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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 Sets Its Sights On LNG Superpower Status

Qatar’s recent decision to go ahead with bold plans for the North Dome, its supergiant non-associated gas reservoir, together with corollary deals to secure massive new liquefied natural gas (LNG) capacity in its chief target export market, China, has spurred Iran into moving forward with its own long-stalled LNG plans, according to a senior oil and gas industry figure who works closely with Iran’s Petroleum Ministry. “Iran and Qatar share the same huge [non-associated] gas reservoir [the 9,700 square kilometre gas basin, 3,700 of which is Iran’s South Pars, with the remainder being Qatar’s North Dome], so each side is always suspicious that the other’s drilling activities will impinge on their own deposits,” he said.

“Now’s a very good time for Iran to move ahead with its LNG strategy, as relatively low gas prices means there’s little opportunity cost in re-configuring the various sectors of its gas sector, and by the time that it is in a position to offer a significant LNG business, gas prices should be a lot higher,” he added. “Iran has thought for a long time that there’s a huge discrepancy between its status as a global gas superpower and its position in the global LNG market,” he told OilPrice.com last week. “Given how much more difficult it will be under the new U.S. sanctions to complete some of the pipeline export options for gas, the emphasis now is on finally realising an LNG capability,” he added. Always a prime advocate of Iran developing its status as a key global LNG supplier, in recent weeks Petroleum Minister, Bijan Zanganeh, has repeatedly pressed the issue at cabinet meetings, he underlined.

In fact, Iran has been tantalisingly close to doing just this for years. Before the penultimate round of sanctions were ramped up in 2011/12 forcing its suspension of the project, German chemicals giant Linde Group had 60 per cent completed a US$3.3 billion flagship LNG export facility near Tombak Port that was set to produce at least 10.5 million tons per year (mtpy) of LNG, with expectations that it would take less than a year to finish. After sanctions were lifted again in 2016, Iran awarded Linde – whose liquefaction process the facility’s first two trains were to have used - a ‘sweetener’ contract when it signed the first petrochemical co-operation deal between Iran and Germany; a Front End Engineering Design contract for the olefin unit of Kian Petrochemical. Related: The End Of The OPEC Deal Could Be The Start Of A New Oil Price War

Iran had also been moving ahead with plans to construct floating LNG facilities, 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 a floating LNG 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.

Additionally, prior to 2011/12, Iran was in negotiations over various LNG projects with, among others: Total, Petronas, Repsol, and Royal Dutch Shell. Each of these already had different agreements with Iran as part of its fourth ‘Five Year National Develop Plan’ (2005-2009) that aimed to produce 70 million tonnes per year (mtpy) of LNG from the South Pars, North Pars, Ferdosi and Golshan gas fields.

With the newest U.S. sanctions in place since 5 November 2018, however, there has been an understandable degree of caution on the part of European firms to fully re-engage with Iran, despite the E.U. itself invoking the ‘Blocking Statute’ that makes compliance by European firms with U.S. sanctions illegal. Linde’s chief executive officer, Aldo Belloni, highlighted earlier last year that the company had to wait to find a way to transfer money out of the country before proceeding with its Iran investment plans. The same is true of the plans for a series of mini-LNG complexes to be funded and built by South Korean entities.

In this latter context, late in 2018, South Korea’s Minister of Land, Infrastructure and Transport, Kim Hyun-mee, agreed the finer points on its LNG co-operation with Zangeneh, which included Exim Bank’s initial €8 billion credit line to Iran and another €2.3 billion from two other South Korean companies. Prior to the withdrawal of the U.S. from the nuclear deal in May 2018, the intention had been for the National Iranian Gas Company (NIGC), utilising South Korea’s technology and know-how, to build up a large number of mini-LNG complexes. The production capacities of these would range from 2,000 to 500,000 tons of LNG per year, compared to typical large scale plant capacity of between 2.5 and 7.5 million tons per year.

These smaller facilities benefit particularly from being both relatively quick to start up and locatable almost anywhere, even in very remote gas fields. This idea was again voiced at the end of last year by Talin Mansourian, the director of investment at the National Iranian Oil Company (NIOC), who said that Iran was looking at constructing six small LNG units with a total 500,000 tons per year production.

Recently, though, another option has emerged, involving Russia. “Exactly the same rationale lies behind the determination of [Russia’s President, Vladimir] Putin to bring Russia’s LNG standing in the world market into line with its status as a global gas superpower as is the case with Iran,” a senior oil and gas industry source in Moscow told OilPrice.com. In Russia’s case, this determination, and massive state funding, has resulted in the continued success of the Yamal LNG project, run by Russia’s number two gas producer (after state-owned Gazprom), Novatek.

Significantly as well, this has seen Russia largely insulate itself operationally from the effects of any of its own U.S. sanctions by indigenising much of the technology and machinery involved with the Yamal LNG project. The ‘Arctic Cascade’ process - based on a two-stage liquefaction process that capitalises on the colder ambient temperature in the Arctic climate to maximise energy efficiency during the liquefaction process - is the first patented liquefaction technology using equipment produced only by Russian manufacturers. “Russia is perfectly capable of supplying Iran with all the machinery, technology, expertise, and money that it needs to get its own LNG sector into the next phase,” said the Iran source. Related: Smart Money Is Betting On These 5 Exciting Energy Technologies

This would build on the signing in 2018 – just after the U.S.’s re-imposition of sanctions on Iran, of two memoranda of understanding between the NIOC and Russia’s state gas behemoth, Gazprom. This came after wide-ranging discussions between Zanganeh and senior Gazprom officials, including its chairman and CEO, Alexey Miller. Gazprom – which already supplies nearly one third of all of Europe’s gas – led to an agreement with NIOC of a two-fold LNG sector development strategy. The first part involved a gas cooperation roadmap between the two companies, and the second the construction of Iranian LNG facilities in partnership with Iran’s Oil Industry Pension Fund.

