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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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Sanctions On Russia Are Stalling A Crucial Iranian Gas Project

  • Iran cannot make any meaningful progress on its flagship gas project, South Pars Phase 11.
  • South Pars already accounts for around 40 percent of Iran’s total estimated 33.8 tcm of gas reserves.
  • Because of international sanctions on its industries, Russia may not be able to honour its promises to help Iran develop key gas fields.

Things were not meant to go like this as far as Russia and Iran, and indeed China, were concerned, following the invasion of Ukraine on 24 February 2022. Within a week of that date, President Vladimir Putin’s vision ran, Russia would have secured control over its neighbour. In oil and gas terms, this would have meant the continuation and expansion of Russian gas flows into Europe through Nordstream 2 and oil shipments being increased into the south of the continent. This would also have meant that a big increase in gas and oil from Iran would have been very useful to Russia for logistical reasons and for control over pricing. This is why just before Russia invaded Ukraine, Putin personally ordered the signing of several memoranda of understanding (MoU) to ensure continued Russian influence in the Islamic Republic. Fate, however, can be a fickle mistress and if that was Putin’s vision, then he would be well advised to visit an optician. As it now stands, Russia is stuck in a disastrous war of attrition in Ukraine and Iran cannot make any meaningful progress on its flagship gas project, South Pars Phase 11 (SP11).

According to a senior oil and gas industry figure who works very closely with Iran’s Petroleum Ministry spoken to exclusively by OilPrice.com last week, the beginning of 2023 saw a series of meetings between high-level officials from all the relevant ministries and companies connected to SP11 in order that a progress report be put together for the consideration of Supreme Leader, Ali Khamenei, and his team. The final report is split into three parts, the first one being the development history of the SP11 project up to the increased involvement of Russia and China after the U.S. unilaterally pulled out of the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and reimposed sanctions on Iran and those who traded with it. This part is very long. The next part, which is considerably shorter, is the progress made by Russia and China on the project during their time at its helm. The third part, which is about as short as a line in a Samuel Beckett play, deals with the options for advancement on the project now. 

To recap at this point on why the South Pars gas field is so important in the world of gas and why the Phase 11 project is such an important part of that - it should be remembered that South Pars is one part of the two parts that comprise the 9,700-square kilometre gas basin that forms the world’s largest gas field by a very long way. This entire gas reservoir holds an estimated 51 trillion cubic metres (tcm) of non-associated natural gas and at least 50 billion barrels of natural gas condensates. Qatar’s 6,000 square kilometre section – the ‘North Field’ (or ‘North Dome’) – is the cornerstone of the Emirate’s world-leading liquefied natural gas exporter status. Iran’s 3,700 square kilometre section – ‘South Pars’ – holds an estimated 14.2 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.

Related: Iran Claims Panama Oil Tanker Cancellations Were Politically Motivated

After the signing of the JCPOA by the ‘P5+1’ group of nations (the U.S., UK, France, Russia, and China, ‘plus’ Germany) on 14 July 2015, there was a scramble of international oil companies to sign agreements for the various Phases of the South Pars development, with the first big Phase in focus after the deal had been done being Phase 11. The Phase’s original target production capacity was 57 million cubic metres per day (mcm/d) of gas – around 335,000 barrels of oil per day – although the first part of the Phase would target around one fifth of this volume. 

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France’s 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 when the U.S. pulled out of the JCPOA, and the French firm subsequently pulled out of the project. At that 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. 

 

Unfortunately for Iran, that time in 2018 also saw the increased personal interest of then-President Donald Trump in China, as indicated in the first instance when the U.S. imposed 25 percent tariffs on a further US$16 billion of Chinese goods on 23 August 2018. The newly reimposed U.S. sanctions on Iran and Trump’s personal increased scrutiny on China meant that Beijing focused more on those projects for which it had the most need - in Iran, this was oil from the big fields to power its economic growth. Beijing’s interest in those projects for which its needs were less pressing, notably including the South Pars Phase 11 gas project, diminished markedly. A further negative factor for China in this context was that it could not ‘rebrand’ Iranian gas from South Pars as Iraqi gas, as it could in the case of much of its Iranian oil imports, as the South Pars gas reservoirs is not shared with Iraq as so many of Iran’s oil field are, as analysed in depth in my last book on the global oil market

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An understanding was reached between Beijing and Moscow that Russia would take up where it had left off elsewhere in Iran by dint of seven agreements in the oil and gas sector made just after the U.S. withdrawal from the JCPOA, and provide support for Iran’s own efforts on SP11 until such time as China could fully re-engage in the project. Beijing envisaged that this would occur after Trump’s presidency ended, whenever that might be. According to Trump’s National Security Advisor, John Bolton, it was former President Barack Obama’s Secretary of State, John Kerry, who advised Iran to stay in the JCPOA deal and just wait it out until Trump was no longer president. 

The preparations for this were laid by Russia and Iran just over one month before Russia invaded Ukraine when Iranian President, Ebrahim Raisi, visited his counterpart in Moscow, the first visit of an Iranian president to Russia in almost five years. According to comments from Iran’s Petroleum Minister, Javad Owji, several parts of the rolling 20-year cooperation deal between Russia and Iran that related to the development of oil and gas fields, the construction of refineries, and technology transfer were signed. This groundwork was then augmented by a reciprocal visit to Tehran in July 2022 by Putin that set the seal on a US$40 billion wide-ranging memorandum of understanding (MoU) signed between the National Iranian Oil Company (NIOC) and Russian gas behemoth, Gazprom. 

In this, 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 their producing more than 10 million cubic metres of gas per day. The MoU also detailed a US$15 billion project to increase pressure in the supergiant South Pars gas field on the maritime border between Iran and Qatar. Gazprom further pledged assistance in the completion of various liquefied natural gas projects and the construction of gas export pipelines. 

The problem with this, a senior source in the European Union’s energy security apparatus exclusively told OilPrice.com last week was that the invasion of Ukraine did not prove to be as quick and easy and affair as Putin had intended. “[Putin] thought it would be over within a week and then it would be business as usual, but when Ukraine didn’t just fold up and then the U.S. and Europe got behind Kiev Putin found he was dealing with a NATO Mark Two plus economic sanctions on Russia as well,” he said. “Russia now has nothing to give Iran – no machinery or technology or manpower that’s any good, and no financing – just promises of the delivery of military items, like an upgraded S-300 [missile defence system] and the Sukhoi 35s [fighter jets], and even if they finally honour their promises it is not going to help Iran get more gas out of South Pars,” he concluded. 

By Simon Watkins for Oilprice.com

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