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    Iranian Gas Likely to Stay Close to Home, for now



Because China has a record of being able to foot the bill for major investments, Micha'el Tanchum believes it will push to orient Iranian gas away from Europe.

by: Drew S. Leifheit

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Top Stories, Caspian Focus, Iran, Iraqi Kurdistan

Iranian Gas Likely to Stay Close to Home, for now

A post-sanctions Iran will double its gas production, if it can achieve its targets, according to Atlantic Council nonresident senior fellow Micha'el Tanchum, who has authored a report entitled A Post-Sanctions Iran and the Eurasian Energy Architecture-Challenges and Opportunities for the Euro-Atlantic Community.

But whether Iranian natural gas can/will ever make its way to European markets depends on a number of factors and contingencies, he says. Iranian gas is likely to be used for matters closer to home before being imported, say to Europe. 

For one, Tanchum says there is a “desperate need” for gas re-injection to enhance oil recovery in Iran, where decline rates in the oilfields are high. “That will take up a good proportion of the gas allocation,” he explains.

The second allocation for Iranian gas, he says, will go to petrochemicals. “Iran is the leader in petrochemicals, particularly in Asia. An Indian company is building a third petrochemical hub at the new Chabahar port that India is constructing for Iran,” he reports. “It will be the first Iranian port built to modern shipping standards. Located at Iran’s outlet to the Indian Ocean, it will give a cost reduction to the petrochemicals, for which Iran already has an advantage. This will bring foreign earnings, which are also important for Iran to offset its dependence on the revenues for oil foreign earnings, as well as consuming a lot of the new gas that will be produced.”

Still, Tanchum explains that if one looks at what will be left for export it is not as much as the popular conception. He offers, “Iran will emphasize LNG for flexibility. Where that LNG will go is an interesting question; it's also a question of whether they can acquire the proprietary technology to do it.”

In the country's previous 5-year plan, he explains, Iran's goal for LNG production left numerous cancelled contracts in its wake. “If they recover the volume of production from those contracts, which is their goal, it's the equivalent of 55 billion cubic meters (bcm)/year. Their minimum would be 14+ bcm/y, which is the volume from the most recent client contract that was cancelled. If they hit the higher end, they will have very little available for piped gas exports.”

This means, he says, that Iran has a two out of three choice, not being able to reach the three major markets-the EU via the Trans-Anatolian Pipeline (TANAP), China, and India-simultaneously. “They will not have enough gas,” quips Tanchum.

“TANAP is scheduled to come online in 2019, but if you look at the dates for when the expansions will come online, basically it is at the same time when either the D line of the Central Asia-China system will be finished, or, if China decided to build an extension of the Iran-Pakistan pipeline, they all come online roughly at the same time,” he explains. “So while we might think TANAP has an advantage, it comes online when all of these options will be open.”

Because China has a record of being able to foot the bill for major investments, as evidenced by a $45 billion dollar investment on an infrastructure package to Pakistan, Dr. Tanchum believes the country will push to orient Iranian gas away from Europe. “As part of a package, China has agreed to finance 85% of the Iran-Pakistan pipeline, which they plan on building, so they've already oriented Iranian gas, to a certain extent, to Pakistan.”

Meanwhile, he notes two existing pipelines between Turkmenistan and Iran also complicate the situation. “They are reverse-flow and were used for Turkmenistan to supply Iran in peak demand during the cold winter months in the northern part of the country, where it's very hard to deliver Iranian gas emanating from the Persian Gulf. From Turkmenistan, it's a straight shot.”

This, he says, gives China two options for receiving Iranian gas.

“It's a question of how much Iran will be oriented towards Asia; how much it will be oriented towards Europe. The pipelines also represent political cooperation and commitment in a way that LNG doesn't,” he says. “Whoever can get a piped gas commitment is going to orient Iranian gas.”

If Europe doesn't receive Iranian gas, he contends, Turkmen gas becomes extremely important, as Azerbaijan does not have enough gas for the long term viability of TANAP.

Tanchum explains, “If Azerbaijan exploits its known reserves at the current rate, it will deplete them in 40 years. It's possible Azerbaijan will find more, but the likely places are the areas that are disputed with Iran.”

