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    [NGW Magazine] South Pars output up but exports are limited


Iran’s South Pars gas output needs to rise fast, given the plans across the Straits of Hormuz. But how to use the gas most efficiently is the challenge.

by: Dalga Khatinoglu

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Top Stories, Premium, NGW Magazine Articles, Volume 2, Issue 13

[NGW Magazine] South Pars output up but exports are limited

This article is featured in NGW Magazine Volume 2, Issue 13.

Iran’s South Pars gas output needs to rise fast, given the plans across the Straits of Hormuz. But how to use the gas most efficiently is the challenge.

Iran’s nominal gas production capacity from giant South Pars (SP) rose by 20% to 500mn m³/d during the year ending March 21. Now, the deputy of National Iranian Gas Company (NIGC) says another 20%-growth is expected in South Pars (SP) output as more phases come on stream this year. 

Currently the nominal output capacity of the field stands at 515mn m³/d.

NIGC’s head of dispatching Ali Shakarami told NGW that gas demand in Iran is going to become flat in the coming years and exporting gas is on the agenda, whether via pipeline or LNG. According to him, SP phase 11, with 56mn m³/d sour gas output capacity, is projected totally for LNG feedstock.

Iran has developed SP phases 1-10, 12, 15-21, and phases 13, 14, 22-24 are to start by March 2018. Some of them would become semi-operational and reach full production capacity in 2018. 

Only phase 11 remains undeveloped, but Iran and the French firm Total signed a $4.8bn MoU last year to develop it. 

Iran also has a half-finished LNG plant, developed by German Linde Company at a cost of $2.5bn, but it has been abandoned since sanctions were imposed on Iran’s nuclear programme in late 2000s.

Shakarami said it would cost a further $6-8bn to finish the project, the figure that has been confirmed on a new report, released by Parliament Research Center in mid-June. Iran LNG project includes three investment stages. 

First stage: Gas treating unit, liquefaction unit, 1.13-GW combined cycle power plan, sulphur solidification, storage and loading, utilities and offsite facilities, 

Second stage: LNG and LPG storage tanks, 

Third stage: LNG/LPG Jetties, break water, several berths, west /east deck and seawater lines.

“We will be happy if German companies resume the project, otherwise others are ready to do that,” he said. The final capacity of this plant is 10.5mn mt/yr (14bn m³/yr).

After full start-up of South Pars, its final capacity would reach 720mn m³/d.

He also said that completing Iran Gas Trunk-line 6 (Igat-6) and Igat-7 is also projected by March 2018, the first is aimed to export gas to Iraq and the later to Pakistan (or India through an underwater pipeline project).

Iran has two agreements with Iraq to export 50mn m³/d of gas to Baghdad and Basra. Iran started 7mn m³/d gas delivery to Baghdad late June, initially. Iran should have started exporting 21mn m³/d to Pakistan in 2015, but Iran still has to add about 180 km to Igat-7 to reach the Pakistan border, while work has not even begun on Pakistan’s side yet.

The Iranian official also said that the construction of Igat-9 and Igat-11 was also under study to transport South Pars gas to the northwest and northeast of the country respectively. The capacity of Igat 6, 9 and 11 is 110mn m³/d each while Igat-7 is about 70mn m³/d.

Iran’s gross dry and associated gas production reached 285bn m³ last fiscal year, of which 40bn m³ were re-injected to oil fields or flared. According to an official document, seen by NGW, NIGC’s produced sale gas reached 229bn m³. Its sweet (refined) gas output also reached 204.77bn m³.

The supply/demand balance indicates that the country used about 6.63bn m³ of raw gas as feedstock in the petrochemical sector last year.

About 98% of cities and 70% of villages – in total 21.25mn households – are connected to the gas grid and a further 2mn households should be connected to gas grid. In total the housing sector will need 10bn m³/yr more gas in the coming years. However, Iran has a $2bn package to raise the efficiency of central heating systems in this sector, which would partly reduce gas use.  

On the other hand, Iran could deliver more than the current 61.3bn m³ to power generators in order to save on liquid fuel. Iran also plans to increase power generation capacity by a quarter to 100 GW in 5 years, of which about 70% would be thermal power plants. 

However, thanks in part to deals with foreign turbine manufacturers, the country plans to increase the thermal power plants’ efficiency from the current 33% to about 45-50% in five years, so gas demand growth is not expected in this sector.

