Iran and Oman near agreement on gas deal

Sunday 05/06/2016
Iranian Foreign Minister Mohammad Javad Zarif (R) and Omani Minister of Foreign Affairs Yusuf bin Alawi bin Abdullah in Tehran, last February.

Washington - Iran is forging ahead in its post-sanctions world by seeking an advantageous export route to ship natural gas. Surprisingly, it is looking to a friend within the Gulf Cooperation Council (GCC) to provide that outlet.

A long-discussed undersea gas pipeline and supply deal between Iran and Oman is back on the table now that international sanctions on Tehran over its nuclear programme have largely been lifted. Muscat is eager to gain access to Iranian gas for domestic consumption and Teh­ran wants to tap into Oman’s un­derused liquefied natural gas (LNG) terminals to export its gas to wider markets.

Oman hopes to utilise as much as two-thirds of the Iranian gas inter­nally with the remaining amount exported as LNG on Iran’s behalf to European and Asian customers.

A final deal has not yet been signed but a pipeline feasibility study was approved by both coun­tries’ Oil ministers in September and Iran is reportedly zeroing in on South Korean firm Korea Gas Corpo­ration (KOGAS) to build the subsea gas line.

Discussions between Iran and Oman regarding a gas supply agree­ment date back a decade but pro­gress was slowed by differences between the two neighbours on pricing as well as international sanc­tions that were levelled on Tehran as it sought to develop its nuclear pro­gramme.

In 2014, the two countries signed a preliminary 25-year gas supply agreement valued at $60 billion. Integral to that agreement was the laying of a $1 billion, 200km pipe­line under the Gulf of Oman, pos­sibly from the Iranian port of Kuh-e Mubarak that would link to Oman’s industrial port of Sohar, near LNG export facilities at Sur. The deal would provide Oman with 10 billion cubic metres of gas per year from Iran’s giant offshore South Pars gas complex.

The agreement would benefit Oman greatly. The Gulf sultanate has been facing mushrooming do­mestic gas usage, forcing it to delay LNG exports to meet domestic de­mand. Muscat began receiving 200 million cubic feet a day of Qatari gas through Qatar’s Dolphin export pipeline in 2008. Oman has increas­ingly been using gas for enhanced oil recovery in ageing oil fields and as feedstock for the Gulf state’s petrochemical industry and power plants.

The increase in domestic gas consumption prompted Oman to cut back on LNG exports it is obli­gated to supply through long-term contracts with South Korean and Japanese buyers that run until 2024 and 2025, with the recent shortfall expected to be made up later. This has meant that the three liquefac­tion trains operating at Oman’s LNG export complex at Sur are operat­ing well below capacity, providing an opportunity for Iranian gas to be piped to the site, liquefied and ex­ported.

Although Iran has the world’s largest natural gas reserves, it has lagged behind major gas exporters such as Russia and Qatar in pipeline and LNG infrastructure that would allow it to ship its gas. Tehran’s large-scale LNG export project, Iran LNG, was halfway completed when international sanctions were tight­ened in 2012, causing work to be halted. Iran estimates it could take three or four more years to complete that project.

Trade between Iran and Oman has gathered pace in recent years, topping $1 billion in 2015. Iranian of­ficials suggested the level of trade could reach $4 billion within five years. Oman has been complicit in allowing Iranian smugglers to evade the international sanctions on Teh­ran, as small speedboats crossed the 60km in the Strait of Hormuz that separate Oman and Iran, stocked with Omani goods and return to Iran, only paying Omani taxes on the goods.

Muscat has been savvy in cultivat­ing strong ties with both the United States and Tehran, something Wash­ington capitalised on when it sought to reach a sanctions deal as part of the P5+1 negotiations with Iran.

Relations between Oman and Saudi Arabia are prickly. Rather than following suit with its fellow GCC neighbours when they cut or down­graded diplomatic ties with Iran in early January over an attack on the Saudi embassy in Tehran, Muscat chose instead to rebuke Riyadh, calling the severing of diplomatic re­lations “an unwise action conducted through an incorrect method”.

One has to believe that the Saudis are none too pleased that Oman and Iran could be further strengthen­ing their political and economic ties through a gas supply and pipeline deal that allows Tehran to capitalise on reaching new energy markets.