Iran looks to become Europe’s main supplier of gas
London - An energy conference in Tehran in late November attracted companies, including oil majors Total, Statoil, BP, Shell and Sinopec, from 33 countries. The Iranian media reported that 50 energy projects were discussed. The main aim, though, was to outline terms for foreign participation in the sector. Visitors left with as many questions as answers.
Iran has long wrestled with the challenge of attracting foreign investment and know-how while retaining strict state ownership of upstream activities, including retention of reserves. Since 2012, the Iranian Oil Ministry and the state-owned National Iranian Oil Company have been examining alternatives to “buy back”, a system used extensively until the majors pulled out in 2009-11 under threat of punitive US action.
The oil companies disliked “buy back”, which meant they funded development, received an agreed production share and then transferred operation of the field to Iranian authorities after a set number of years.
While short on details, the Tehran conference confirmed that the new kind of agreement — the Integrated Petroleum Contract (IPC) and also known as the Iran Petroleum Contract — would give international companies incentives to maximise output.
Essentially, participants in joint venture would be paid with a share of output, giving them an incentive, not present under “buy back”, to increase production and profits. Contracts could last up to 20 years rather than the usual five under “buy back”.
The majors remain wary. American companies refused invitations to attend the conference, mindful of repeated warnings from the White House that sanctions have not yet been lifted and indeed that not all sanctions will go as a consequence of last July’s nuclear agreement.
But others, too, are cautious, and not just over their bottom lines with global oil prices at the lowest level for nearly seven years and likely to fall further. They are wary of potential Iranian joint-venture partners — including companies linked to the Islamic Revolutionary Guards Corps — and nervous over Iran’s insistence on access to advanced technology.
Iran wants to increase its oil exports in the short term from 1.2 million barrels a day (bpd), down by more than 1 million bpd since stringent US and EU sanctions were introduced in 2012. Achieving further significant increases will be far from easy, however.
Vienna’s Organisation of the Petroleum Exporting Countries (OPEC) meeting confirmed the determination of Saudi Arabia to keep prices down through what amounts to a daily oversupply of 2 million bpd — a determination that flows, say many analysts, from the kingdom’s desire to squeeze Iran. “Everyone does what they want,” noted Iranian Oil Minister Bijan Namdar Zanganeh, in Vienna, in remarks hardly suggesting he expects a price recovery.
Tehran is also short of domestic private-sector capital while facing the need for vast investment to update technology and maintain ageing oil fields. Hossein Zamaninia, a deputy oil minister, spoke in October of $185 billion being needed by 2020.
Just as important as investment for Iran is access to the advanced technology held by the majors, especially to convert reserves in the vast South Pars field into liquefied natural gas (LNG), its most exportable form. While Iran holds 18.2% of global gas reserves, its production in 2014 was only 5% of world total, according to the BP 2015 Statistical Review of World Energy.
In what looked like an admission of defeat, the previous administration of president Mahmoud Ahmadinejad announced that gas from Phase 12 of South Pars would go into a pipeline for domestic consumption, a step back from plans to produce LNG alongside Phases 11, 13 and 14 in cooperation with Shell, Repsol YPF and Total. In 2014, Iran consumed 170.2 billion of the 172.6 billion cubic metres of the gas it produced.
Now, more ambitious plans may be revived and adapted. If the LNG nettle can be grasped, gas may be more promising for Iran than oil. The Paris-based International Energy Agency forecasts the share of natural gas in the world energy market will grow from 21% in 2010 to 25% in 2035 (the only fossil fuel whose share is increasing), with demand for LNG increasing even faster.
Iran’s recent announcement that the German company Linde will, once sanctions lift, build a floating LNG production facility for the offshore Forouzan oil rig, would be a small step in itself. But it gave Zanganeh a good opportunity to flag up the gas Iran could potentially supply to Europe.
The bigger issue of producing LNG from South Pars, work from which Linde pulled out around 2010, was also discussed in a recent visit to Tehran by Linde Chief Executive Officer Wolfgang Buechele.
This would be the real game changer. If the majors play ball, Iranian officials believe they can supply 25 billion-30 billion cubic metres of gas a year to Europe and have an overall target for gas exports, including LNG, of 80 billion cubic metres per year by 2021.