This sets up the greater likelihood for potential conflict in the region.

“Iran could upset the maritime security environment in the Caspian, and because Azerbaijan has more assets there, Baku will have much more to lose. Azerbaijan can't afford to get into that game.”

This means, he says, Azerbaijan will face price competition in the short-term, while in the long-term it pays for other suppliers to be included in TANAP, especially considering the pipeline's construction to secure the country's political sovereignty. “It would've been economically cheaper for Azerbaijan to sell its gas at the border with Turkey than to build an $11 billion pipeline across Turkey, so it's not simply a commercial issue, it's an issue of political sovereignty, which dictates that they find other suppliers.”

Gas from Iraqi Kurdistan, he adds, could also enter TANAP, but that may be risky. “The Kurdistan Regional Government is subject to Iranian meddling and it may be possible for Iran to destabilize the situation there. The Eastern Mediterranean is a better option if the parties can get together for a pipeline from the Leviathan field to Turkey, because it's less subject to Iranian meddling, but will require progress on the Cyprus issue.”

Still, even if TANAP finds suppliers that are not Caspian-based, if the Caspian countries are all oriented to China, he says: “The boundary of European influence will stop at Azerbaijan, will stop in the Caucasus, and China will dominate economically Central Asia, which is not a good situation for Europe or the Euro-Atlantic community.”

In terms of what Europe needs to do to court this gas in the context of diversifying its suppliers, Tanchum says that even if Iran doesn't send piped gas to Europe, it will send LNG. He offers, “The gas from Iran will be more cost effective than Russian gas, because Iranian fields are cheaper to develop than Russian fields.”

The cost of the Yamal field, he says, is a case in point.

“This is why the so-called Turkish Stream, or its predecessor, South Stream, was a political device and not economically viable, because by 2025 Russia will have to take gas from Yamal, and that has not been factored into the price,” he explains. “Even in the last proposal on the table, we've seen that Russia has decreased from four strings to two strings.”

Meanwhile, Iranian gas, according to him, can come in the form of LNG, especially since the flattening of LNG prices between Asia and Europe. “There isn't a great incentive to ship to Asia. It really just becomes what is most commercially viable, but the idea that Iran would be totally focused to ‘Asia first’ is a chimera.

“If you look at Iranian diplomacy, their idea to revive the Nabucco natural gas pipeline project shows that they have a very strong interest in Europe. Their statements represent, I think, two things: 1) the fact that Iran is negotiating for better transit fees, and 2) even though it's an authoritarian regime, it does not speak with one voice on energy policy.”

Oil Minister Bijan Namdar Zanganeh, explains Mr. Tanchum, speaks forthrightly and mostly sticks to issues of commercial viability, while President Hassan Rouhani and the Iranian Foreign Ministry prioritize geopolitical considerations.

“Zanganeh said publicly, 'we don't need Turkmen gas any more, but we're just going to buy it for political reasons.' And then, very shortly later, Rouhani said Iran would up the amount of gas the country would buy from Turkmenistan, and suggested Iran offering itself to be a transit state, either to Europe or to Asia, for Turkmen gas. We can see the geopolitics there.”

Geopolitics, says Mr. Tanchum, must be kept in mind when considering where Iranian gas will go.

Still, two outstanding questions remain: 1) the issue of project finance, and 2) the question of attracting investment. Of the latter, he says, that depends on the details of the Iranian Petroleum Contract.

“We've looked at what Egypt has done after the Zohr find to attract investment and it stands as a very strong example,” he says, offering that Turkmenistan's reversal of policy could also be setting a good example for Iran.

He adds: “It's a little complicated, because there are entities that don't work on a commercial rationale, but political calculation within the Iranian government, particularly the Revolutionary Guards, who controls segments of the economy."

While the West is betting that the lifting of sanctions and the imposition of commercial rationality will strengthen Iran's reform factions that will follow such rationale, it all depends on what's happening inside the machine, contends Micha'el Tanchum. “It's a gamble, and I think that most of us hope that it pays off.”

-Drew Leifheit