Middle East Economic Survey
VOL. LI
No 8
IRAN
Iran’s Future Gas Development And Exports In View Of The January 2008 Gas Crisis
By Narsi Ghorban
Dr Ghorban, an oil and gas consultant for the past 30 years, is the Managing Director of NarKangan International Gas to Liquid Company, Director of Azar Energy Qeshm, Chairman of Qeshm Energy International and Director of International Institute for Caspian Studies. He is a fellow of Institute of Energy, member of the International Institute for Strategic Studies, member of the Royal Institute of International Affairs and a member of the Iran Association for Energy Economics. This article for MEES represents his personal views of the major issues facing the Iranian oil and gas industry.
In January 2008, with an unprecedented cold spell in northern Iran, gas shortage became the hottest political and economic issue. Iran, with the second largest gas reserves in the world, was short of gas even for its domestic sector. The supply to the Northern Provinces was either interrupted or experienced low pressure. Over 40mn people endured temperatures between -4° to -30° centigrade. Turkmenistan, which supplies around 9bn bcm/y, also cut its gas exports because of payment delays and price disputes. This was a blow to the confidence in the government’s handling of energy policies in general and on the capabilities of National Iranian Oil Company (NIOC) and National Iranian Gas Company (NIGC) in particular.
On 12 January, Oil Minister Gholamhossein Nozari said that nearly all gas production of 460mn cmd (record production) was being used by the domestic sector. Most power stations were switched to liquid fuel, and gas to the industrial sector was cut, with substantial losses to the economy. Most of the gas injection programs were halted, and Iran’s gas exports to Turkey (the only current gas export scheme) were interrupted, with heavy penalties to be paid in accordance to the contract. The significance of this gas shortage has contributed to an already intensive debate over Iran’s potential of sustainable gas exports in the future and the government’s logic in signing recent agreements for gas export by pipeline and LNG when there is a major shortage of gas within the country. Does Iran have a long-term plan for its gas development and utilization?
20-Year Outlook
The only long-term policy guideline vis-à-vis the hydrocarbon industry was affirmed two years ago in Iran’s 20-year political, economic and social vision. Approved by the supreme leader and parliament, it envisages that by 2024 Iran will be the world’s third largest gas producer, attaining 8-10% of the world’s gas business. The Expediency Council has also produced a broad policy guideline for Iran’s energy future which has been approved by all decision making bodies. This clearly indicates that the export of petroleum and gas products must replace that of crude oil and natural gas. However, it promotes the utilization of Iran’s geographical advantage for regional trade in oil, gas and products. It is clear that gas trade with Turkmenistan, Turkey, Armenia and the Indian subcontinent falls within this long-term vision, but the sale of LNG does not.
Gas Reserves
The Ministry of Oil in 2007 disclosed that Iran’s volume of natural gas in place (free and associated gas fields) was 47.86 trillion cu ms (tcm) of which 59% (28.3 tcm) was considered recoverable. Since then, at least two large fields have been discovered, which would increase the recoverable reserves to around 30 tcm. Some experts believe that the potential for finding new gas fields in Iran is higher than other countries in the region. Apart from geological evidence, they argue that most of the current gas fields were found when companies were looking for oil, so there are many areas that have a high potential for gas discovery. Current recoverable gas reserves are nearly equal to those of North, Central and South America, plus Africa. But gas production in Africa and America is nearly nine times that of Iran. Iran’s gas output has the potential to rise substantially and the existing reserves are more than adequate for its internal demand (domestic and commercial consumption, injection into the oil fields, electricity generation and gas-based industries) and export. It must be noted that about 15% of recoverable reserves is associated gas and gas caps which are dependent on oil production plans.
Gas Production
The main problem of the recent crisis was the inability of the system to produce gas. South Pars Phases 9 and 10, scheduled to pump gas into the network by winter 2007, were not complete. Plans to produce gas from different phases of South Pars in the coming years are also delayed, due mainly to financial, structural, political and managerial problems. Currently the rate of growth in development of gas resources does not match the rate of increase for internal demand. Potential for gas production in Iran, based on the volume of reserves, is huge. The 20-year plan envisages gas production rising from around 130 bcm in 2007 to around 475 bcm (1,300mn cmd) by 2020. The amount of gas produced will be adequate for all domestic demand, for injection in accordance to the existing plans and for some export. Nearly half of this production is going to be from South Pars gas field in the Persian Gulf. The balance would be from major gas fields onshore and offshore.
