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Simon Watkins

Simon Watkins

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…

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Iran Plans Critical Gas Hub In Bid For Global Gas Supremacy

  • Iran’s Petroleum Minister, Javad Owji presented Kish Island as being a crucial part of the Russo-Iranian strategy to corner global gas markets.
  • Kish Island will act as a focal point not just for the gas in-situ, but will also draw in gas supplies from the North Pars gas field.
  • Gazprom is Iran’s main partner in LNG development, and stands to benefit from the major expansion in LNG export capacity.

As a core element of the Russo-Iranian strategy to corner as much of the global gas market as possible in as short a time as they can, Iran’s Petroleum Minister, Javad Owji, last week identified Kish Island in Hormuzgan Province as being a critical gas hub in these plans. Kish Island is positioned off the south-west coast of Iran with an easy transit route past the northernmost tip of Oman – which abuts east of the UAE’s Ras Al-Khaimah – into the Gulf of Oman. From there, the Arabian Sea stretches out to the Indian Ocean, which offers unfettered access to either the East or the West. Kish Island is to be used both as a refining hub for gas for the production of sanctions-proof high-value petrochemicals production, and in the manufacture of liquefied natural gas (LNG). The first of these two project elements will provide excellent returns on Russian money invested into Kish – the project will cost US$25 billion, according to Owji (with much of this coming from the recent US$40 billion Gazprom-National Iranian Oil Company, ‘NIOC’) deal) – and will enable Russia and Iran to dominate the global LNG market over time.  As highlighted in the Gazprom-NIOC MoU recently, LNG has been identified by Russia and Iran as the ‘swing’ product in the gas supply and demand matrix in the coming years. Over and above the two countries’ ongoing efforts to bring Qatar firmly into their planned ‘Gas OPEC’ alliance, both Moscow and Tehran are working now towards unleashing the full potential of Iran’s LNG capabilities. These capabilities are huge, given that Iran holds the second largest gas reserves in the world (33.8 trillion cubic metres, ‘tcm’), just behind Russia (48 tcm). If the 8.1 tcm estimated reserves of the ‘Greater’ and ‘Lesser’ Chalous fields – exclusively highlighted here – were included then Iran would have a total gas reserves figure of 41.9 tcm. According to a recent comment from NIOC officials, Kish Island will act as a focal point not just for the gas in-situ (around 1.6 tcm of reserves) but will also draw in gas supplies from the North Pars gas field (1.67 tcm of reserves) and South Pars gas field (14 tcm of reserves), plus other gas fields, as the Kish Island hub expands. Gazprom will directly assist in seven key areas in Iran’s gas production expansion, including: investment in the development of gas fields, investment to complete the half-finished ‘Iran LNG’ project, development of new floating LNG (FLNG) terminals, development of small-scale LNG projects, gas swaps, the construction of high-pressure export lines, and gas technology transfers. 

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It is apposite to note that Gazprom was instrumental in the building out of Iran’s initial LNG program, and that much of this latest US$40 billion Gazprom-NIOC MoU is a continuation of that work, as analysed in depth in my latest book on the global oil markets. The most notable project in which Gazprom was a key mover early on was the ‘Iran LNG’ project, an LNG complex that was begun by German engineering giant Linde, but then abandoned by it after sanctions were ramped up in 2012, and again when they were reintroduced in 2018. Originally estimated to cost US$3.3 billion, this flagship LNG export facility near Tombak Port - was set to produce at least 10.5 million tons per year (mtpy) of LNG – had been 60 percent completed at the time of Linde’s last withdrawal from the project, with expectations that it would take less than a year to finish. 

At that point, the then-NIOC managing director, Ali Kardor, and Gazprom’s chief executive officer, Alexei Miller, agreed in principle that Gazprom would replace Linde on the Iran LNG project, with the initial focus being the completion of the LNG export facility near Tombak Port, as a natural adjunct to the range of gas exploration and development MoUs that had been agreed a year earlier. At the time of the announcement of this involvement by Gazprom in the ‘Iran LNG’ project, then-Iranian Petroleum Minister, Bijan Zanganeh stated: “Repayment of the finances for developing these projects will be made by selling the produced gas and because of the fact that Gazprom is an experienced company it will consider gas exports either by launching pipelines or construction of plants to produced liquefied natural gas...signature of this MoU is a major step for the presence and partnership of Gazprom in Iran’s gas development projects”. 

