The Fuse

Gas Could Trump Oil in Iran’s Post-Sanctions World

by Matt Piotrowski | September 16, 2015

Much of the energy discussion surrounding the lifting of Iranian sanctions has focused on the effects on oil prices, but Iran’s gas potential could shake up global gas markets and provide robust economic benefits for the country. Iran’s gas reserves are the second largest in the world (the largest by some accounts) and will have a large role in rebuilding the economy by feeding growth in a post-sanctions world and bringing in revenue for the country.

Iran’s share in of global gas exports is only 1 percent, largely because of high domestic demand and underinvestment over recent decades from sanctions and war.

“The situation will change hugely. Iran will soon have access to technology and investment,” Sara Vakhshouri, President of SVB Energy International and a senior Fellow at the Atlantic Council Global Energy Center, told The Fuse in an interview.

Iran is more optimistic about its potential in developing and marketing the country’s gas than its oil, particularly in the current low price environment.

Iran is more optimistic about its potential in developing and marketing the country’s gas than its oil, Vakhshouri said, particularly in the current low price environment.

The excitement surrounding the country’s gas prospects is partly due to its vast reserves; but it is also thanks to its strategic geographic location, which provides a huge advantage in a highly competitive market. Iran can feed many different markets via pipeline, such as Arab Gulf states, India, Pakistan, Lebanon and Syria. It can also send gas supply to Turkey, which is becoming a major trading hub between East and West. By contrast, in the oil market, Iran has to sell its volumes in an oversaturated market where competition is fierce among OPEC countries, particularly in the high-growth Asia-Pacific region.

“Iran’s main priority is now to export gas through GCC (Gulf Cooperation Council) countries, and that has a price advantage,” Vakhshouri told The Fuse before she spoke at an Atlantic Council event on Tuesday. “GCC countries all need gas because all of them are oil-producing countries and their energy consumption is very high. They can substitute their liquid fuel in their power generators or industries (petrochemical industry in case of Saudi Arabia) by Iranian gas and free up their crude oil for export.”

Europe is interested in buying Iran’s gas in order to diversify its supply base and lessen its reliance on Russia, but there are many obstacles for this to occur. It makes more sense for Europe to keep buying gas from Russia despite political tensions, as LNG prices would be double what Russia offers. “It will take a long time for Iranian gas to reach European markets,” Brenda Shaffer, an adjunct professor at Georgetown University and a fellow at the Atlantic Council Global Energy Center, said at the event “Post Agreement: The Role of Natural Gas in Iran’s Energy Future.”

So much potential, but so many hurdles

Although Iran has great export potential, there are plenty of challenges for Tehran to fully realize its upstream goals. These uncertainties include: When the sanctions will actually be lifted, the readiness of companies to negotiate with Iran, a legacy of corruption in the energy sector, and low price levels for both crude and gas in the international market.

Iran will introduce its International Petroleum Contract (IPC) at a conference in London in December, and it is unclear whether the terms will be sweet enough for international oil companies (IOCs).

Although Iran has great export potential, there are plenty of challenges for Tehran to fully realize its upstream goals.

Vakhshouri notes that, unlike before sanctions were implemented, IOCs will be involved in the entire production and marketing process and the IPC will work close to the basic model of a production sharing contract.

European majors such as Total, Eni, Shell and Statoil, which all have a strong history of investing in Iran, are expected to be active again, while Japanese, Chinese and Indian companies are also likely to dive in if terms are favorable. U.S. companies such as Chevron and Exxon cannot invest in Iran directly as they are subject to the Iran Sanctions Act, which was passed in 1996 and is not related to the nuclear deal.

Iran

Vakhshouri understands that under the new terms there will be a fee per barrel which increases by the risk of investment and that the IOCs could be involved in the production process for the first time since the 1979 revolution. “There would be mutual control over production,” she said. “This would be the big change, and also the duration of contracts would be longer now. Previously, it was 5-7 years, but now it could go up to 20-25 years.”

IOCs will be involved in the entire production and marketing process and the IPC will work close to the basic model of a production sharing contract.

The country’s projections for the medium term are modest. The Iranian oil minister has said that the country needs roughly $50 billion to reach its upstream production goals by 2018. Tehran is targeting 4.7 million barrels per day, up from the pre-sanctions level of 4.2 mbd, and condensate output of 1 mbd. Natural gas production should rise from 23,000 million cubic feet per day to 35,000 mcf/day.

Vakhshouri says the goals are realistic, but she is taking a more conservative outlook, suggesting the targets will be met by the beginning of next decade.

Low prices make Iran more attractive

Low oil and gas prices are both a blessing and a curse for Iran as it opens its country to foreign investment.

“From one side, low oil prices are benefitting Iran because companies are more interested in low-cost production than going to places with higher costs,” Vakhshouri said, noting that the cost of production in Iran is just $2-$7 per barrel. “But selling oil and gas on the international market, Iran will not see as strong revenues.”

 

ADD A COMMENT