Other estimates put gas production at over 550 bcm in 2020, making Iran the second largest gas producer in the world (depending on the US production at that time). Higher gas production requires the right investment atmosphere and appropriate structural changes in industry. Given its reserves, Iran could increase gas production to around 600 bcm/y by 2025 and produce at that level for over 25 years.
Gas Refining And Transmission
Another element of the recent gas crisis was the inability to refine gas and transport it to the north of the country. The interruption of gas imports from Turkmenistan exasperated this problem. There are 15 gas processing and dehydration units in Iran with capacity of around 450mn cfd and more are needed as new fields are developed. Also, different phases of the South Pars gas field (with over 20 phases) have their own gas processing units. Phase 2 of the Parsian gas refinery, scheduled for completion in early 2007, is still not operational. This contributed to the recent gas crisis. That is why, in January 2008, the minister of oil declared that, even if we had additional availability of gas in the south, we were restricted by the refining and transmission network to move it to the north.
Natural gas produced in the southern gas fields, plus associated gas, is moved to northern Iran through four gas transmission lines (IGAT 1-4). Their total capacity is about 360mn cfd (130 bcm/y). There is an additional pipeline that brings gas from the Khangiran gas field in northeast Iran to the cities near the Caspian Sea. Southeast Iran has recently been connected to the grid, and the pipeline from Aghar and Dalan gas fields used for gas injection could also be used to add capacity for the movement of gas to the north. The total capacity of the gas network at present, including local lines and loops, is around 460-480mn cmd.
There is about 500mn cmd (185 bcm/y) of transmission capacity under construction or planning. IGAT 8, 10 and 11 would move gas from the South Pars fields to the north of the country. IGAT 6, 7 and 9 are designated to move gas east, west and north for domestic use, as well as for export to Kuwait, the Indian sub-continent and Europe. IGAT 5 is to carry three phases of South Pars gas for injection programs. These will barely cover the gas needs of the country under the 20-year plan. More pipeline capacity has to be envisaged to transmit high scenario consumption. Furthermore, IGAT 1 and 2 are over 30 years old, so replacement must be considered.
Gas Consumption
The share of gas in Iran’s energy basket is over 60% and the distribution network covers over 630 cities and nearly 53mn people. Over 34% of utilization is in domestic household and commercial sector. Power stations and the industrial sector account for 32% and 26.5%, and the balance of 7.5% constitutes export and gas injection into the oil fields. In January 2008, the domestic gas consumption of Iran was over 15% higher than the similar period last year, most of it in the domestic sector. Gas consumption has increased over 10% yearly in the past decade, and if this trend continues consumption would more than double every seven years, reaching 875 bcm (from 130 bcm in 2007) in 20 years. This is a very unwelcome scenario within the gas industry and much higher than the figures predicted by the long-term plan and NIGC for the coming 20 years.
Future Prospects And Challenges
NIGC estimates that total gas consumption will rise from around 130 bcm in 2007 to 430 bcm by 2024, based on an annual rate of growth of 8-12% in the coming five years and 4-8% in the following years. Such forecasts have not been accurate in the past. For example, eight years ago, NIGC forecasted a 7.8% average rate of growth in consumption from 2000 to 2010, while the growth has been in double digits so far. If the predictions are more accurate this time, domestic, commercial and industrial gas consumption is expected to rise from around 78 bcm in 2007 to 175 bcm in 2024, an average yearly increase of 6%, which is much lower than the current rate of increase. NIGC assumes that as all big cities are now converted to gas, the price of gas has increased for heavy users, and people are learning to utilize gas more efficiently. So the rate of increase of gas consumption would be reduced from current 12% to around 4% in the coming 15 years.
