon Watkins for Oilprice.com
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Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for… More