Politics, price challenge in Iran's gas export to Gulf

Politics, price challenge in Iran's gas export to Gulf

By Dalga Khatinoglu

Iran says it is testing the water to evaluate possibility of gas export to Gulf countries, including Oman, Kuwait, United Arab Emirate, Saudi Arabia and Iraq.

Among them, Iran has two contracts with Iraq and one memorandum of understanding with Oman to export 60 million and 30 million cubic meters per day of natural gas respectively.

Iran's South Pars gas field in southern regions of the Gulf shares about one third of Iran's total gas reserves and more than 50 percent of gas production. The distance between South Pars and Gulf's Arab states varies from 180 to 450 km depends on the route.

A pipeline from Iran's Ilam Province in western region towards Baghdad has been almost completed and delivering initially 4 mcm/d of gas is projected until February. This volume is to reach 25 mcm/d in the future. The second route to deliver 35 mcm/d of Iranian gas towards Iraq's Basrah hasn't started yet.

Iraq a side, other Iranian Arab neighbors can receive this country's gas through underwater pipelines. For instance, Tehran sealed a deal with Muscat to export 30 mcm/d of natural gas on March 12, 2013. The cost of construction a 200-km underwater pipeline from Iran's coasts to Oman is estimated be at $ 1 billion. The sides agreed that gas deal should commence in 2016, but the piping process hasn't been started yet.

Iran increased gas output from South Pars by 100 mcm/d in 2014 and it's projected the volume be raised as much as 2014's growth in the current year. Currently Iran produces 350 mcm/d of sour gas, of which 282 mcm/d is sweetened, but Iran is determined to complete all phases of South Pars by 2017 to increase the production level to above one billion cubic meters of enriched gas per day.

All of the Gulf's Arab states, except Qatar, need gas imports.

The Director of Gas Research at the Oxford Institute for Energy Studies, Jonathan Stern told Trend Feb.11 that "how much Iranian gas is interesting or vital for Gulf countries depends on two things: politics and price".

"There have been many past attempts to export Iranian gas to Gulf and other regional countries - all have failed. If the export to Iraq succeeds it will be a first," he said.

Currently Iran is able to deliver a restricted amount of associated gas, refined at Ilam refinery to Baghdad, but for delivering the final targeted volume, Iran should complete two separated routes, a 611 km sixth cross-country pipeline at a cost of $2 billion and piping a project worth $1.5 billon for delivering 35 mcm/d of gas towards Basrah.

Considering gas price, Iran says the value is similar to Iran's gas price formula for Turkey (About $480 per 1000 cm in 2013).

Iran also signed a contract to deliver 14 mcm/d of sour gas to UAE in 2001, but the contract was canceled later during ex-President Mahmoud Ahmadinejad's office due to price disputes and corruption claims on the contract.

Political problems

Iran and its Arab neighbors have serious disputes over a various range of issues, including what Arab nations call "the seizure of UAE's Abu Musa, the Greater and Lesser Tunbs islands", as well as Iran's support to Shia militants from Yemen, Bahrain, Iraq, Lebanon to Syria. Iran also has land disputation, especially over some oil fields with Iraq.

Stern believes that the principal problem is the political relationship between Iran and individual Gulf countries, the other problem is the price that Iran expects to receive for its gas compared with what Gulf countries are willing to pay. "I very much doubt that significant volumes of Iranian gas will be exported to these countries soon," he said.

Risibility of gas export

Iran's enriched gas output reached 666 mcm/d, however domestic demands for gas in winter is even more than the production level.

Iran's sweet gas consumption

10 month (mcm/d)

10 months of last year(mcm/d)

10.5 months

(mcm/d)

10.5 months of last year (mcm/d)

Housing sector

221

215

231

226

Industry sector

90

85

88.5

80.7

Power plants

142

106.3

140.9

103

Total

453

406.3

460.4

409.7

Iran is using above 602 mcm/d of sweetened gas currently, but this level in warm weather is less. In total, Iran's refined gas consumption in first 322 days of current fiscal year, started on March 21, 2014, stood at 460.5 mcm/d, above 46 mcm/d more than the previous year.

Iran's gas production growth is above two times more than consumption growth in 2014, but the gas shortage in the country is still at a high level. For instance, Iran's power plants need more than 200 mcm/d of gas, but Iran was able to deliver only 140 mcm/d of gas to this sector during the last ten months, 40 percent more than the same period in the previous year.

Iran also needs re-injection of at least 290 mcm/d of gas to its oil fields, of which 80 percent are in their second half-life and lose 8 to 13 percent in production level each year.

Iran reportedly re-injects 77 to 90 mcm/d of gas to old oil fields.

Iran hasn't able to commence any new oil field since 2007 and currently produces about 2.79 to 2.8 million barrels of crude oil per day on average. However, there is not any accurate information about the country's production capacity. Iran has had to stop oil production from some oil fields due to sanctions imposed in mid-2012, which caused declining the export volume from 2.2 mb/d in 2011 to around 1.1 in 2014.

Stern believes that it is more profitable for Iran to focus on domestic demand than exports. Iran also has announced that it is keen to export gas to Europe, however Stern says Iranian gas is interesting for the EU but it is impossible to ignore the sanctions and the time it might take to remove them and agree to new import contracts. "For these reasons, it is very difficult to imagine that Europe could receive significant quantities of Iranian gas before 2030," he believes.

Edited by CN

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

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