(ORDO NEWS) — Iran has the second largest natural gas reserves in the world, and Russia is ready to help it unleash its potential in this area, writes Oil Price. Moscow and Tehran are working on a strategy that will eventually allow them to dominate the gas market.
Last week, Iranian Oil Minister Javad Ouji called Kish Island in the province of Hormozgan a key element of the Russian-Iranian strategy to capture as much of the world’s gas market as quickly as possible. Kish Island is located off the southwestern coast of Iran and offers a convenient transit route past the northern tip of Oman into the Gulf of Oman near Ras Al Khaimah in the UAE. The Arabian Sea extends to the Indian Ocean, from where unimpeded access to the east and west opens.
Kish Island is planned to be used as a processing hub for the production of non-sanctioned and highly profitable petrochemical products, as well as liquefied natural gas (LNG). The first of the two elements of the project promises a solid return on Russian investment in Kish. The project, Oudji said, will cost $25 billion (most of it will come from a recent $40 billion deal between Gazprom and the National Iranian Oil Company, or NIOC) and will allow Russia and Iran to potentially lead the global LNG market.
As highlighted in a recent Memorandum of Understanding between Gazprom and NIOC, Russia and Iran have identified LNG as a “transitional” product in the supply and demand matrix for the coming years. In addition to long-term efforts to firmly involve Qatar in the gas analogue of OPEC, Moscow and Tehran are trying to fully unlock the Iranian potential in the field of LNG. And these opportunities are huge, given that Iran has the second largest gas reserves in the world (33.8 trillion cubic meters), second only to Russia (48 trillion cubic meters). And taking into account the preliminary assessment of the Big and Small Chalus fields at 8.1 trillion cubic meters, the total volume of Iranian gas reserves increases to 41.9 trillion cubic meters. According to a recent statement by NIOC, Kish Island will become a hub not only for local natural gas reserves (about 1.6 trillion cubic meters).
Gazprom will provide direct assistance in seven key areas of gas production in Iran, including investments in the development of gas fields, the completion of the Iran LNG project, the construction of new floating LNG terminals, the development of small LNG projects, gas swaps, the construction of high-pressure export lines and the transfer of gas technologies.
It is pertinent to note that Gazprom was at the forefront of the Iranian LNG program, and that the latest $40 billion Memorandum of Understanding between Gazprom and NIOC is in many ways a continuation of this work, which was analyzed in detail in my last book on global oil markets. The most notable of Gazprom’s early projects was Iran LNG, an LNG facility started by German engineering giant Linde but abandoned after sanctions were tightened in 2012 and 2018. Initially, the $3.3 billion capacity of this flagship LNG export facility near the port of Tombak was estimated at a minimum of 10.5 million tons of LNG per year. At the time of Linde’s departure, the project was 60% complete. It was expected to take less than a year to complete.
It was then that former NIOC Managing Director Ali Kardor and Gazprom CEO Alexei Miller reached agreement in principle that Gazprom would replace Linde, with a focus on building an LNG export plant near Tombak. After announcing Gazprom’s involvement in the Iran LNG project, then-Iranian Oil Minister Bijan Zanganeh explained: “Funds for the development of these projects will be recovered from the gas produced, and due to its experience, Gazprom will consider either pipeline exports or the construction of LNG plants. This memorandum of understanding is an important step for Gazprom’s presence and partnership in the framework of gas projects in Iran.”
However, due to the increased influence of China in Tehran – especially after the landmark 25-year agreement signed in August 2019 – Russia decided to postpone the project for some time. Then Iran revived a number of other frozen LNG projects to advance its long-term goals. In a recent memorandum of understanding between Gazprom and NIOC, it was announced the construction of six small LNG plants with a total capacity of 500,000 tons per year (for comparison, a large plant produces from 2.5 to 7.5 million tons per year). These plants rely heavily on the designs and technologies of the “mini-LNG” complexes that were expected to be financed and developed by South Korean companies before the wave of US sanctions in 2018.
Iran has also taken up plans to build floating terminals, especially in and around continental Europe. At the same time, fundamental deals were concluded with the Italian Eni and the Spanish Cepsa for the supply of Iranian oil and LNG as soon as they are ready. Similar plans for a new firm to build and operate an LNG storage and regasification facility at Alexandroupoli have been discussed with Greek state gas supplier Depa. Another gateway for Iranian gas was the regasification terminal on the island of Revitus near Athens after expansion. It was assumed that both facilities would be connected to two international systems: the Trans-Adriatic Pipeline and the Greece-Bulgaria gas pipeline. The calculation was that these deliveries would complement a number of other LNG deals, over which Iran has negotiated at various times with international oil companies (IOCs), including Total, Petronas, Repsol and Royal Dutch Shell. Previously, a number of IOCs signed agreements in principle with Iran under the Fourth Five-Year National Development Plan (2005-2009), which included the production of 70 million tons of LNG from raw materials from the North and South Pars, Ferdowsi, Kish and Golshan fields.
An earlier deal is also being discussed, under which Iran will be able to use up to 25% of Oman’s production capacity at the Qalhat plant with a capacity of 1.5 million tons of LNG per year. This will be possible through a 200 km onshore pipeline from Rudan to Mount Mobarak in the southern province of Hormozgan, and then a 192 km offshore pipeline along the bottom of the Sea of Oman at a depth of up to 1,340 meters to the Omani port of Sohar. As for Oman, China is already trying to lure it into its sphere of influence with the standard set of Hotel California-style deals (“You can check out anytime, but never check out”). This is generally typical for the One Belt, One Road project, and there is plenty of money allocated for preliminary preparation. This includes seabed exploration and pipeline design, components and compressor stations. To date, the estimated cost of the Iranian and Omani sections of the underwater pipeline is estimated at $1.2 billion. All of these options are being considered in a wide-ranging memorandum of understanding between Gazprom and NIOC. At the same time, an additional bonus is that, if necessary, Russia, as a major LNG exporter, will be able to share technology with Iran.
At the same time, Russia will recoup its investments not only by strengthening its geopolitical influence through effective control over gas reserves around the world, but also physically – from one of the largest sources. Firstly, it will be able to receive payment with Iranian gas supplies, and secondly, it will receive dividends from the non-sanctioned and profitable petrochemical production on the island of Kish. Iran’s share in petrochemical trade in the Middle East is already well over 20%, and the next step in the development of the sector includes 47 projects, which, according to various estimates, will bring Iran’s petrochemical industry up to $50 billion by 2027. The petrochemical sector provides Iran with about 15-16 times more revenue per ton of product than crude oil, and investors, based on the current terms of the contract,
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