THE IMPACT OF GEOPOLITICS IN WORLD GAS SUSTAINABLE MARKETS: OPPORTUNITIES FOR 'S DEVELOPING GAS INDUSTRIES

Gholamreza Bahmannia 1 , Naser Abgoon 2

1. National Iranian Gas Company - SPGC 2. National Iranian Gas Company

Keywords: 1. Geopolitics; 2. Natural Gas; 3. Developing Market; 4. Iran; 5. Outlook.

1. Introduction: How the world energy map is changing? Structural evolutions of global economics and energy sectors, new and sustainable secure energy supply resources, and energy demand growth in long-term horizons, environmental issues in developing countries and rapid demand growth of petrochemical industries, all cause the natural gas situation as fuel of choice in new century. Asian South-east region countries (Japan, S. Korea and Taiwan) already are the biggest natural gas consumers and analysts predicts growing demand of LNG for this region on next 20 years. In geo-economics terms, the biggest impact will come from increasing demand for oil and natural gas from developing countries, which may outpace the development of new sources of supply, thereby putting pressure on prices. In geopolitical terms, the consequences of such an imbalance will be magnified by the fact that demand is rising most strongly in China, India, and other large emerging economies. By most estimates, global consumption of natural gas - a cleaner-burning alternative to coal and oil - will double by 2030. However, in North America, Europe, China, and South and East Asia, which are the areas of highest-expected demand, the projected consumption of gas is expected to far outstrip indigenous supplies. Delivering gas from the world's major reserves to the future demand centers will require a major expansion of inter-regional, cross-border gas transport infrastructures. Yes, the world energy map is changing. Projected energy demand will come increasingly from developing and emerging economies, as will supply. The global energy future is also distinguished by an increasing concentration of energy suppliers and demand centers, which are geographically farther apart; requiring increased investment, longer transport routes, and raising security and environmental concerns. The emergence of new market players, new alliances, and evolving rules further complicates the global energy picture.

Russia 25.1 %

40%

Middle East

Iran 15.8%

Qatar 14.4 % UAE 3.4 %

S. Arabia 4.1 %

Fig. 1 – Middle East in Global Geopolitics of Natural Gas

Natural gas will turn into one of the world's main energy source in only less than two decades. Due to increasing global energy consumption, it could be expected for countries that are somehow enriched with such scarce resources and capable of having the necessary technology in upstream and downstream industries, to play a significant role in the future economy of the world. Natural gas still maintains the fastest consumption growth rate among the world's primary energy sources and has the highest consumption growth rate among the developing countries. Based upon "International Energy Prospect" scenario, the global natural gas consumption during years 2001-2025 will experience an average growth rate of 2.9-3.2 % per year which is comparable to annual growth rate of 1.8% for oil and 1.5% for coal. Based on supply-demand models, Declining indigenous gas production in some regions will lead to a growing supply-demand gap, In fact industrial countries (especially North America & west Europe) which are also the largest natural gas consumers will loose their key roles in the global natural gas supply on next two decades.

2. Middle East as New Energy Hub!? Middle East countries with considerable increase in gas production and due to their economical, political and geopolitical situations could be the best players in the future demand-supply scenarios. In 2008, based on BP statistics, approximately 40% of the world’s total gas reserves were located in the Middle East. Bahrain, Oman, and Syria have limited gas reserves compared with others in the region and due to increasing domestic demand; they are expected to import significant gas volumes in the future.(Fig.1)

World Gas Reserves (2008) Middle East Gas Reserves (2008)

UAE 8.2% Saudi Arabia UAE Saudi Arabia Iraq 4.1% 3.4% 9.9% 4.3%

Kuwait Qatar Others 2.4% 14.4% 37.2% Qatar Others Iran 34.6% 2.6% 15.8%

Iran 38.0% Russia 25.1%

Fig. 2 – Middle East Gas Reserves in 2008

Several nations in the Middle East are geographically situated to become swing suppliers that could interconnect regional gas markets into a global system of gas trading. The rise of this role has been delayed, partly, by the large fixed costs for the new infrastructure that will be needed to carry their gas to the lucrative European and Asian markets. (In contrast, the existing Russian export infrastructure to Europe is already in place and is able to carry additional gas at a small marginal cost.) As global gas demand rises, these new supplies from the Middle East will become an important hub for flexibility in global markets. In an attempt to dominate this future opportunity, Qatar (and to a lesser degree, Iran) is making massive investments in LNG. Interestingly, Qatar’s rise was contemplated and could have happened even a decade earlier if not for the distraction of political controversies with its neighbors and concern by major LNG users (notably Japan) about the risks of relying on gas tankers that had to traverse the strategically waters of the Persian Gulf. Prolific Turkmen gas may also be slow to come to market due to political and economic barriers in moving that gas across rival Russia.

