Issue Number: 103   December 2013

Will Iranian LNG come in from the cold?

Recent breakthroughs in negotiations over Iran's nuclear programme have raised the prospects of Iranian gas and LNG (liquified natural gas) reaching world markets. MJMEnergy Analyst, Nico Cottrell, considers the impact of sanctions on the Iranian gas industry, and possibilities for future development.

Benjamin Netanyahu, the Israeli Prime Minister, has described the recent negotiations at Geneva over Iran's nuclear programme as an 'historic mistake'. In contrast, William Hague, the UK foreign Secretary, has said that the deal signals 'good news for the whole world'[1]. A blessing or a curse, the deal will mean that Iran will curb some of its nuclear activities in return for 'limited, temporary, targeted, and reversible [sanctions] relief' which will last for six months and is worth an estimated $7bn (£4.3bn). EU foreign ministers will meet in the next few weeks and the proposal for the relief of sanctions may be approved as early as December 2013. These negotiations have also indicated that a permanent solution to Iran's sanctions will be sought.

Whilst sanctions have been a feature of US Iran policy since Iran's 1979 Islamic Revolution, the UN and worldwide bilateral sanctions on Iran are relatively recent. The more recent sanctions were imposed on Iran because of its uranium enrichment programme. Since Iran's nuclear activities began in 2002, the International Atomic Energy Agency (IAEA) has been unable to determine whether Iranian activities were exclusively peaceful, or intended to produce nuclear weapons. These uncertainties over Iran's nuclear intentions have triggered various sanctions from the UN, EU and US since 2006 and particularly in 2010, which were more forcefully felt. The sanctions have hit the country's economy hard: it is in recession and the rate of inflation has been as high as 41.3% in June 2013 [2]. Fereydoun Khavand, an economist and expert on Iran, has said, 'Iran's economy is out of breath' [3]. The sanctions have had a huge impact on Iran's banks and oil exports, reducing the country's revenue by about 65%. Some take this as a sign that the sanctions work and therefore should continue. Others believe that it is unjustifiable to financially ruin a country. One online blogger invoked hyperbole and compared the sanctions on Iran to the extremely punitive 'Treaty of Versailles but perhaps on steroids. [4]' The moderate line is that the sanctions should be relaxed if Iran acts according to the requirements of the deal; if it fails to do this then, as Barack Obama warns, 'we will turn off the relief and ratchet up the pressure. [5]'

Whilst Iran's economy has been hampered by sanctions since 2006, it has only been the more recent sanctions in 2010 that have severely affected the country's gas industry. EU sanctions in 2010 meant that there was a ban on the export to Iran of key equipment and technology required for the refining and production of natural gas. Soon after the EU sanctions, Germany's Linde stopped selling its LNG technologies to Iran, which is likely to be related to political pressure. And then, in October 2012, the EU banned the import, purchase and transportation of natural gas from Iran. As a result, Iran can only export gas via by pipeline, which is a less lucrative option compared to the export of gas as LNG.

In November 2013, The NIGC (National Iranian Gas Company) collapsed and declared bankruptcy with a debt of $4bn. Media reports quote Bijan Zangeneh, Iran's oil minister, that the gas company 'is destroyed.' [6] Are the sanctions to blame?

Looking for reasons why Iran's gas industry has failed: are the sanctions a red herring?

Some experts have pointed out that there have been longstanding inabilities associated with Iran's gas industry; the sanctions from 2010 were not the key reason for its failure and only served to put the nail in the coffin. Not convinced that the sanctions are the best explanation for Iran's weak gas industry, these analysts look to domestic factors such as costly subsidies and domestic over-consumption; objections to foreign participation; and policy and institutional conflicts. [7]

Whilst these are all important reasons that have had an important bearing on Iran's gas industry, this view neglects the fact that Iran's LNG industry had made significant ground in recent years and, prior to the 2010 sanctions, looked hopeful. Iran had two projects with investment from large companies, a national project, as well as preliminary agreements for four other projects. But the sanctions in 2010 ended all but one of the projects. And the remaining project has been suspended for the foreseeable future.

Construction of Iran LNG at Tombak Port.

Source: http://interfaxenergy.com/images/post-content/iran-lng.jpg

What did the sanctions mean for Iran's LNG projects?

