Effects of regional tensions on natural gas market

8 July 2016 15:58 (UTC+04:00)

By Omid Shokri Kalehsar 

With its huge oil and gas reserves, Iran is currently planning to play a key role in the world energy market – and since the P5 + 1 nuclear agreement and the lifting sanctions on the Iranian energy sector, the country is now poised to do so more than ever.

Iran will first have to concentrate on recovering its oil, natural gas, LNG and production capabilities, and attract foreign companies to invest in the country’s energy sector. Although investment will be required to enable a pipeline to be built for the purposes of exporting natural gas to the European market, exporting natural gas to close neighbors is the first priority for Iran, and in past years, the country has signed three agreements with Iraq, Oman and Pakistan for exporting natural gas.

The Iran-Oman Gas Pipeline

Iran signed an agreement in March 2014 to export gas to Oman by 2017. According to this agreement, Iran is to export 10 million cubic meters per annum. Both sides are discussing the building of a 260 km underwater pipeline to carry Iranian gas across the Persian Gulf to Oman. Oman’s gas reserves are roughly 900 bcm, while the country’s gas production is about 85 mcm/d.

The Iran-Pakistan Gas Pipeline (IP Pipeline)

Iran and Pakistan began work on the IP Pipeline in March 2013. The 2700 km pipeline transports gas from the Assalouyeh Energy Zone to Pakistan. Some 2000 km of it run through Iran and 700 km through Pakistan. The generated revenue looks to be around $7.5 billion. Iran is planning to export 1.5 mcm per day natural gas to the country.

Iran-Iraq Pipeline

Iran signed an agreement to export Iranian gas to neighboring Iraq. According to this agreement, Iran is to export 40-65 mcm to Baghdad and Basra every day for six years. It is expected that Iranian gas will be ready for export to Iraq by the end of 2017, with both countries having invested around $2.3 billion for the construction of a shared pipeline.

Export of LNG to the EU is another option for Iran, and the country is trying to complete one LNG complex (to boost capacity beyond the current level of 10 million tons). Iran is also interested in exporting natural gas to Oman via a pipeline and use Oman’s LNG facilities to produce LNG (annually 2-3 million tons) to be shipped-out to consumer market. Recent political tension in the region has affected natural gas agreements with its neighbors, with some energy experts believing that political tensions between Iran and Saudi Arabia have an overall negative effects on Iran’s ability to conduct business on natural gas agreements with other Arab nations.

Iran enjoys good political and economic relations with Oman, however, foreign factors have delayed the project of Iranian-Omani natural gas pipeline on the planning phase.

Alireza Kalami, CEO of Iran National Natural Gas Company said last moth that the review of construction plans will be finished by summer-end and then Iran and Oman will mutually select a contractor to build pipeline.

The Iran-Pakistan pipeline has significance for both sides: Iran wants to export more gas to consume market and Pakistan must also import natural gas due to an increase in demand in its domestic market. Iran will construct the required pipeline from the South Pars field to its border with Pakistan. However, due to financial problems on Pakistan’s side, no pipeline has been built on its own territory.

Pakistan is committed to building a pipeline financed by the Chinese from Gwadar to Nawabshah, therefore all that is needed is a fifty kilometer long pipeline –something that can be constructed quickly at a cost of approximately $100 million.

In recent years, a fall in the cost of LNG has encouraged Pakistan to plan on importing more LNG from Qatar, and also from other suppliers rather than Iran. As of 2016, Pakistan has no financial resources in its budget to construct the pipeline with Iran. According to the IP agreement, this project will be completed by end of 2018.

Construction of a pipeline connecting Iranian and Iraqi territory is ready, and Iran is ready to export gas to Iraq. However, according to Alireza Kalami, Iraq must guarantee security around the route of the pipeline as a prerequisite.

Considering ISIS and Iraq's instability, Iran's natural gas export plan may not become a sure thing in the foreseeable future.

Instability in Iraq, political tension with Saudi Arabia, as well as Qatar’s natural gas plans may disrupt Iran’s plans in the short term.

At present, there is an excess in the LNG market, and even if Iran is able to complete one of its LNG facilities in a timely manner, finding a consume market will not be an easy task. Beyond the region too, the US is planning to increase its share in LNG market, while Russia plans to increase its share from 5% to 15% in coming years.

Australia and Mozambique are also likely to join the club of LNG-exporting nations. Still, Iran has the potential be a real game changer in the world energy market, and exporting natural gas to neighbors in short term is the best option it can take.

Iran also has to be more active in foreign diplomacy in order to eliminate problems with its neighbors. Iran has a huge potential in the petrochemical sector, and exporting more petrochemicals may provide an alternative to exporting LNG whilst oversupply lowers the value of the LNG market.

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