Domestic demand threatens Iranian gas exports

30 October 2008
Despite having the world’s second-largest gas reserves, Iran needs to take drastic action to curb spiralling domestic consumption that is hampering its ambitions to become a major global supplier.

When Iran’s top gas officials convened in Tehran in early October to discuss the country’s export plans, they could do little more than put a brave face on their attempts to become a major energy provider to the world.

In addition to the problem of US-led sanctions, Oil Minister Gholamhossein Nozari admitted that new government policies were urgently needed to curb rampant growth in domestic demand for natural gas, which threatens to derail the republic’s international export ambitions.

With heavy subsidies still in place for domestic users, Nozari called for a rebalancing of priorities. “We must make changes in order to fulfil all of these export ambitions,” he told an industry conference in Tehran on 4 October.

Iran, which has the world’s second-largest gas reserves, is aware that subsidies offer far too much help to local industries by keeping the price of petrol, natural gas and electricity artificially low.

The country has to import nearly half of its petrol because of a lack of domestic refining capacity. Petrol sold in Iran, whether from local sources or imported, is purchased at the rate of about $0.11 a litre, far below its true cost, putting a huge strain on government spending.

Supply shortages

Yet politicians and oil bureaucrats are wary of imposing new rules for consumers, who have bitter memories of gas supply shortages amid severe winter weather earlier this year.

Nozari admits Iran has a lot of “bottlenecks” in its gas industry, which must be ironed out. “We have to accept our country has a great market but we simply consume too much,” he says. “The only way to compensate for gas shortages in winter is to change consumption patterns and rectify prices. We have to decide what to target because all of these [gas export] plans cannot proceed with the way things are.”

Despite this unexpected note of realism, Nozari says it is still possible for the country to target a long-term share of the global gas market of 8-10 per cent, despite currently holding less than 1 per cent.

“Given the huge gas reserves in the country, we have sufficient gas to inject into oil fields, for home consumption and for industrial development,” Nozari told the conference.

But analysts and experts on the sidelines of the conference were more pessimistic about the country’s gas export plans.

Tehran-based energy expert Narsi Ghorban says no gas export projects will go ahead unless subsidies are scrapped and changes are made to how gas resources are developed.

“A major policy change is needed to engage the private sector in all aspects of the gas business,” says Ghorban. “Nothing less will do.”

Several of the world’s largest oil companies, including France’s Total and the UK/Dutch Shell Group, froze their involvement in South Pars projects earlier this year because of sanctions pressure from the US, which remains concerned about Tehran’s nuclear ambitions.

The real growth area is expected to be exports via pipelines. Pipeline projects that require Iranian involvement include the Nabucco pipeline, which aims to carry gas from Central Asia to Europe by 2013, and a $4bn natural gas pipeline to the EU that could rival Nabucco.

Deputy Oil minister for Planning Akbar Torkan tells MEED that Iran is also considering switching some existing liquefied natural gas (LNG) contracts to pipeline deals.

“We have had difficulties with some of these LNG projects but we have a lot of options at our disposal for the way we can use gas from the South Pars fields,” he says.

Buyback deals

Torkan also raises the issue of the republic’s much-disliked buyback contracts, which are signed with oil firms looking to invest in Iran. Under the current buyback system, an inter-national oil company (IOC) pays for the cost of a project up front.

It then recoups its costs and a fixed profit from the sale of petroleum products over a five or seven-year period. Effectively, the IOC acts as a contractor and never gains any equity rights over the oil.

Critics argue that there is little incentive for investors to optimise production, as IOCs receive no extra profit for boosting output beyond a certain target.

Torkan says the buyback formula must be revised to attract more foreign investment, although he rules out making a wholesale change to production-sharing contracts.

But changes are being made. Tehran recently confirmed it is to sign its first production-sharing deal within weeks, with Brazil’s Petrobras taking a stake in the development of oil and gas resources in the Caspian Sea.

While Tehran continues to pursue a global customer base, Ghorban says a more realistic option in the interim comes in the form of deals with its regional neighbours.

Talks have already been held with Bahrain, Oman, the UAE and Kuwait - countries where the threat of US sanctions is less likely to stop the deal being done.

“It may be that Tehran’s own neighbours are the best place to kickstart the country’s international plans,” Ghorban tells MEED.

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