Iran’s Gas Export to the EU: When, How and How Much?

While Iranian officials have prioritized the export of gas on regional markets, hopes for delivering Iranian blue fuel to the European Union in the long term is rising.

Iran and the P5+1 (the US, UK, France, Russia, China + Germany) reached a nuclear deal on July 14th, which paved the way for the elimination of sanctions on Iran by late 2015, including a gas import ban by the EU.

Iran increased gas production by 10 percent to 202 billion cubic meters per annum (bcm/a) last fiscal year, ending on March 20th, while the figure re-increased by 5 percent during the current fiscal year, according to Iran’s Oil Ministry. However, all of the increased output has been absorbed by domestic sectors, while the huge gas shortage in some sectors like electricity generation and re-injection to oil fields continues. Iran says it has planned to increase gas production to about 400 bcm/a by 2019.

Homayoun Falakshahi, Middle East Upstream Analyst at Wood Mackenzie told Natural Gas Europe that "Iran’s gas production is likely to significantly increase in the future, but most of the increase is going to be absorbed by re-injection needs at the country’s most ageing oil fields. Gas production in 2014 (sales gas and gas available to re-injection, excludes flares and losses) was at 19.3 bcfd [or 546 million cubic meters per day (mcm/d) or about 200 bcm/a].  We estimate this could grow to 25 bcfd [or 780 mcm/d or 258.4 bcm/a] by 2020 given new supply from South Pars.”

Iran increased gas deliveries to power plants by 38 percent to 50 bcm/a during last year, while the current power plants need more than 20 bcm/a of gas fuel. On the other hand, most of Iran’s oil fields are in their second half-life and in need of gas re-injection to prevent output decline pace. Iran re-injected 34 bcm/a of gas to these fields last year, while the figure is not enough and should reportedly double.

Iran also wants to attract western companies to gather flaring gases, then convert to LNG and transport to international markets.

Recently, Iranian media outlets reported that Iran is in talks with Spain’s Repsol and a small French company (without mentioning its name) to gather the flaring gas in Foroozan and other fields, liquefy that and transport to EU.

Iran also had contracts with the Anglo-Dutch Royal Dutch Shell, Spain’s Repsol and France’s Total, Germany’s Linde to build LNG plants but they abandoned the projects last decade due to sanctions.

Falakshahi said that "almost all associated gas production is either flared or re-injected into the producing field, a number close to 1.6 bcfd [or 45 mcm/d or 16.5 bcm/a]. The NIOC implemented some projects to gather this gas such as the AMAK project, which aims to offtake sour associated gas from four fields in the Ahvaz area: Ahvaz, Mansuri, Ab-Teymour and Kupal. The project has a capacity to supply 190 mmcfd [or 5.3 mcm/d] to the Razi Petrochemical complex.”

However, it is expected that international markets will face an LNG glut in coming years. Iran is also studying the gas export option through pipeline to the EU.

Natural Gas Europe posed the following question Stephen O'Rourke, Global Gas Analyst at Wood Mackenzie: “Regarding the EU's demand for LNG, is it possible for Iran to export significant amount of LNG to EU without needing to export natural gas through pipeline?” Mr O'Rourke responded that "we anticipate that global gas market will be oversupplied in the medium term as new LNG projects in Australia and the US come on stream. Therefore, the market opportunity for Iranian LNG is a long-term proposition.”

Regarding the pipeline option, Iran may need to construct a $6 billion cross-country pipeline towards Turkey's borders in order to realize its gas export plan to the EU. Recently, Iran announced that constructing a pipeline from South Pars towards the EU through Turkey is expected to cost $16 billion.

On the other hand, Iran is evaluating the option of joining to TANAP and TAP projects, which aims to transit 16 bcm/a of Azerbaijani gas to Turkey and the EU by 2021 in first stage. But, it is not clear how much Iranian gas could be delivered to EU by TANAP and TAP, which their final capacity is 30 bmc/a and 20 bcm/a respectively.

Mr O'Rourke says: "Iran has discussed increasing sales into Turkey but again pipe exports west of Turkey appears a longer-term proposition. Iran will priorities the use of gas in optimizing oil production and meeting domestic demand in the medium-term. Longer-term Iran could dedicate new phases of the South Pars development to the European export market and construct additional pipe capacity to the Turkey-Iran border. However, it will need to compete with new Azeri, Russian and even Kurdistan gas to access export capacity within and out of Turkey."

Energy intensity in Iran is two times more than the global average, according to the International Energy Agency. The country's energy consumption sits at 2 billion barrels of oil equivalent annually, of which about 70 percent is natural gas.

Recently, Iran announced that it is preparing to halve energy intensity by investing $200 billion in 6 years.

Responding to the question: “Is Iran a reliable source for gas import in mid and long terms and how much investment is needed to halve the energy intensity in Iran?” Mr Falakshahi said that "Iran is always going to prioritise its domestic market over exports, whether it would be simply consumption or re-injection into the oil fields. The government is trying to tackle the issue of high consumption by decreasing the level of subsidies. The average domestic gas price has increased by 350% since 2010. In order to reduce the country’s energy intensity, the subsidy reform will need to go through at a quicker pace.”

Mr O'Rourke added "The perception of Iran's gas supply reliability could be enhanced with IOC involvement in developments dedicated to the export market. To attract IOCs Iran will need to offer more investment-friendly fiscal terms."

About 45 percent of Iran’s gas production is consumed via its housing sector. Consumption levels in the winter months sometimes reach winter production levels.

Mohammad Mirzaei, head of the equipment and housing sector at Fuel Conservation Organization told Trend on September 16th that some 600,000 central heating systems (engine rooms) should be optimized by investing $2 billion. About 20 million heaters are active in Iran, consuming 1500 cubic meters each on average annually, that is very high. Currently, engine rooms waste 50 percent of energy they receive.

On the other hand, over 25 percent of Iranian gas output is used in power plants, which have an efficiency rate of approximately 37 percent.

Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service.