Initially, this would allow Gazprom to, in effect, take over from Linde on the existing 60 per cent complete LNG complex, and later to be integral in the construction of the mini-LNG complexes, with Gazprom taking payment for its work from the sale of gas both from this complex and from part of the output from fields feeding gas into it. Indeed, at the time of the deal announcement, Zanganeh stated: “Repayment of the finances for developing these projects will be made by selling the produced gas and because… Gazprom is an experienced company it will consider gas exports either by launching pipelines or construction of plants to produced liquefied natural gas.”

Alongside ensuring the continued development of the flagship supergiant South Pars non-associated natural gas field the onus to maximise the potential gas feeds for Iran’s LNG complexes is on bringing new output online from relatively underdeveloped gas fields. Typical of the type of development proposition Iran is focussed on that is considered by Tehran as a possible candidate for more direct Russian involvement is Halegan, discovered in 2005. It is in an ideal location, to begin with – in Fars Province in southern Iran, 73 kilometres north of the Assaluyeh petchems hub, 25 kilometres south of the Sefid Baghoun gas field, and neighbouring the Sefid Zakhour and Dey gas fields to the north.

According to current estimates, the Halegan site holds at least 355 billion cubic metres (bcm) of gas reserves in place, about 72 per cent of which is deemed recoverable. Based on initial domestic studies, the development of the site would allow for a sustainable output of about 50 mcm/d of gas over a 20-year period, contributing to an overall estimated value of the field of about US$85 billion.

By Simon Watkins for Oilprice.com

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  • Mamdouh Salameh on June 16 2020 said:
    Iran has the world’s second largest proven natural gas reserves after Russia and is also the world’s third biggest producer of Gas after the United States and Russia. Iran, however, is yet to match its huge gas reserves with its ambitions to emerge as the second gas superpower after Russia.

    To enhance its gas status, Iran has to follow a three-pronged gas strategy aimed at achieving three goals: (1) enhance its gas production and build gas pipelines to pipe it to the European Union (EU); (2) build LNG facilities to export its LNG to the EU and the Asia-Pacific region; and (3) join Russia, Qatar and other major gas producers in transforming their 12-country Gas Exporting Countries Forum (GECF) into an OPEC-like organization for gas.

    The first goal can be achieved by linking the Tabriz-Ankara pipeline to the Trans-Anatolian Pipeline (TANAP) which is part of the Southern Gas Corridor (SGC) bringing Caspian gas supplies to the EU via Turkey and thereafter via the Trans-ADRIATIC Pipeline (TAP) to the EU. This is the most cost-effective way of bringing Iranian gas to the EU. However, this has to await the lifting of US sanctions on Iran.

    The second goal can be achieved by enlisting Russia’s help.Russia is perfectly capable of supplying Iran with all the machinery, technology, expertise, and money that it needs to launch its LNG. Against very intrusive US sanctions, Russia has managed with state-of-the-art home-grown technology to launch its highly successful Yamal LNG project by its number two gas producer (after state-owned Gazprom), Novatek.

    Gazprom could help construct Iran’s LNG complexes taking payment for its work from the sale of Iranian LNG.

    The third goal is for Iran to join Russia and Qatar in transforming the GECF into an OPEC-like organization for gas. Their motivation is that this could enable them to create a global gas and LNG market and influence gas and LNG prices exactly as OPEC does with crude oil.

    A key reason why GECF has been unable to control gas prices is that it lacks OPEC’s production-quota provisions. Instead, GECF members try to influence gas prices by coordinating their policies.

    However, an evolving gas-market and a changing geopolitical landscape mean GECF has the potential to develop into a gas organization with a lot of clout in the global gas market similar to OPEC’s. GECF leader Russia is confident that such an organization could succeed as OPEC has done.
    But before GECF can transform itself into an organization capable of controlling gas prices, the market must first become international. This is already happening with growing production of LNG around the world. LNG now accounts for 11% of world gas production and that figure is growing. Moreover, an estimated 34% of LNG is now traded on spot markets, where prices are not linked to those of oil.

    Moreover, the continuing surge in LNG capacity is also likely to accelerate the process of delinking gas and oil prices. GECF certainly has the clout to pull it off: Its members control 70% of the world’s proven gas reserves.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Andrew Doolittle on June 16 2020 said:
    Might help explain the epic price fail in US natural gas futures. Negative pricing looks imminent even in Europe which has some of the highest energy prices in the World. While the USA has a powerful sanctions regime on Iran there has also been a surprisingly strong working relationship with Iran happening at albeit very much "entry" non-economic levels. Not much talk of War anyways and unlike what is going on between India and China at the moment.

    US margins in the oil and oil refining business remain massive at the moment as well thus causing an uptick in US produced natural gas as an associated product. Exports to Mexico remain strong despite a dramatic fall off in demand from the US lng sector the past 2 Months. Amazingly the USA just imported an lng cargo from Nigeria an albeit not unheard of event but very rare going on many Years now.

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