The real problem is that domestic and commercial consumption increases by nearly seven times in cold winter spells (as in January 2008) compared to summer. This creates a major problem as gas to power stations and industry has to be cut to cope with the shortage. NIGC gas agreements with power plants and industry have a clause that requires the gas purchaser to have alternative fuel for three weeks’ consumption in case gas supplies are cut. While the industries that use gas as fuel can comply with this clause and store alternative fuel, those using gas as feedstock can not have an alternative feed during winter time and have to close.
The gas demand at power stations in Iran is expected to rise from 37 bcm in 2007 to 124 bcm in 2024, an average yearly growth of 7.4%. It is a well established and expensive policy to shift power stations from gas to liquid fuel in winter to allow for the surge in gas demand for household sector. An additional demand in the coming years is compressed natural gas (CNG) needed in the transport sector – estimated to increase from 1 bcm in 2007 to 26 bcm by 2024. During the cold spell of January 2008, drivers using CNG could not get access to gas for their cars.
The volume of gas injected in oil fields last year was about 30 bcm, but NIOC plans to inject over 1,500 bcm between now and 2024. Gas injection will reach a peak of around 100 bcm/y within 10 years. Over two-third of this would be recovered with oil production in the next 20 years, which could be used for further injection or consumption. In January 2008, part of the gas injection program, considered vital to the continuance of oil production, stopped because of demand for gas in northern Iran. Every winter some gas allocated for injection is diverted to consumers, further delaying the enhanced oil recovery program.
The flaring of associated gas has been going on for nearly 100 years but, according to the latest NIOC figures, has been reduced from over 11 bcm/y to around 8.4 bcm/y in 2007 – still much higher than Iran’s exports to Turkey or its import from Turkmenistan. The amount of gas flared is nearly twice the gas consumption of Norway and one fifth of that in India. The fact that so much gas is still being flared is incomprehensible.
2024 Vision Attainable?
Any long-term vision for Iran’s gas industry is linked to domestic, regional and international developments – economic, social and political – and needs to be adjusted from time to time. Petrol rationing, intended to slow down Iran’s dependence on imported gasoline, was a shock to the economy and brought about major policy changes in the refining sector. The same problem exists in the gas oil market and it should be rationed shortly. The natural gas shortage of January 2008, which closed the industry but could not even satisfy the domestic sector, was a wake-up call for the gas sector. It will have a serious and long-term impact on gas export plans, particularly on the future of LNG exports. NIGC predicts a negative balance of gas, particularly in winter time, throughout the 20-year plan. No major export scheme can be designed in such a way to operate for only 9-10 months of the year.
To avoid this problem, NIOC has allocated certain gas fields for export (such as South Pars Phases 11, 12, and 13, Golshan and Ferdos). These will not be connected to Iran’s domestic transmission network to ensure that NIGC can not divert gas from them to the domestic sector in winter. But under the present circumstances it is inconceivable that major LNG exports can proceed if a shortage of gas (similar to January 2008) happens again. The political and social pressure on the oil minister, NIOC and NIGC would be unbearable if the northern part of the country was without gas, while major gas exports were under way from the south.
Parliament is about to vote on a bill forbidding NIOC gas export agreements without its consent, affecting all gas deals (not yet finalized) by the National Iranian Gas Export Company (NIGEC). Even without such parliamentary restrictions, plans for 75mn tons/year of LNG exports are in doubt and it is difficult to predict the realization of one third of this figure by 2024 unless there is a drastic change in business conditions and a major surge in gas production. It is time that those who promote LNG export within the oil industry realized that while Iran is in competition with Qatar to develop its share of the joint South Pars/North field we are not competing in LNG production. Iran has other options for gas utilization such as injection into oil fields and getting value added from gas through gas based industries.
The economics of gas production from Iranian gas fields are sound because of big gas reservoirs on land and in the Persian Gulf, and the potential of producing large amounts of condensate from them. South Pars, from where half of the future gas is to be produced, is very rich in condensates. The current development costs of each phase of South Pars, producing 10 bcm/y of gas and 14mn barrels/year of condensate have risen to $2bn. Assuming $85/B for condensate and only $1/mn BTU (3.5 cents/cu ms) for gas, revenue would be over $1.5bn per year and the project could pay for its development and finance costs within three years. Failure to produce more gas is blamed on US sanctions. But equally important are structural and management problems within the state oil and gas companies, as well as unattractive contracts to would-be investors.