The sanctions crippled Iran's LNG prospects. Two advanced LNG projects, Pars LNG and Persian LNG, which had planned capacities of 10 million tons per annum (mtpa) and 16.2mtpa respectively, were cancelled due to the sanctions and political pressure put on Iran's international partners. Iran had attracted investment from companies such as Total and Petronas in Pars LNG, and Shell and Repsol in Persian LNG. There were also other LNG projects which Iran had signed preliminary agreements but which did not advance, including Golshan LNG, Lavan LNG, North Pars LNG and Qeshm. There is one other LNG project, Iran LNG, which is 100% owned by Iran's natural gas company (National Iranian Gas company), but it has been suspended for the time being. It was unfortunate that at the moment Iran's LNG projects were about to take off, the sanctions came into play, which thwarted the projects' potential.

The future of LNG in Iran

The possible removal of the sanctions opens up an interesting question: what might it mean for the future of Iran's gas industry? The recent negotiations will mean that a deal will be struck for six months. But given the complex domestic issues already mentioned, the temporary suspension of the sanctions will not mean that Iran's LNG projects will suddenly gain a second-wind and pick-up where they left off before the deadly sanctions in 2010. Things have dramatically changed since then; to say just a couple of reasons: Iran's national gas company has gone bust and will take years to recover, there will probably be a gas shortage over the next few years, and the economy is in pieces.

The future of LNG in Iran will depend on the outcome of the negotiations which will take place in six months' time. If Iran successfully meets the conditions and requirements of the EU, and wrangles a long-term solution that includes the removal of sanctions, then this will give a more promising context for Iran's gas industry. It will boost Iran's economy but, more significantly, it will open up the chance of outside investment and give the country access to the latest LNG technology.

Conclusion: Doubt remains

Even if the sanctions are permanently removed, it is extremely difficult to know whether foreign companies will still want to invest in Iran after the failure of its LNG projects in 2010. The chief concern is that Iran might break its promises and receive sanctions again. This could mean that investors would lose hundreds of millions of dollars. What is clear is that before Iran can attract investment, it must re-gain the trust of the EU and US, as well as the foreign investors. For many companies, there might be 'safer bets' for their investments, and in the next few years, this might even take the form of the new Floating LNG vessels. [8] Ultimately, the future success or failure of LNG in Iran lies in the hands of foreign companies. And for many the risk will probably be too great.


[1] 'Iran agrees to curb nuclear activity at Geneva talks', http://www.bbc.co.uk/news/world-middle-east-25074729 (accessed 9/12/13).

[2] 'Iran Inflation Rate', http://www.tradingeconomics.com/iran/inflation-cpi (accessed 9/12/13).

[3] Cited by Farnaz Fasshihi, 'Iran State Gas Company Faces Collapse, Hit by Sanctions', http://online.wsj.com/news/articles/SB10001424052702303755504579206103448476892 (accessed 9/12/13).

[4] 'Iran Sanctions Oil Embargo vs. Treaty of Versailles', http://www.dailypaul.com/202556/iran-sanctions-oil-embargo-vs-treaty-of-versailles (accessed 9/12/13).

[5] Iran agrees to curb nuclear activity at Geneva talks', http://www.bbc.co.uk/news/world-middle-east-25074729 (accessed 9/12/13).

[6] Farnaz Fasshihi, 'Iran State Gas Company Faces Collapse, Hit by Sanctions', http://online.wsj.com/news/articles/SB10001424052702303755504579206103448476892 (accessed 9/12/13). However, there is some dispute over this: the Iranian deputy oil minister gas denied claims that the NIGC has gone bust: http://www.iraniangas.ir/Site.aspx?ParTree=11131E&LnkIdn=192575 (accessed 9/12/13).

[7] David Ramin Jalilvand, 'Iran's gas exports: can past failures become future success?' Oxford Institute for Energy Studies, esp pp. 13-22. http://www.oxfordenergy.org/wpcms/wp-content/uploads/2013/06/NG-78.pdf (accessed 9/12/13).

[8] See 'LNG: Will it float? A short report on planned Floating LNG (FLNG facilities around the world, 2013-2023', http://www.mjmenergy.com/MZINE/2013/november13art.html (accessed 9/12/13).


December 2013 MZINE