Iran Aims At Unlocking Massive Oil, Gas Reserves In Wake Of Nuclear Deal

November 2014, Vol. 241, No. 11

Carole Nakhle, Energy Economist

The six world powers – China, France, Russia, the United States, the United Kingdom and Germany – are continuing efforts to persuade a reluctant Iran to scale back its nuclear program with hopes the long-time standoff can be settled.

Should the dispute be resolved, it will have significant geopolitical implications and create exciting dynamics in the oil and gas markets. But even under an optimistic scenario, it will take some time before the Iranians are able unlock their massive resource potential and deliver to international markets.

Iran’s current oil and gas production does not reflect the country’s potential. A combination of international sanctions and prohibitive contractual terms has hindered the investment needed to boost the country’s energy production.

Iran holds vast reserves of hydrocarbons. Its resources have not been widely exploited because of the Iranian constitution, which restricts foreign investment in the exploration and production of oil and gas, and economic sanctions imposed by the West.

Iran is the third-largest gas producer after the United States and Russia, but its gas sector remains underdeveloped. Most production is used to meet growing domestic demand. In 2013, gas production increased by less than 1%, to 167 billion cubic meters (Bcm), while domestic consumption reached 162 Bcm. In terms of oil, Iran ranks seventh in the world after Saudi Arabia, Russia, the United States, China, Canada and the United Arab Emirates.

In 2011, Iran was the third-largest exporter of crude oil, after Saudi Arabia and Russia, exporting 2.5 MMbpd. That figure dropped significantly to an average of 1.1 MMbpd in 2013. Iran’s crude oil sales are capped at an average of about 1MMbpd.

While international sanctions, which have targeted Iran’s energy sector since 2010, have accelerated Iran’s declining production and limited its export capacity, prohibitive contractual terms have hindered investment to boost the country’s production.

In an attempt to lure international oil and gas investors, Iran announced it would introduce a new contractual arrangement to be presented in London in April 2014. But that date has been postponed. Many oil companies hesitated about attending until a deal had been reached between their governments and Iran.

Iran could, one day, become a major oil and gas exporter. The potential is there but significant investment is needed to build the infrastructure for pipelines and LNG exports. Iran’s gas exports are limited. They are the equivalent of less than 1% of global natural gas exports, of which 93% goes to Turkey through the Tabriz-Ankara pipeline, the rest to Armenia and Azerbaijan, also via pipelines.

Armenia exports electricity to Iran to compensate for the natural gas volumes it receives, while Azerbaijan repays Iran for the gas sent to its Nakhchivan exclave by exporting similar volumes to north east Iran.

The country’s first LNG plant at South Pars (the field it shares with Qatar), in cooperation with South Korean and Chinese firms, is likely to miss its completion deadline of 2014. Should Iran succeed in boosting its gas production and hit international markets, its three main regions would be Asia, Europe via Turkey and neighboring Arab countries. Iran can also play an important transit role for Central Asian gas; it has been importing gas from Turkmenistan.

Iran agreed to export gas to India and Pakistan in the 1990s, through the Iran–Pakistan-India (IPI) gas pipeline. India suspended its involvement in the project because of “security concerns” in 2008. Gas deliveries from Iran to Pakistan were expected to start this year.

Much has been said about Iran exporting gas to Europe via Turkey, as Europe looks to reduce its dependence on Russian gas. Iran was included in the original plans for Nabucco and the Trans-Adriatic Pipeline – to bring gas from Central Asia and the Middle East to Europe via Turkey – but then dropped because of the political situation.

Iran has held discussions with its Arab Gulf neighbors for several years. Some failed, others are ongoing. Iran has said it is ready to start exporting gas to Iraq.

A continually growing population at home and generous energy subsidies have encouraged wasteful consumption in Iran and caused budgetary problems. About 56% of Iranian oil and 97% of Iranian gas is consumed domestically.

In 2010, the government decreased some of the subsidies on energy prices and is planning further reduction over 2015 and 2016.

It is not surprising to see oil and gas companies, oil and gas producers, and major consumers watching to see how the deal on Iran’s nuclear program unfolds in the coming months.

Author: Carole Nakhle is an energy economist, based in London, UK, specializing in international petroleum fiscal regimes, world oil and gas market developments, and energy policy. She is an associate lecturer in energy economics at the University of Surrey and acts as external expert for the Fiscal Affairs Department at the International Monetary Fund (IMF). She also works as a consultant to major oil companies and academic consultancies.

This article originally appeared in World Review and can be found at www.worldreview.info/expert-info/Dr%20Carole%20Nakhle.

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