2000 2007 Total: 360 mmtoe Total: 525 mmtoe Others Others 1% 1%

Oil Oil 53% 57% Gas 42% Gas 46%

2015 2020 Total: 865 mmtoe Total: 1,040 mmtoe Others Others 1% 1%

Oil Oil 48% 47%

Gas Gas 51% 52%

Fig. 3 Growing Natural Gas Role in World Energy Demand through 2000-2020

 Based on FACTS Global Energy forecast, Middle East marketed gas production and gas consumption will grow through 2000 to 2020 in all countries. But Iranian gap between these two important indexes is very low, meaning that an Iran opportunity for being an exporter is less than others. In other term, both production and consumption have grown rapidly over the past 20 years. According to FACTS Global Energy, Iran’s natural gas exports will be minimal due to rising domestic demand even with future expansion and production from the massive new projects. The UAE has become a net gas importer since late 2007 by virtue of its rocketing gas demand for power generation (imports from the Dolphin Project).( Fig.4 & Fig.5)

90

80 Others Iraq Kuwait Oman 70 UAE Qatar Saudi Arabia Iran 60

50

40 bscf/d 30

20

10

0 2000 2002 2004 2006 2008 2010 2012 2015 2020

Fig. 4 – Middle East Marketed Gas Production 2000 to 2020

70 Others Bahrain Kuwait 60 Qatar UAE Saudi Arabia Iran 50

40

bscf/d 30

20

10

0 2000 2002 2004 2006 2008 2010 2012 2015 2020

Fig. 5 – Natural Gas Consumption Trend Forecast for Middle East

According to EIA forecast:

• It is expected that total gas exports from the Middle East region will increase from 6.7 bscf/d in 2007 to 14.0 bscf/d in 2010 and 25.0 bscf/d in 2020.

• Qatar is expected to play the main role in Middle East gas exports from 2009-2020

• Iran is expected to have much smaller export volumes (20-36 mtpa of LNG and small volumes of pipeline gas) but Iran’s LNG exports are unlikely to materialize before 2015.

• Yemen will start LNG exports in 2009.

• Iraq has serious prospects for LNG exports from associated gas. Also potential for pipeline exports (depending on its political stability).

Middle East Gas Exports* (2007-2020)

30 Iraq Yemen Oman

25 Iran UAE Qatar

20

15

bscf/d 10

5

0 2007 2010 2012 2015 2020

Fig. 6 – Middle East Gas Export

3. Iran's natural gas facts and outlooks According to Oil and Gas Journal , Iran’s 2008 estimated proven natural gas reserves stand at 948 trillion cubic feet (Tcf), second only to Russia. Roughly two-thirds of Iranian natural gas reserves are located in non-associated fields, and have not been developed. Major natural gas fields include: South and North Pars, Tabnak, and Kangan-Nar. In 2007, Iran produced and consumed an estimated 3.9 Tcf of natural gas. Natural gas consumption is expected to grow around 7 percent annually for the next decade. Both production and consumption have grown rapidly over the past 20 years, and natural gas is often used for re-injection into mature oilfields in Iran. According to FACTS Global Energy, Iran’s natural gas exports will be minimal due to rising domestic demand even with future expansion and production from the massive South Pars project. In 2007, roughly 70 percent of Iranian natural gas was marketed production, while approximately 30 percent was for enhanced oil recovery gas re-injection, and 285 million cubic feet was lost due to flaring. As with the oil industry, natural gas prices in Iran are heavily subsidized by the government.

4. Iran's gas developing industries and key projects, 2009-2020

4A. Natural Gas Plants:

• Gas treating plant expansion (Maymak) 3 MMCM/DAY will be expanded to 6 MMCM/Day (Completed but not in service now - 2010)

• New gas treating plant (Bid Boland 2) 57 MMCM/DAY (Under construction and will completed next 3 years - 2013)

• South Pars 5 New Phases with 125 MMCM/DAY that will completed through next 7 years.

• Gas treating plant expansion (Sh. Hashemi Nejad) 12 MMCM/DAY

4B. Pipelines :

Developments in the Iranian Gas Trunkline (IGAT) pipeline series, all fed by South Pars development phases, are important to Iran’s natural gas transport. IGAT-6 (operating as of the end of 2008) will have a capacity of 3.5 Bcf/d, but will likely operate at half capacity initially. IGAT-7 (2009) will transport up to 3 Bcf/d of gas along southern Iran, between Assaluyeh and Iranshahr. IGAT-8 (2009) will run nearly 650 miles to Iran’s northern consumption centers, including Tehran. IGAT-9 (2014), is an estimated $8 billion pipeline proposed to run from Assaluyeh to the northwestern city of Bazargan. IGAT-9 is unique in that for the first time, Iran is offering a build-own-operate contract for construction of its pipelines.

