Iran's Gas Plans: Hopes Meet Reality

Tehran and its potential customers have shown interest in gas deals at home and abroad once the sanctions on Iran have been lifted. But some buyers will be disappointed.

Production of dry gas and associated gas will eventually reach 1.11bn m³/d on the basis of what is already planned, while demand at home and abroad totals 1.13bn m³ in the shorter term.

Iran has contracts with Iraq, Oman and Pakistan to export 50mn m/d, 28mn m³/d and 22mn m³/d in the coming years. It already exports 28mn m³/d to Turkey; while on the credit side are 20mn m³/d from Turkmenistan.

Iran also wants to export gas to Europe using floating LNG plants, and liquefying gas for export either at home or using spare capacity in Oman. But none of these projects are expected to be realized by 2018.

On top of that, it needs more gas than ever for use at home: to enhance oil recovery; to grow its large foreign currency-earning petrochemicals sector; to replace other fuels in the power and industrial sectors; and to heat more homes.

The country's total gas production in the year to March 2015 stood at about 553mn m³/d, of which 93mn m³/d were re-injected to oil fields and 37mn m³/d delivered to petrochemical plants.

During the nine months of this year Iran has boosted production by 18mn m³/d thanks to new production capacity in the previous fiscal year, while phases 15 and 16 of South Pars became fully operational in December, adding about 30mn m³/d. Iran's gas production level will average 572mn m³/d this fiscal year.

Iran had aimed to add 100mn m³/d to this year’s output, but it only spent $1.7bn on those plans, a fifth of what they called for, and so it achieved only 30% of its target.

Dry gas output

The country’s dry gas output comes mostly from the giant South Pars field, whose development depends on foreign investors bringing billions of dollars. Some, such as Italy’s Eni, France’s Total, Malaysia’s Petronas and Russia’s Gazprom, have already worked there to some extent, some of them in defiance of the US Iran-Libya Sanctions Act of 1996. Iran has invested $64bn in South Pars, while further $20bn investment is needed.

South Pars: present and planned output

Source: ministry, *NGE estimates

It is not clear when phases 19, 20 and 21 will start production and at what initial capacity, but Iran produces 23mn m³/d of gas from phases 17 and 18, while the final production capacity of these two phases is 50mn m³/d.

So if Iran brings all five phases to full production capacity, and assuming 75mn m³/d of commercial gas output for trains 19-21, output would rise by about 100mn m³/d, exceeding 680mn m³/d by March 2017.

Iran says South Pars would only become fully operational at the cost of another $20bn by late 2018. Output could reach 700mn m³/d.

However that is unlikely as phase 11 has not been developed yet, while phases 13, 14, 22, 23 and 24 are lagging far behind the development plan. South Pars may become full operational in 2020-2022, at the current rate.

Associated gas

On the other hand, no significant new volumes of associated gas amount are expected to be added to Iran's gas output by 2018, because Iran might by that point be operating only three new oil fields with 180-200,000 b/d output capacity.

However, Iran introduced a new contract in November which offers 21 gas and 29 oil fields to foreign entities. The oil fields are estimated to add 200mn m³/d of associated gas while production from the gas fields is estimated at 380mn m³/d.

Some of the projects can become operational by 2020, but the majority of them might be inaugurated by mid-2025 or later. It is not expected that foreign companies will start to invest in the projects before the end of 2017. 

Export plans

Iran exports 28mn m³/d of gas to Turkey and imports about 20mn m³/d from Turkmenistan.

The country needs to spend $2.3bn completing a sixth cross-country pipeline to export 25mn m³/d to Baghdad and the same amount to Basra.

On the other hand, Iran has agreed to export 28mn m³/d of gas to Oman, which entails building a $1.5bn subsea pipeline.

Iran also has a project to deliver natural gas to Pakistan. That will cost Iran $2bn, while Pakistan has not started work on the so-called Peace pipeline that will  take the 22mn m³/d of gas.

It seems none of the projects will be operating at full by 2018.

The managing director of National Iranian Gas Export Co Alireza Kameli told Wall Street Journal January 26 that Iran was in talks with Golar LNG to build floating LNG facilities – offshore vessels on which the gas would be liquefied – so Iran could supply the EU in under two years from the date of an agreement.

He also said that the country plans to complete the Linde-designed Iran LNG plant with 10.4mn mt/yr production capacity. This plant also needs money: $2.5 bn will finish off the half-built plant by late 2018. However, by 2020 all the gas export projects are theoretically realizable.

Iran's domestic consumption (fiscal year)

* Iran's industrial sector operates at half capacity due to sanctions, while Iran's GDP growth is expected to stand at 4-5% in coming years.

Last FY, Iran’s daily gas demand stood at more than 520mn  m³/d, while oil production needs a further 200mn m³/d to keep reservoir pressure up.

Iran re-injected 93mn m³/d of gas into old oil fields, accounting for over four-fifths of the overall output. It delivered a further 135mn m³/d to power plants, but substituting gas for more valuable diesel and so on will bring this up to 190mn m³/d.

Iran has also planned to increase power generation at 5%/yr, while more than three million new households should be supplied with gas – a 13% increase – by 2018. At present, 19 million households overall use more than 250mn m³/d. The country also should gasify 19,000 more industrial units, a rise of a fifth, during this period.

Iran also plans to double petrochemical production level to 120mn mt/yr by 2020 an triple to120mn mt/yr by 2025 . For now, this sector consumes 37mn m³/d. Gas accounts for two thirds of Iran’s total primary energy consumption. It seems Iran would face at least 350mn m³/d domestic gas consumption demand growth, to fulfill all the foregoing domestic projects.

Investment needs

Iran expects to absorb $185bn investment from the new upstream contracts, while $53bn are needed to develop power plants and water projects; $40bn are needed to double the cross-country pipelines, equipment, and so on and $70bn are needed to triple petrochemical production capacity by 2025.

On the other hand, Iran needs a $200bn investment in total to halve its energy intensity by 2021.

Iranian officials have warned that without halving energy intensity, the oil-rich country may become net energy importer in mid-term.

In total, the country's needed investment is more than $500bn in the energy sector over the next 10 years.

 However, according to the United Nations Conference on Trade and Development (UNCTAD), Iran's annual inward foreign direct investment (FDI) was $2.408bn on average during 2005-2007, while this figure for 2011-2014 was $3.523bn. Iran’s total FDI inward from 1995 to 2011 was a little more than $33bn, according to the UNCTAD.

Conclusion

It seems Iran could become a major gas exporter by mid-2025 to 2030 and exporting 100mn m³/d to Europe and the same amount to neighbors is feasible. However, more attractive terms should be offered to foreigners and the concerns over the country's nuclear program should be eliminated entirely.

For now, releasing the tens of billions of dollars tied up in overseas assets could help Tehran fund projects in relatively short order, but in the mid and long term, Iran has no choice but to attract hundreds of billions from foreign investors if it is to become a serious gas exporter.

Dalga Khatinoglu is a Natural Gas Europe expert on Iran's energy sector and head of Trend Agency's Iran news service