Could World's Second-Largest Gas Reserves be Inching Toward Development?

The appearance by Iranian President Hassan Rouhani at the World Economic Forum has raised this intriguing possibility: that the country that sits astride the world's second-largest pool of natural gas will emerge from diplomatic and economic purgatory to begin tapping this largely neglected resource.

Rouhani was the first Iranian leader to address the annual business summit in the Swiss resort of Davos in a decade. It came three days after the United States and the European Union began a rollback of economic sanctions in exchange for Iran's halt in high-level uranium enrichment and international inspections of its nuclear facilities.

The president's public message was: Iran has no intention of building nuclear weapons, and it wants a comprehensive deal that will permanently lift crippling economic sanctions.

In private meetings with energy managers, his message was: Iran is ready to talk business.

Most sanctions will remain in place under the six-month agreement and would be lifted only if a full agreement were reached to ensure Iran never militarizes its nuclear capacity. But that prospect is enough to set wheels in motion.

First, of course, is oil. If sanctions end, Tehran's immediate objective will be to revive oil exports to levels before the U.N. Security Council authorized sanctions in 2006.

After oil, could gas be next?

"The Islamic Republic of Iran is prepared to engage in constructive cooperation for promoting global energy security, drawing on its vast oil and gas resources," Rouhani told delegates before holding an hourlong meeting with executives of BP PLC, Italy's Eni SpA, Royal Dutch Shell PLC, Saudi Arabia's Aramco and France's Total SA.

Iran's proved gas reserves of 1,187 trillion cubic feet are second only to Russia's 1,688 tcf, according to January 2013 figures published by the U.S. Energy Information Administration.

Most of Iran's reserves are undeveloped, and the country cannot even supply its own needs. According to the EIA, since 2000 Tehran has imported more gas than it exported in all but two years.

Experts believe it could take decades for Iran to develop a high rate of production, build an infrastructure, refashion its domestic market and become a major player in the international gas market. Even uncomplicated projects take 10 to 15 years from conception to export, and there's nothing simple about Iran.

"The sector needs complete reform," said Brenda Shaffer, a visiting professor at Georgetown University who is closely involved in gas projects in the Middle East and Central Asia.

Iran would need to end subsidies and raise domestic prices to reduce home consumption. That may be necessary to lure international investment and technology but could lead to political upheavals. "It's not going to happen overnight," Shaffer said.

The nation rarely agrees to production sharing contracts, an important incentive for international developers. Such agreements allow the companies to count the fields they develop as part of their own reserves, a major component of their stock price.

Nonetheless, interest is budding on the side of both the supplier and the buyer.

On the day Rouhani was pitching Iran as an investment destination in Davos, international reporters were taken on a tour of Asalouyeh, the hub of Iran's largest gas field, South Pars.

"The future of Iran's energy sector passes through the field," Saeed Leilaz, a Tehran-based political and economic analyst, told the journalists. "Iran needs to expand it in terms of the international market and for domestic consumption." He was quoted in an Associated Press report.

Export prospects

Iran is well-situated to export gas, either by pipeline to Europe or by ship to Asia in the form of liquefied natural gas, LNG. Already on the drawing board is a pipeline eastward to Pakistan, which could stretch to India if the two South Asian rivals could overcome their hostilities.

The sheer vastness of Iran's potential has competitors worried. Charles Ellinas, CEO of Cyprus National Hydrocarbons Co., told a conference in December that hopes for export wealth from the gas fields of the eastern Mediterranean already faced challenges from America and Africa.

"And now the U.S.-Iran agreement may be paving the way for Iranian gas supplies to Europe. Given its huge resources, in a few years Iran could be a major player in the region, competing with East Med unless we move fast," he was quoted as saying on the website Natural Gas Europe.

The Cypriots needn't panic, at least not immediately. With the American market well supplied with shale gas, energy companies are not chasing every prospect as they once did. The future of gas markets has rarely been as cloudy, and no one can predict with certainty what the demand, supply and price of gas will be in the long term.

If Iran were to launch a major drive to become a supplier to Europe, it would face severe obstacles. But it also could transform regional geopolitics.

It would need an infrastructure to bring gas from its distant fields on the Persian Gulf to the Turkish border.

From there it would connect to the so-called Southern Corridor, a superhighway of pipelines that envisions bringing gas to Europe via Turkey from Azerbaijan and other Central Asian countries, and possibly from the eastern Mediterranean.

A key link in the corridor was chosen last year when Azerbaijan agreed with investors to build the Trans Adriatic Pipeline from Turkey through Greece, Albania and under the Adriatic Sea to Italy.

If all this became reality, Iranian gas could threaten Russian domination of the European market. "The only country right now that can give Russia a run for its money in its major gas export market, which is Europe, is Iran," Shaffer said in a telephone interview from Washington.

And if the Southern Corridor is expanded to accommodate Iranian gas, it could develop tributaries to Eastern European markets that are now exclusively supplied by Russia. "I believe that once the highway is built, a lot of other vehicles will want to use it," she said.

Russia, which ostensibly is Tehran's only friend among global powers, is likely to do all it can to keep Western investments out of Iran. "If Iranian volumes hit Europe, that would be intolerable" for Moscow, Shaffer said. "Their whole alliance with Iran could unravel."

Arthur Max, E&E correspondent

Republished from EnergyWire with permission. EnergyWire covers the politics and business of unconventional energy. Click here for a free trial

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