An overview of Iran’s Energy Industry, and the complexities of exporting LNG from South Pars
This month we take an
insight into the topical subject of the Iranian
energy industry, the politics which surround it,
and a more detailed look into Iran’s
endeavours to export gas from South
Pars.
Iran’s Economy & Energy Industry
Indeed, Iran is a nation spoilt with vast natural resources. Holding the third largest proven oil reserves (estimated at 136.2 billion barrels), and the second largest natural gas reserves (estimated at 974 Tcf). Currently, Iran is OPEC’s second largest exporter and producer of crude oil, behind Saudi Arabia. However, Iran is yet to exploit their gas reserves to the same extent, particularly in terms of the exportation of gas.
The bulk of Iran’s gas reserves are located in non-associated fields, where there has been a lack of focus on development of these resources. This appears to be due to oil reserves being the Iranian government’s top priority. Additional Iranian energy policy objectives stipulate that they plan to replace domestic consumption of oil with gas, in order to make more crude oil available for export; the second goal is to become a major gas exporter, an objective stated long ago, yet they are still to export any meaningful quantities of gas.
In regards to domestic consumption the government implemented this strategy by initiating national programs to make natural gas the main source of energy for households and industrial consumption, gas being sold at a concession to encourage demand.
Whilst Iran contains a luxury of gas reserves, they are yet to have developed any consistent form of export. As a country, they only export gas through one pipeline to Turkey, and even this export agreement is said to be unreliable and severely under-utilised. This is further undermined by the fact that Iran is a net importer of natural gas from Turkmenistan, largely due to most of Iran’s gas reserves being located in the south, while the majority of the population is situated in the north of the country to which gas is imported to from Turkmenistan. Iranian energy policy states ambitious plans for gas exportation, however given the lack of development and long distances between gas supplies and the consumption centres (market), Iran’s share of the global gas trade has been very low . This is why LNG has been suggested as a viable export avenue due to it being more easily transported to market.
A key defining moment for the Iranian energy industry was the Islamic Revolution. In 1979, Grand Ayatollah Ruhollah Khomeini ended the monarchy of Shah Mohammad Reza Pahlavi, and shortly afterwards Iran became an ‘Islamic Republic’. The government now plays a prominent role in energy related issues. Since the Islamic revolution in 1979 the Iranian energy industry has been a strictly nationalised industry.
This concept of an ‘Islamic Republic’ resulted in changes to Iran’s political structure where by a unique form of governmental structure was introduced, “Islamic” and “Republican” structures running in parallel to each other. Therefore, whilst there is a president who acts as head of the executive branch, there is also a Supreme Leader as head of state . This system runs through their political system as shown by the following chart.
http://lningram.files.wordpress.com/2008/01/iran.jpg
One policy resultant of the government’s influence has been the state’s decision to limit foreign investment through ‘buyback contracts’. Iran Oil & Gas Report (2009) states that the ‘Iranian constitution prohibits the granting of petroleum rights on a concessionary basis or permitting a direct equity state, so potential foreign partners have no ownership rights.’ However, the National Iranian Oil Company (NIOC) recognised that a lack of financial investment and technical knowledge was prohibiting progress on planned projects, so they proposed a change of legislation. The Ministry of Petroleum changed legislation in 1987 to permit foreign investment through the introduction of ‘Buyback’ contracts, though the situation is still far from ideal in terms of attracting foreign investment.
The South Pars gas field seems to very much exemplify the problems Iran have experienced when trying to develop gas exports. This article will focus on Iran’s problems developing exports through LNG.
Off the coast of Iran, located in the Persian Gulf, lies the South Pars gas field, the world’s largest known gas reserve. The field is shared with Qatar, who call their portion the ‘North-Field’, and is divided by the Iranian and Qatari maritime border. The field as a whole contains 900 Tcf of gas reserves accounting for 10% of the worlds proven reserves . The Iranian sector holds 450 Tcf containing approximately 47% of Iran’s natural gas reserves .
Yet whilst South Pars contains an embarrassment of riches, so far all stages of development are dedicated to meeting domestic consumption, and the reinjection of gas into Iran’s depleting oil-fields to boost production is also a significant use of gas. Since the field’s discovery in 1990 the field has seen no export development and seems to epitomize the Iranian gas industry as a whole. This is in stark contrast to the Qataris who are set to reach an export level of 77 mpta of LNG by the end of 2010, and are LNG exportation market leaders .
Abdullah Bin Hamad Al Attiyah, the Minister of Energy and Industry in Qatar, states that the successful exploitation of the vast reserves of North-Field has been put at the core of strategy for development of the state of Qatar and their economy, which has resultantly seen significant success. This begs the question as to why Iran has not exploited their field to a similar extent as Qatar.
The answer to this question is that there are a number of issues to consider as to why Iran is yet to utilize their gas reserves for the export of LNG. Whilst the political system in Iran has been much maligned in the west and an easy target when considering this issue, there are a number of other mitigating circumstances effecting Iran’s ability to export gas.
The UN economic sanctions weigh heavily on Iran and constrain their foreign investment opportunities, but perhaps more importantly their requirements for western LNG technology. Due to the UN sanctions and the poor relationship Iran experiences with the US, Iran are unable to get the technology they badly need to develop LNG export opportunities.
Furthermore, domestically Iran is heavily dependent on gas. This is due to the demands of their large population of 71.2 million. But also the demands of a declining oil industry which firstly requires local demand to be offset by gas, but also the oil industry’s requirements for gas to boost production from their depleting oil reservoirs.
As mentioned previously the government has played a role in hindering the development of gas exports in South Pars, Iran. A complex political system has meant somewhat ironically that there has been too much democratic discussion over potential projects, and resultantly projects have been delayed and costs have inclined. This is in contrast to Qatar which has been able to utilize a short chain of command and a more direct process; this has resulted in an efficient process of decision making, whilst there is also a growing belief that the Iranian government is failing to provide the gas sector with the strategic direction required to deliver their objectives and targets.
These constraints and differing market needs lead to question whether it would be strategically and economically viable to export gas or whether Iran would be better served utilizing their gas domestically. This question may be more appropriate for Iran to answer before they continue their plans to try and export LNG.
Fig 1.0 Map of South-Pars/North-Field