4C. LNG Projects:

Iran's plan for development of south pars is production of 28 bcf/day and share of LNG projects in this plan is 7 bcf/day through 3 different projects with total capacity of 36.2 mmton/year and from other gas fields is 30.0 mmton/year that totally is 66.2.

4C.1. Pars LNG 10mmt/a Upstream: - Phase 11 of South Pars development plan with capacity of 2 bcf/d will produce feedstock for Pars LNG

Midstream: - Pars LNG is a plant with capacity of 10 mmt/a - It is a joint investment project between NIOC as 50% and Total-Petronas 50% - The project is in FID level - This project has started in 2001 and unfortunately because of political reasons does not succeed as schedule

4C.2. Iran LNG 10mmt/a Upstream: - Phase 12 of South Pars development plan with capacity of 3 bcf/d will produce feedstock for Iran LNG

Midstream: - Iran LNG is a plant with capacity of 10 mmt/a - It is an entirely investment project by NIOC - All necessary Licenses has been provided - All contractors for different activities has been selected and are active in site - The project is in 12% progress

4C.3. Persian LNG 16.2mmt/a Upstream: - Phase 13&14 of South Pars development plan with capacity of 3 bcf/d will produce feedstock for Persian LNG

Midstream: - Persian LNG is a plant with capacity of 16.2 mmt/a - It is a joint investment project between NIOC as 50% and Shell- 50% - The project is in tendering level - This project has started around 7 years ago and unfortunately because of political reasons does not succeed as schedule

4C.4. North Pars Field LNG Plant : Iran’s plan for development of North Pars is production of 20 mmt/a LNG. • CNOOC from China is Iran’s partner for this development. • It has been agreed to allocate 10 mmt/a of this production for CNOOC and 10 mmt/a for other Iranian customers.

4C.5. LNG Plant: Iran’s plan for development of Golshan Gas Field is production of 10 mmt/a LNG. • SKS from Malaysia is Iran’s partner for this development. • It has been agreed to allocate 5 mmt/a of this production for SKS and 5 mmt/a for other Iranian customers.

5. Iran's Natural Gas Industry SWOT Analysis

5.1. Strengths • Islamic Republic of Iran as a major state in Persian Gulf has the world's second largest natural gas reserves (around 15.3%, after Russia) • Iran is strategically and geopolitically located in Middle East between the Persian Gulf and Caspian Sea, in fact Iran is a bridge between important natural gas resources and major gas markets in Europe. In other hand the country is the best location for access to world market through Persian Gulf by LNG. • Iran is owner of the largest natural gas resources which are cost effective for production. • Low cost expert manpower that has more experience in oil & gas fields. • Despite the fact that domestic natural gas demand is growing rapidly, Iran has the potential to become a significant natural gas supplier (exporter) due to key development projects. • Many new natural gas infrastructures are under construction (Bid Boland II, South Pars new phases, …) • Swap to other countries

5.2. Weakness • Non-competitive, sate-controlled environment governs in Iranian natural gas industries. • Political conditions govern on major Iran's economics management and decision makings. • Non-competitive organizational structure in oil & gas up-stream sectors. • Privatization trend is very slow. • Lack of enough attention to new technologies in natural gas production sectors. • Lack of enough attention to world gas trades. • The largest country's gas source (Sought Pars) is common with Qatar. • Iran's economy relies heavily on oil export revenues - around 80-90 percent of total export earnings and 40-50 percent of the government budget. • Large-scale state subsidies on foodstuffs, gasoline, etc • Inflation is running at around 15 percent per year • Another problem for Iran is lack of job opportunities for the country’s young and rapidly growing population. • Foreign investors appear to be cautious about Iran due to uncertainties regarding its future political & economical directions. • The price of natural gas to consumers is state-controlled at extremely low prices, encouraging rapid consumption growth. • No clear energy policy notably in natural gas trade or re-injection for EOR.

5.3. Opportunities • Fast growing of global gas markets. • Geopolitical location of Iran among far east, Europe, Africa, Russia and central Asia • The major role of Iran in the most important gas sources of world • New markets in eastern Asia (China, India …) and close to Iran. • Existing of new competitive trade and industrialized condition in world. • Leadership in Gas Exporting Countries forum(GECF)

5.4. Threats • Sanction. In March 2004, USA extended sanctions originally imposed in 1995. • Industrialized countries which hold new innovation technologies of gas industries. • International Financial limitations for investment. • Changing international political/economical structure. • Entering new players in investment on natural gas international projects.

