26 August 2006

Iran: Gas, gas everywhere but not a bit to sell

Caught between the Great Satan of sanctions and the Deep Blue Sea of indecisiveness and bad planning, Iran's enormous gas reserves remain hugely under-utilised.

26 August 2006
The Hindu

Gas, gas everywhere but not a bit to sell

Siddharth Varadarajan

FOR THOSE unlucky enough to have to work there, Assaluyeh, a boomtown coming up alongside the massive offshore South Pars gas field on the Persian Gulf coast, is unlovingly called darwaza-e-jahannum or gateway to hell. In the summer, temperatures can hit 50 degrees Centigrade and the humidity washes around you like a giant sticky wave. But for the Government of Iran, Assaluyeh, headquarters of the Pars Special Economic Energy Zone, is the new El-Dorado where some $15 billion has already been invested and into which many billions more need to be poured so that the enormous potential of the nearby gas field can be exploited fully.

So just how big is South Pars? "What we have here is 8 per cent of total gas reserves in the world," says S.A. Jalil Razavi, head of the PSEEZ. With proven reserves of 27 trillion cubic metres, Iran is second only to Russia in the list of gas-rich states, accounting for 16 per cent of world reserves. And since one-half of that is in South Pars, 100 kilometres offshore, Assaluyeh has emerged as the country's most important and dynamic energy and petrochemical hub with eight phases involving the extraction and cracking of gas and condensates already operational and another 14 at various stages of construction and planning.

And yet, Iran is today only a bit player in the world gas trade. Despite having as much gas as the combined reserves of Saudi Arabia, the United States, Canada, Britain, Algeria, Norway, Netherlands, and Indonesia, its annual production — at 80 billion cubic metres — is barely 8 per cent of the combined output of those countries. Qatar, whose North Gas Field is part of the same gas structure as South Pars, produces (and exports) much more than Iran. In any event, the bulk of what Iran produces is consumed domestically, leaving only some residual gas for export to Turkey. As a result of conscious attempts at substitution, gas today directly accounts for 60 per cent of total Iranian energy consumption, freeing up an additional one million barrels of higher priced crude oil for export as a result. And if one considers that the bulk of Iran's sour gas production is injected into its oilfields to boost crude production, it becomes clear that gas is seen by the Iranians as mainly a medium for increasing crude oil export revenues rather than an exportable commodity in itself.

As the Assaluyeh phases mature, however, the attitude towards gas is likely to change. Not only have rising oil prices lifted the terms on which gas is being sold worldwide — in the long run, the price of oil and gas per unit of standardised calorific value will tend towards equality — but the power balance in the gas market is gradually shifting away from buyers and towards sellers. In the South Pars, three liquefied natural gas (LNG) projects involving two trains each are likely to come on stream by 2010-11 with a total envisaged sea-to-ship capacity of 34 million tonnes per annum. Iran has experienced some difficulty accessing proprietary, commercially proven liquefaction technologies because of U.S. sanctions but its foreign partners — Shell, Repsol, and Total — are confident their use of European-patented processes such as DMR and Liquefin will help circumvent the provisions of the Iran-Libya Sanctions Act. However, much will depend on how skilfully the Iranian leadership manages to negotiate its nuclear file through the threatening minefield of United Nations sanctions.

In the past two years, Iran has signed an MoU for the eventual sale of $100 billion worth of LNG to China over the next two decades, as well as an actual contract for the annual export of 5 million tonnes of LNG to India. Thanks to the sharp and sustained rise in world oil prices, the Iranian Majlis, which scrutinises the work of the Iranian Oil Ministry and nationalised companies, is reluctant to clear the contract since the current price of benchmark crude is more than double the upper ceiling of $31 a barrel referenced in that agreement. Assuming the deal eventually goes through, India will likely be supplied by one of the Greenfield trains currently planned. Less clear is which specific South Pars phase will feed the proposed Iran-Pakistan-India natural gas pipeline; certainly it has not been identified yet. At the same time, Iranian officials seem clear about the strategic importance of the project not just for relations among the three countries but also for allowing Iran to create a new hydrocarbon export outlet with exciting prospects for backward linkages to the Caspian Sea and Central Asia.

Before the three hurdles of U.S. opposition to the pipeline, Indian suspicion of Pakistan, and differences in gas pricing are crossed, the Majlis needs to clearly define Iran's gas export policy. In a recent parliamentary debate, Oil Minister Hadi Nejad-Hosseinian was accused by some MPs of selling Iranian gas instead of conserving it for future use when oil runs out. (Fear of a post-oil world is also what is driving the Iranian civilian nuclear energy programme to a large extent.) Apart from using gas for domestic energy and oilfield injections, MPs argue that Iran should add value to its gas by setting up export-oriented petrochemical industries rather than selling the precious resource untreated. Mr. Nejad-Hosseinian replied that so far no gas had actually been sold and that it was for Parliament to decide what the country's policy should be in this regard.

In theory, Iran's reserves are large enough to meet every conceivable domestic need and still leave enough for it to be a major gas exporter until well into the next century. But Iran is short of capital and technology and finds it difficult to develop its gas fields with the Damocles sword of sanctions hanging over the head of all potential collaborators. As a result, the government in Tehran is not in a hurry to prioritise the sector's development.

"So far, sanctions have not affected us and I hope we will continue to manage," Hoshang Taheir, an engineer with the Pars Oil and Gas Company, told The Hindu in Assaluyeh earlier this month. "In the current phases, 60 to 75 per cent of the material used is Iranian and this is written into the agreement we sign with our foreign partners." At the Mobeen Utility Centre, where gigantic Hitachi pumps suck in 100,000 cubic metres of deep sea water per hour to cool a nearby petrochemical complex, the presence of foreign technology is evident.

Given the differences over gas pricing, one way for India and Iran to move ahead could be to combine mutually acceptable gas sales agreements with joint ventures in which Indian companies undertake to help Iran modernise and develop its oil and gas sector. For both India and Iran, the true value of collaboration lies not so much in the direct mutual gains each will undoubtedly make but in the wider integrative processes energy links between the two will generate for Asia as a whole.

3 comments:

Hiren said...

Informative write up. I feel that underutilized capacity of human beings is the most tragic.

Your Sri Lankan Friend from New York said...

Siddhart

I can not write in more detail for obvious reasons. But the geopolitical ramifications of the current conflict in Sri Lanka needs to be covered more in the Hindu. Please do it. You are best equipped. What Israel did in Lebanon, the Rajapakse administration hopes to replicate in the North East.

My regards to Nandini.

Terror-Free Oil said...

Please sign petition to Shell to stop doing business with terrorist regime of Iran!
http://www.terrorfreeoil.org/projects/petition_shell.php

If you have a website, please feel free to post the petition.