Why Two Gas Giants Failed in Iran’s LNG Projects
An Iranian official claims that Shell and Total had proposed the cost of construction of Iran's LNG projects at so high a cost that the Iranian government was forced to supply natural gas feedstock of the LNG plants for less than 8 cents per cubic metre to make the produced LNG economically justifiable for export.
The statement was made by Ali Kheirandish, the ex-director of the Iran LNG project, who was speaking about why Shell and Total failed in implementing Iran’s LNG projects.
“Proposing high costs for construction of LNG projects means that for making the projects profitable, the feedstock price should be very low compared to LNG prices in international markets,” he said in an interview with Fars news agency.
There are several indicators that are important in determining whether a project is economically justifiable, he explained: LNG sale price, operational and transportation costs, as well as initial costs for establishing a complex are the most important indicators.
Costs for Pars LNG and Persian LNG had been announced to be around 11.6 billion dollars and 16.5 billion dollars, respectively, he said.
The two projects were planned to produce 10 million tons and 15 million tons of LNG, respectively.
“They [Shell and Total] wanted to buy gas at 28-30% of LNG price in the first years and then increase it to 40%. If we assume the LNG price to be around 7 dollars, it means that gas should be sold at 2.1 dollars per BTU, or less than 8 cents per cubic metre,” he explained.
He added that for construction of LNG plants with 9 to 10 million tons production capacity annually, some $6 billion to $7 billion investment is reasonable, but Shell and Total's proposed costs were very high.
Iran is not yet producing LNG. Prior to sanctions, Iran had started the Iran LNG project, and had spent a total of $2.5 billion on the project, but since international sanctions blocked the work, it is today only 50% complete. If the construction restarts, the first Iranian LNG will go to market in 2018, Energy International Risk Assessment reported on Sept. 7.
"Additional LNG production does not seem to be the priority for Iran due to high costs, viable cheaper pipeline alternatives, and an urgent need to fill in the technological and infrastructure gap for the national gas industry created by international sanctions. Consequent LNG projects could be executed in the mid-term, at best," the report added.
Iran had aimed to produce 70 million tons of LNG annually by 2009 from the South Pars, North Pars, Ferdosi and Golshan gas fields by launching six LNG production facilities.
After cancelling Iran's LNG project contracts with French Total, Spanish Repsol, Dutch-British Shell and Malaysian Petronas in 2008 due to sanctions, Iran practically lost almost all opportunities in the LNG industry.
Iran had also signed a contract worth $25 billion to develop its gas fields and produce LNG with the Chinese SINOPEC group, Chinese CEPA, Polish state-owned gas company PGNiG and Malaysian Petrofield LNG Co. The value of Iran's contracts with PGNiG and Petrofield were respectively about $2 billion and $14-16 billion. Those contracts were also cancelled due to sanctions.
For now, Iran is to complete the "Iran LNG" project, which stands at 50% completion, to produce 10 million tons of LNG by 2018. It's expected a further $2.5 billion investment is needed to complete this project. Iran and Germany's Linde company is negotiating to resume the development of this project.