US doesn't bother with Iran's strategic commodity, Iran struggles anyway

US doesn't bother with Iran's strategic commodity, Iran struggles anyway

Baku, Azerbaijan, Aug. 17

By Azer Ahmadbayli – Trend:

The United States launched an unprecedented campaign to limit the export of Iranian oil to the world markets, in order to deprive Tehran of multi-billion dollar revenues, thereby weakening the country's economy, and trying to encourage the Iranian leadership to make concessions in the nuclear agreement and in Iran's activities in the region, or even to overthrow the existing regime.

But Iran has another strategic commodity, which can, potentially, provide great revenues. Why does the US remain cool about it?

Iran, world's second biggest (as of end of 2017) in gas reserves, accounted for 33.2 trillion cubic meters, has been so far unable to export its strategic commodity to the world’s markets in significant quantities. That’s what we seem to be discovering within quite a long period of time.

In 2017, according to BP’s latest statistical review, Iran could export only about 12 bcm of its natural gas. Almost all of this amount had only one market, which is Turkey. Also, at the moment Iranian gas is exported to Iraq and Armenia in small quantities.

Gas is supplied to Turkey from several countries, but the dominant is Russia, followed by Iran and Azerbaijan. Gas from other countries is a small fraction and only complements the Turkish market.

In 2017, according to the report of the Turkish energy market's regulatory body, Russia exported 28.7 billion cubic meters or almost 52 percent of all gas received by Turkey. Imports from Iran amounted to 9.2 billion cubic meters, which is almost 17 percent, and from Azerbaijan – 6.5 billion (almost 12 percent).

Beginning of the additional 6 bcm Azerbaijani gas supplies to Turkey through the newly inaugurated TANAP pipeline within the Shah Deniz 2 project in June of this year, as well as completion of the first stage of the Turkish stream pipeline by Russia, which will deliver about 15.5 billion cubic meters of Russian gas to the Turkish market by the end of 2019, will make the increase of the Iranian export to the Turkish market almost unreal.

Additionally, Iran's gas is more expensive than that of Russia ($210/thousand cubic meters to Russia's $190).

As to the cost of Azerbaijani gas, in the Turkish market it is set at one point lower than the average price of gas coming to Turkey from any other country. Thus, Iran will remain an important supplier of gas to Turkey's growing energy market, but it will hardly manage to increase its exports.

Where else can the Islamic Republic potentially sell its strategic commodity?

There are several markets – existing and perspective – for Iran to sell its gas.

In June 2017, Iran, for the first time, began exporting gas to Iraq. The gas supplies are planned to be about 2.5 bcm per year at the initial stage and would eventually reach up to 12.8 bcm, according to Iranian officials.

In 2017, Iran exported about 1.5 bcm of its gas to the neighboring country.

In mid-May, Behzad Babazadeh, the National Iranian Gas Company's director for international affairs, said that “the amount currently stays at 8.5-9 mcm/d and will reach 14 mcm/d next month.”

"Gas exports to Baghdad are progressing well and expected to reach the final volume of 30-35 mcm/d," he was quoted as saying by IRNA.

Iran and Iraq have another agreement of 2015, to build a gas pipeline to the southern Iraqi city of Basra. Iranian officials said exports of up to 25 million cubic meters of gas per day to Basra will start as soon as Iraq is ready.

However, latest events in Iraq show that the overall situation is strongly responsive to externalities, and security risks together with political instability can really affect any (intergovernmental) agreements.

If we look to the East, we’ll find enormous and untapped markets of Pakistan and India, where Iran's gas is just itching to be exported.

Pakistan has been a cherished market for Iranian gas since 1990, when Iran-Pakistan (IP) pipeline concept was put on the table for the first time.

Generally speaking, the IP pipeline is one of the most marketable options for Iran to export its gas. Iran completed the 900-km part of the pipeline on its territory in 2014, while Pakistan has not started the construction of its part of the pipeline yet.

As it was contracted in the bilateral agreement, the pipeline would carry 8.7 bcm of gas per year at the initial stage and about 39 bcm at its maximum capacity.

Despite efforts, Iran has tried for years to push the project forward, it remains anchored for a number of reasons not directly depended on Tehran.

Another potential destination is Oman. Based on an agreement signed between Tehran and Muscat in 2013, Iran will export 10.2 bcm of gas per year to Oman within 15 years. A pipeline will have land and sub-sea sections.

Iran plans to convert about one-third of the whole volumes into LNG at Oman’s LNG facilities, with further exports to the world markets. So far, the two countries are limited to the exchange of delegations and establishment of a joint committee to finalize details.

Iran has one more perspective export destination on the table. It intends two options – to construct a 1400-km long deep-water pipeline directly to India or do it passing through Oman. The concept has already been named MEIDP – Middle East to India deep-water pipeline.

The Indian side together with some European companies has carried out technical studies on the project. The pipeline is planned to transport about 12 bcm of gas annually.

The project has two principal assets, which are especially of concern to Iran. One is that the three countries are well disposed towards each other and avoid political issues. The other gives a good opportunity for Iran to enter the one of the world’s most growing gas consumer markets.

However, the project has so far been of slow progress, i.e. it still remains mostly on paper.

At the time, there was an idea to build a pipeline leading from South Pars field towards Europe via Iraq and Syria. However, activities on the project were completely interrupted due to civil war breaking out in Syria.

However, Iranian officials, sincerely or not, believe that the EU gas market is oversupplied and exporting Iranian gas to this market is not profitable in short-term perspective.

There is one more serious problem in Iranian gas affairs. If we trace the development of the Iranian gas production and domestic consumption within the last 10 years we’ll find several stable tendencies.

First, there was no year when production or consumption decreased – both are continuously growing. Second, the more Iran produces the equally more it consumes, at times consumption exceeding production. The difference between two figures has always been small – for instance, in 2017 Iran produced 223.9 bcm of natural gas while the consumption stood at 214.4 bcm (BP’s statistical review 2018).

Iran is so far unable to break that vicious circle and to achieve the result when it will have enough gas to increase its exports.

There is a way to solve the problem – to increase production exponentially, but there comes another kind of challenge for Iran.

In July 2017, Iran signed a $5 billion deal with France’s Total SA and China’s CNPC to develop the South Pars offshore field, the world’s largest natural-gas field. It was expected that by commissioning all 24 phases of South Pars field within coming years, gas production will sharply grow.

Amir Hossein Zamania, Deputy of Oil Minister said then that Iran would increase gas output to 1 bcm/d by the end of the fiscal year (ended March 20, 2018) and based on 6th National Development Plan (2017-2022), the country should export 80 bcm/y of gas, of which 50 bcm/y is projected to be delivered to neighboring countries.

However, the deal with Total has failed due to the latest political events and newly re-launched US sanctions.

Having lost the contract with Total, Iran again loses the pace of ramping up the export volumes from the South Pars field.

Too many countries with large gas reserves are located on relatively limited area. But, for the moment, there are very few stable and payable markets for selling it. This is why many breathed with sigh of relief when Tehran’s deal with Total has failed as they are afraid of losing advantage in the competition with the Islamic Republic.

The conclusion is unfortunate – Iran, sitting on enormous reserves of natural gas, is now unable to produce and export it in sufficient quantities earning billions for the prosperity of its people.

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