As China began to tighten its influence over Iran, however – most notably in the aftermath of the landmark 25-year deal struck in August 2019 and exclusively broken by me in September 2019 – Russia was persuaded to put the LNG project on the slow development track for a while. At this juncture, Iran resuscitated several other dormant LNG project ideas to allow it to move ahead with its LNG ambitions. These again were mentioned alongside the recent Gazprom-NIOC MoU, with the first being the construction of six small LNG units, with a total 500,000 tons per year production capacity (compared to a typical large-scale plant capacity of between 2.5 and 7.5 million tons per year). These units are closely based on the designs and technology of the series of ‘mini-LNG’ complexes that were to have been funded and developed by various South Korean companies before the U.S. sanctions hit again in 2018. 

Iran had also been moving ahead with plans to construct FLNGs, especially in and around continental Europe, with in-principle deals having been struck with Italy’s Eni and Spain’s Cepsa to take both oil and LNG when it became available from Iran. Similar plans were being discussed between Iran and Greece’s state-run gas supplier, Depa, to form a new firm that would build and run an FLNG storage and re-gasification facility at Alexandroupolis, in the north of Greece. An expansion of the Revythousa re-gasification terminal near Athens was also being looked at as a potential entry point for Iranian gas. Both facilities would have been connected to two international pipeline systems: the Trans Adriatic Pipeline, and the Gas Interconnector Greece-Bulgaria links. These LNG links into Europe were to have complemented several deals that Iran had been negotiating at various points with several international oil companies (IOCs) about LNG-related projects, including Total, Petronas, Repsol and Royal Dutch Shell. Several IOCs had in-principle agreements with Iran much earlier as part of its fourth ‘Five Year National Develop Plan’ (2005-2009) that aimed to produce 70 mtpy of LNG from the North Pars, South Pars, Ferdowsi, Kish, and Golshan gas fields. 

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There was also a deal being made, and currently again being discussed, that Iran utilises about 25 percent of Oman’s total 1.5 million tons per year LNG production capacity at the Qalhat plant. This would be done with a 56-inch land pipeline (to be constructed in Iran) extending for 200 kilometres (km) from Rudan to Mobarak Mount in the southern Hormozgan province, and then a 36-inch sea pipeline running 192 km along the bed of the Oman Sea at depths of up to 1,340 metres, from Iran to Sohar Port in Oman. From Oman’s side, with China already looking to lock it into its sphere of influence through its standard set of ‘Hotel California’-style deals (‘You can check out any time you like, But you can never leave’) that characterises its ‘One Belt, One Road’ initiative, there has been money enough to complete the preliminary work. This includes work related to seabed surveys, design of the pipeline and its accessories and the compressor stations has been completed. As it stands, the total estimated cost for Oman’s section of the undersea pipeline and Iran’s section will be around US$1.2 billion. All these options are under consideration in the Gazprom-NIOC wide-ranging MoU, with the added bonus that Russia – as a significant LNG exporter itself - can also provide Iran, as stipulated in the MoU, technology transfer as and when required.

Russia’s return on invested funds will not only come in the form of the increased geopolitical influence accrued from effectively controlling even more gas supplies across the globe but also in monetary terms as well from two main sources. One is that it can take delivery of Iranian gas in payment and the other is that it can receive payment from the sanctions-proof high-value petrochemicals production at Kish Island, to begin with. Iran’s share of the Middle East’s petrochemical trade is already well over 20 percent, and the next step in the development of that sector will cover 47 projects, which is estimated to bring Iran’s petrochemical industry revenue to US$50 billion by 2027. In fact, not only does the petrochemicals sector generate revenues for Iran of around 15 to 16 times more per tonne of product than crude oil but for investors, based on current contract terms, petrochemicals produce rates of return of 30-35 percent against 12-15 percent in the upstream segment.

By Simon Watkins for Oilprice.com

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