In the industrial sector, Iran plans to double petrochemical output to 120mn mt/yr by 2022. As it is, the plants use about 20bn m³/yr of gas as fuel and feedstock, so the plans mean doubling gas demand. In other industrial sector also the gas demand would increase, depends on the success it has in attracting investments.

Iran also plans to end 12bn m³/yr gas flaring by 2022, although this gas is likely to be reinjected and not sold.

Iran plans to increase gross gas output by 125bn m³/yr to 400bn m³/yr in next five years, opening room for 60-80bn m³/yr gas export. Beside Iraq and Turkey – and probably Pakistan – Iran has a 10bn m³/yr gas export contract with Oman. The total amount of gas contracts now stands at about 46bn m³/yr, while export capacity, including the doubtful LNG plant, could reach 60bn m³/yr.

Regarding the demand growth in housing, power and industrial sector, it seems Iran is able to realize export plans, but there are four major challenges:

• Iran’s gas output from South Pars is expected to decrease significantly due to pressure fall in 2023 (NGW Vol 2, Issue 9).

• About 80% of Iran’s active oil fields are in decline and need every greater amounts of gas reinjection to maintain oil production level. They lose 300,000 b/d of their productivity each year. Iran should triple gas re-injection to these fields to at least 90bn m³/yr.

• Iran’s energy intensity index is very high but halving it would cost $200bn. Iran’s agricultural, industrial and housing sectors uses 3.3 times, 2 times and 1.5 times more energy respectively compared with global averages according to Iran Fuel Conservation Organization (IFCO). Over the last two decades, Iran has had plans to cut the energy intensity index, but failed to.

• The efficiency of power plants is very low at around 33%; a lot of gas is flared and unaccounted for gas is 12bn m³/yr, etc. Therefore it is not clear if Iran will be able to achieve its energy demand optimisation plans or not. Given that gas accounts for as much as 70% of Iran’s energy demand mix, halving the energy intensify index would allow a significant boost to its export volume. 

Shakarami said that Iran has dozen of new gas fields that can compensate the gas output fall of South Pars in future. Iran plans to offer 21 gas fields to foreign investors based on newly designed contract model, the Iranian Petroleum Contract. 

The total in-situ gas reserves of these fields is about 6.4 trillion m³, based on IPC’s legal generalities documents, seen by NGW. The output capacity would be 130bn m³/yr.  

However, this target will not be achieved until mid-2025 or even later, depending on when it succeeds in attracting foreign investors, or the US waives its sanctions. By the way, currently Iran develops Kish gas fields, projected to become operational by 2021 and produce 10bn m³/yr.

Europe ‘not a viable market’ 

The research center of the Iranian parliament has released a report in mid-June, evaluating the Iranian gas exports to Europe as “economically unjustified”. Based on the report, exporting gas via pipeline to the regional market is, for the time being, the most justified option.  

The report further says Iran may likely have no gas exports in the mid-term, because of pressure fall in South Pars.

The report says the best and most economical option for produced gas is the domestic market, including re-injection and as feedstock for petrochemical products. 

About 80% of Iran’s operating oilfields are in decline, so that their output is reduced 8-12%/yr.

Regarding LNG exports, the report says the costs in Iran would probably range from $800 to $1,200/mt/yr of capacity. The value includes the costs from exploration, developing the field to refining, liquefying, etc. 

Considering 25 years of operational age for different pipeline and LNG projects, costs have been prorated with a rate of 12% over the life of projects. The discount rate has been set at 15% in field development projects owing to their higher economic risks. 

Moreover, transport costs are put at $0.03-$0.053/m³ proportional to the distance from origin to destination. The total sum of costs for producing refined gas is $0.086/m³ on average.

For longer distances, LNG exports will be probably better than exports via pipeline, the report says. “For a certain distance (4,000 km), the costs will be the same.” 

The report added that based on current oil prices (around $50/barrel), Iran gains between $0 and $0.10/m³ of gas exported. 

In the best case – regional markets and $100/b – the net gas export revenue is around $0.35/m³, while the country gains around $40 (taking $10 production costs for each barrel into account) net profit for exporting a single barrel of oil.

“So, it can be concluded that the high costs of gas transfer (either via pipeline or in the form of LNG) mean that priority should be given to domestic consumption not exports”.

Based on current prices (below $50/b) gas exports for distances of more than 3,000 km will not be economically justified, because the net profit of exporting gas will be at most $0.08/m³ and zero in most cases. 

Dalga Khatinoglu