6. ISSUES & CHALENGES

Gas Pricing The price of natural gas to consumers is state-controlled at extremely low prices. Due to a very cheap price of natural gas, the increase in population in Iran and priorities of country to supply of gas to industries, power plants and support of domestic house holds consumers; the final gas consumption has increased more than 13% annually.The average of domestic gas price in Iran through 1997-2006 was 0.66 cent per cubic meters. In comparison of world gas price average (9 cent per cubic meters), natural gas price in Iran is only 7% of world average. The reason of low pricing is for supporting of low salary people and developing industries within Iran. Low natural gas prices make expanding infrastructure and developing field for domestic use an unattractive proposition for outside investment, meaning yet again, that the government must underwrite the expense. While this can be done for some period of time, it can be a unsustainable path resulting burgeoning government debts, rapidly growing energy demand, and inability for domestic supply to keep pace.

0.8

0.7

0.6

0.5

0.4

0.3 Cent cubicper meters.

0.2

0.1

0 1997 1998 1999 2000 2001 2002 2003 2004 2005

FIG 7: Gas Price Trend in Iran (1997-2006) Natural gas pricing for import and export gas is according to world gas trade prices.

7. Key Strategic Priorities, Vision and policies

Based on SWOT analysis, Iran's key strategic priorities in natural gas industry would be: • Providing necessary facilities and potentials to meet fast domestic growing markets and access to world gas trade share. • Privatization • Improvement of assets and maximizing their efficiencies. • Focusing on new technologies, R& D activities, innovations • Interactive with international technology and market owners.

Respect to above, strategic challenges of Iran will be: • To find natural gas effective applications to add values and grow country economy. • To attract foreign investments for contribution in major projects. • To access good situation in world gas trade shares. • To transfer activity levels of natural gas industry from national toward regional and international levels at up stream facilities. • To optimum use of Iran's geopolitical location for creating new competitive advantages. • To improvement of natural gas consumption and country energy intensity index. • To revamping of physical assets and processes and re-construction of institutional management systems toward national and international private sectors.

Based on mentioned strategic issues, the new vision of Iran in natural gas industries has published for 2005-2025 period as below:

"Iran will be the 3 rd largest world's gas producer and will supply 8-10 percent of global gas demand."

8. Conclusion:

1. As demand grows, natural gas becomes strategic commodities susceptible to being used for geopolitical leverage. 2. Over two thirds of the remaining proven gas reserves are located in politically sensitive regions (Russia, Middle East, and North Africa). 3. The growing influence of geopolitical factors on global energy trade has profound implications for the world and there is now multiple evidence for this globalization process in the gas industry 4. The world energy map is changing. Projected energy demand will come increasingly from developing and emerging economies, as will supply. The global energy future is also distinguished by an increasing concentration of energy suppliers and demand centers, which are geographically farther apart; requiring increased investment, longer transport routes, and raising security and environmental concerns. 5. Middle East countries with considerable increase in gas production and due to their economical, political and geopolitical situations could be the best players in the future demand-supply scenarios. 6. Iran has many natural gas production plans, Pipelines, LNG Plants, … 7. SWOT analysis shows Iranian developing gas industry's good opportunities to have major supply role for world trade. 8. Weakness and Threats should be considered by government. 9. Key strategies leads Iranian gas industries to 2020 goals and visions if it can overcome to geopolitical implications and many issues in internal energy policy and foreign interactions.

9. Acknowledgment:

This paper developed and published by National Iranian Gas Company support and we would like to dedicate my special thanks to Deputy of Minister NIGC managing director, R&D manager, SPGC managing director to notably supports and incentives. 10. References:

[1]-BP energy statistical report, Natural Gas, 2009 [2]- IEF-IGU First Ministerial Gas Forum, Globalization through LNG and Gas Pricing Mechanism, S. R. KASSAEI ZADEH Advisor to the Oil Minister & Managing Director of NIGEC,2008 [3]-EIA, Country analysis briefs, Iran, Feb. 2009 [4]-Geopolitics of natural gas, A joint study, Energy forum of Baker institute and Rice university, Hoston, 2008 [5]- FACT global energy report, 2009, Gastech Abu Dhabi, Fesharaki [6]- Geopolitics of World Oil and Gas: Perspectives, Challenges and Opportunities, 2008, University of Manchester, UK [7]- National Iranian Gas presentation in Gastech 2009, Abu Dhabi [8]- Energy and Economy Magazin, Iran, 2009, No.5, pp. 14 [9]-Political and economic influences on the future world market for natural gas Peter Hartley and Kenneth B. Medlock III [10]- Market structure in the new gas economy: is cartelization possible?, Amy M. Jaffe, Mark H. Hayes and David G. Victor; Oil and Gas,2008,June, pp 23-27 [11]- Dialogue for Global Energy Security, Secretary General of the IEF (2003-2007) [12]- Developing gas markets in Persian Gulf, Bahmannia, IGU, 23 rd Gas Conference, Amsterdam 2006