If the present trends continue there will be little chance of attaining the goals of the 20-year plan within the gas industry. Iran would become the third largest world gas producer by 2012 but would consume most of this gas in its domestic sector in winter time. Under this scenario, there will be more gas crises. Gas supplies to gas-based industries can not be guaranteed during the winter time. Further investment into petrochemicals and gas-based industries would be in doubt unless their profitability was guaranteed by low gas prices during the time that they were fully operational. In the past, this issue did not create a problem as all the power stations and gas-based industries were owned by the government. But the growing private sector finds it hard to have feedstock cut by NIGC at short notice or to operate profitably based on only nine months’ supply each year.
The scenario to help meet the vision of the 20-year plan in the gas industry and give Iran its due place in the world gas industry has to incorporate the following steps:
1. Remove all gas subsidies in Iran. This does not mean the increase of gas prices to what US, European or Japanese customers pay in their respective markets. The average price of gas for different sectors of the economy must be set to ensure that costs associated with developing gas resources, refining, and transmission, plus a healthy profit (above 20% IRR) for the state companies, are secured. This will translate to around 4-6 cents/cu ms (without considering the profits associated with the sale of condensates), compared to the current 1-2 cents collected from various clients. This will increase current prices for high consumers of the domestic sector by a factor of three and that of the industry by a factor of two. Adjusted for inflation such prices would encourage saving in the domestic sector and industry without undue hardship for the ordinary consumers or discouraging the flow of capital to petrochemical and gas-based industries. The government will further tax the companies on their profits in accordance to the law. The price adjustment would slow down the yearly average growth in gas consumption considerably.
2. Develop gas storage facilities to ensure uninterrupted supply in winter and avoid cutting gas allocated for injection into oil fields or to industry. The current plan for gas storage (17-32mn cmd for three months) must be doubled to help bridge the gap between winter and summer gas consumption.
3. Gas imports from Turkmenistan must be resumed and increased, even if it means paying higher prices.
4. Restructure the hydrocarbon industry to give one state company all responsibility for oil and another for gas. The present state of affairs where NIGEC signs various gas export agreements without due consideration to domestic needs must be changed. NIGEC could become a department within NIGC.
5. Privatization of downstream activities, approved and in the process of implementation, must be examined to avoid interruption in the day-to-day activities of the gas industry. Instead of selling existing gas refineries and pipelines to the private sector, it is better to stop state companies engaging in major new downstream projects. The construction of new gas refining units, pipelines and even LNG plants should be passed on to the private sector in accordance with the privatization law. The state companies must concentrate on running the present facilities and developing gas resources and infrastructural activities.
6. Innovative financing to ensure inflow of capital to the gas sector from internal and external sources. Iranians must be given the chance to invest in their oil and gas resources through financial mechanisms to be legislated. At present, Iranians take money abroad to invest in projects in hard currencies. With an opportunity to convert rials into hard currency at home and invest it with good returns, there would be millions of euros invested in oil and gas projects. Outside Iran, NIOC can enter regional markets and those of other Islamic countries and issue a eurobond for development of gas production from South Pars with sovereign guarantees and an attractive return (around 10%) to absorb investment for the development of the said projects.
7. Last but not least, Iran’s gas industry needs a highly professional team to handle complex technical and financial issues. It must be selected without consideration to the usual political pressure groups associated with the oil and gas industry, and be capable of managing the assets of the state gas company, transferring these to the private sector in accordance with the privatization law in a manner that does not jeopardize the routine operation of the industry. Furthermore, the management of the state gas company should coordinate and facilitate the developing role of the private sector in the downstream gas business.
If the above conditions are met, Iran would be the second largest producer of gas and gas-based products in the coming 15 years, capable of meeting the gas demand from domestic sector without interruption, fulfilling its objectives under the 20-year plan to be involved in 8-10% of world gas business and building up its important role in regional and gas international trade.