Iran’s nuclear deal gives new hope to gas development

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Iran has lost no time in moving to re-build its oil and gas development capability following the historic agreement over the country’s nuclear activities on 24th November. In the days following the agreement, the country’s newly appointed oil minister, Bijan Namdar Zanganeh, told the Financial Times he had held meetings with European companies and indirectly with US companies about their possible return to Iran – assuming that the six-month interim deal can be converted into a permanent agreement.

Iran is one of the world’s largest holders of proved reserves of oil and gas but its hydrocarbons industry suffered a major slowdown during the two terms of the Ahmadinejad regime. This was partly because of wave after wave of sanctions that led to the withdrawal of major international oil and gas companies, along with their capital and technical expertise. However, as significant was the mismanagement of the industry over the period.

Iran has the world’s second-largest proved reserves of conventional natural gas but its exports are minimal, partly because domestic demand is large in a country of more than 70 million, partly because a lot of gas is re-injected to enhance oil production, partly because a lot of gas is flared, but mainly because new production projects have suffered delay after delay.

Iran’s potential to become a gas exporter is huge. It is the only country in the Mena region to have gas reserves to spare. Of the Middle East’s proved reserves of 81 Tcm, Iran holds 33.6 Tcm, 42% of the total, while Qatar holds 25 Tcm, 31% of the total. However, Qatar has imposed a moratorium on further gas development which is not expected to be lifted until the second half of this decade, if then. Saudi Arabia in third place holds 8.2 Tcm, or 10%.

Eagerly awaited breakthrough: The interim agreement by Iran to limit its nuclear activities in return for the partial lifting of sanctions is a breakthrough that has been eagerly awaited, not just by many Iranian people, but also by the world’s big energy companies.

In a parallel with what happened in Libya when sanctions were lifted a decade ago – triggering a scramble by foreign energy companies to exploit the nation’s hydrocarbon resources – there is now the prospect of a new wave of much-needed natural gas (and oil) development in the Middle East and North Africa (Mena) region.

Unlike the situation in Libya – which centred on exploration, much of which turned out to be disappointing, even before it was disrupted by civil war – Iran has vast reserves of proved gas waiting to be developed. It also has huge potential for further exploration that could lead to further expansion of its proved reserves.

Unthinkable handshake: The elections earlier this year that saw Hassan Rouhani replace Mahmoud Ahmadinejad as president had already raised hopes that Iran might see an end to its international isolation. The recent newspaper front pages, showing US Secretary of State John Kerry shaking hands with Iran’s foreign minister Mohammed Javad Zarif (as shown in the photograph above), would have been unthinkable during the Ahmadinejad regime.

A new wave of oil and gas development in Iran would undoubtedly take time – even assuming that this first step leads to further rapprochement. The interim deal is a tentative beginning towards a more comprehensive deal to be negotiated over the coming six months. Iran has agreed to allow IAEA inspectors daily access to its uranium enrichment plants, to halt progress on its enrichment capacity, and to “neutralise” its stockpile of 20%-enriched uranium, among other concessions. In return there will be a partial lifting of sanctions worth several billion dollars to Iran.

Ludicrous claims: That will come as a huge relief to most Iranian citizens, who have suffered economic hardship because of sanctions, despite ludicrous claims by the previous regime that they were having no impact.

There are many questions to be answered before international oil and gas companies will return to Iran. However, those companies with previous involvement in the nation’s oil and gas industry – among them Total, Shell, Eni  and Statoil – will undoubtedly be ramping up their preparations to do so. If and when Iran feels able and willing to invite foreign investors back, and subject to the terms it is prepared to offer investors, there will be strong interest.

Of particular interest will be Iran’s potential to become a major LNG exporter in a region where rampant growth in domestic gas demand for natural gas, against a backdrop of tightness in regional gas supply, has led to several nations becoming gas importers. Kuwait and the United Arab Emirates already import LNG while Oman imports pipeline gas from Qatar. Several other Middle Eastern nations are working on developing an LNG import capability, including Bahrain and Jordan.

Over the past decade numerous LNG projects have been proposed for Iran but none have come to fruition, partly because of the general slowdown of hydrocarbons activity but specifically because LNG technology requires expertise and equipment that Iran lacks.

By Alex Forbes

Photo © Denis Balibouse/Reuters/Corbis