The approaching 20 July deadline for an international resolution on Iran’s nuclear programme could provide a key juncture in the Gulf’s energy sector, with several countries hoping the Islamic Republic can help resolve their gas shortages.

Finding sufficient fuel for power generation is one of the critical issues facing the Gulf states, as growing populations and industrial development result in competing demands for gas. Despite being major hydrocarbons exporters, the UAE, Bahrain, Oman, Kuwait, Iraq and even Saudi Arabia are having to or are considering importing gas as domestic consumption exceeds supply.

With the world’s largest proven natural gas reserves, estimated at 33.8 trillion cubic metres in the latest Statistical Review of World Energy by the UK’s BP, Iran has emerged as a possible solution to the problem.

Regional deals

In March, Oman signed a 25-year agreement worth an estimated $60bn to import Iranian gas via pipelines. A few weeks later in May, the Islamic Republic finalised a deal to export gas to the central and southern parts of Iraq to ensure newly constructed power plants are not left sitting idle. Then in June, Kuwait’s oil minister said the country was seeking to import Iranian gas to meet increasing demand for electricity. The deals with Muscat and Baghdad have been years in the making and come at a time when Tehran is on the verge of being welcomed back into the international fold.

Iran has to be very cautious when it comes to taking on board additional gas export allocations

Elham Hassanzadeh, Oxford Institute

The issue is whether the Islamic Republic is capable of developing and exporting its vast natural resources. According to the BP survey, Iran accounted for just 0.5 per cent of global gas production in 2013, with international sanctions continuing to stifle the development of its energy sector. With its own domestic demand also rising rapidly, Tehran’s ability to meet the region’s growing gas requirements will depend on progress with removing these barriers to investment.

Between 2003 and 2012, Iran doubled its gas output from 82.7 billion cubic metres to 165.6 billion cubic metres. However, production growth stalled following the tightening of US sanctions against Tehran in 2012, rising marginally to 166.6 billion cubic metres in 2013.

But while production capacity has jumped significantly, so too has domestic consumption. Gas usage leapt by 91 per cent over the past decade, rising from 85 billion cubic metres in 2003 to 162.2 billion cubic metres in 2013. After the US and Russia, Iran is the third-largest consumer of gas in the world, and local demand shows no sign of abating any time soon.

“Iran has a huge domestic market – it’s not just household, commercial, industrial or power generation,” says Elham Hassanzadeh, from the research department at the UK’s Oxford Institute for Energy Studies. “Iran is a major oil producer as well, and most of its oil fields are ageing and in desperate need of gas reinjection, so there is a huge amount of gas needed for the enhanced recovery of oil.”

Tehran reinjected more than 28 billion cubic metres of gas to help boost oil production in 2011, according to the US Energy Information Administration, which estimates this could reach 113.4 billion cubic metres by 2015.

Ageing infrastructure is also a problem for the Islamic Republic’s power sector, with some plants reportedly having efficiency rates of 13 per cent, compared with 40 per cent and above for plants in developed countries.

Turkmenistan imports

As a result of rising domestic demand and slowing production growth, Iran regularly imports gas from Turkmenistan to meet the peak winter demand. This provides a warning sign that Tehran may struggle to meet the demands of neighbouring countries unless crippling international sanctions are removed and investment can begin to flow again into the Islamic Republic.

“Due to increasing demand in the domestic market, including reinjection, Iran has to be very cautious when it comes to taking on board additional gas export allocations,” says Hassanzadeh. “It needs to strike a balance between domestic and export needs.”

She estimates that completion of projects under way on the South Pars development, excluding significant increases in domestic consumption, will increase Iran’s gas production capacity by 50-80 billion cubic metres, meaning an additional 10-40 billion cubic metres will be available for the export market by 2020.

“Out of this, [Iran] has already committed about 10 billion cubic metres to Iraq and 10 billion cubic metres to Oman,” says Hassanzadeh. “So if it can manage to increase output then, yes, it will be able to meet [these agreements]. But it could not meet the demand for the [other Gulf countries].”

Currently, more than 90 per cent of the Islamic Republic’s gas exports go to Turkey. According to BP, it sent 8.7 billion cubic metres of gas via a pipeline to Turkey in 2013, with the remaining 0.7 billion cubic metres going to former Soviet Union territories.

There are three main obstacles to Iran boosting export levels: lack of investment; access to technology; and contractual issues, according to Mariam al-Shamma, manager, petroleum sector risk at US-based consultancy IHS. The first two are directly related to sanctions.

While Iran has the reserves available to cover additional regional demand, its ability to harness its natural resources will hinge on the outcome of the international discussions on its nuclear activities.

“For the past few years, Tehran has done quite a lot of work [on gas projects] itself,” says Robin Mills, head of consultancy at UAE-based Manaar Energy. “But for these additional export projects, it will require international investment and that, of course, won’t come unless sanctions are removed significantly.”

Iran’s largest gas asset is the South Pars field, which is estimated to contain about 50 per cent of the country’s total natural gas reserves. Development and expansion of the vast offshore field has been hampered by US and EU sanctions, which has starved the project of the necessary investment and technical expertise. Embargoes and the volatile political environment have led to major energy firms such as France’s Total and the UK/ Dutch Shell to abandon the scheme in recent years.

While Tehran insists major works on phases 12 and 15-18 of the South Pars development will be completed before the end of 2015, it is clear that future development of the field would benefit from international funds and expertise. Access to foreign technology is also critical if Tehran is to effectively utilise its reserves.

Phase 12 of the South Pars development is an example of a major gas project severely hampered by sanctions. Vital equipment for a multibillion-dollar refinery was built for the scheme in Germany, but delivery was delayed due to the tightening of EU sanctions in 2012. While many major projects have faced delays as a result of sanctions on technology, some, such as planned liquefied natural gas (LNG) projects, have stalled completely.

“Iran had four major LNG projects defined when President [Mohammad] Khatami was in office from early 1997 to 2005, but they were all either suspended or cancelled,” says Hassanzadeh. “The most advanced one was Iran LNG, which was slightly more than 50 per cent developed. But they had to stop work when it got to a level where they required Western technology and money for further development.”

Price disputes

While the primary barriers to the Islamic Republic’s gas exporting ambitions are on the production side, another problem that has beset its export programme is contractual disputes.

“There has been talk of gas supplies to the rest of the Gulf for some time, but a lot of these talks tend to break down over pricing issues,” says Al-Shamma.

In 2009, UAE-based Crescent Petroleum began legal proceedings against National Iranian Oil Company (NIOC) over a 25-year agreement signed in 2001 for the supply of 600 million cubic feet a day of gas, which was scheduled to begin in 2005. No gas has been delivered to date and the case is still under arbitration. NIOC’s failure to deliver is reportedly due to incomplete facilities and its demand for a higher price than initially agreed on.

In 2012, Iran’s largest export partner, Turkey, filed a complaint with the International Court of Arbitration against the Islamic Republic over the price of gas, a case that is also still ongoing.

“There is a bit of a dispute about price with Iran and Turkey; Tehran is trying to force Turkey to import more gas if they pay a lower price,” says Hassanzadeh.

While the Islamic Republic has the potential to play a major role in meeting the region’s growing energy needs, its ability to export significant quantities of gas will depend on whether it can reach a longstanding agreement over its nuclear programme and convince the US and Europe to lift trade sanctions. Until it is welcomed back into the international fold, Iran will struggle to meet rising domestic demand for gas, let alone solve regional supply problems. Nuclear talks are set to resume on 2 July.