Iran’s LNG Dreams Vanish as U.S. Shale Gas LoomsAnthony DiPaola and Robert Tuttle
Iran’s ambition to exploit the world’s biggest natural gas reserves, stymied for years by U.S. sanctions, faces an even sterner test as rising global output and the North American shale boom threaten to erode prices.
The Persian Gulf state would need a decade to build planned export capacity of at least 40 million metric tons a year of liquefied natural gas even if unfettered by economic curbs over its nuclear program, say analysts including Tony Regan at Tri-Zen International Pte. A surge in U.S., Canadian and Australian gas from shale deposits may depress prices for new LNG projects by 35 percent, according to Barclays Plc and Royal Bank of Canada, reducing Iran’s potential profit from selling the fuel.
The U.S. and European Union already restrict Iran’s largest revenue source, crude exports, and the financial industry that enables payments for them. The constraints have cut Iranian crude sales by half since 2011, the International Energy Agency said, and are stifling projects to export some of Iran’s 1,187 trillion cubic feet of gas reserves, about 18 percent of the global total, as LNG. Iran’s President-elect Hassan Rohani said June 17 that he’ll seek a gradual removal of sanctions.
“Iran has missed the boat,” said Regan, an energy consultant at Singapore-based Tri-Zen, which has worked with BP Plc and OAO Lukoil, according to its website. “They should have slotted in nicely between Qatar’s projects and the new Australian ones and before anyone was talking about U.S. exports.” Sanctions have driven away partners with the know-how Iran needs to develop LNG, he said by telephone July 8. “In addition to a lack of technology, they lack the funds.”
U.S. sanctions targeting energy investment in Iran since 1996 have narrowed the Gulf nation’s options for converting its gas resources into cash. Partners such as Royal Dutch Shell Plc, Repsol SA and Total SA abandoned plans for LNG ventures there, depriving Iran of the buyers as well as the money and expertise needed to make and sell the fuel. Iran denies allegations it may be developing nuclear weapons, saying its atomic program is for civilian use.
“Energy should not be politicized,” Iran’s Oil Minister Rostam Qasemi said today in a speech in Frankfurt. “Energy in Iran should benefit all countries.”
Should Rohani succeed in loosening the restrictions and Iran does develop an LNG industry, it would enter a crowded market for the gas chilled to a liquid for shipment by specialized tankers. LNG plants under construction worldwide will boost total export capacity by 32 percent by 2018, data compiled by Bloomberg Industries show.
The U.S. and Canada together may add as much as 77 million tons of capacity by 2020, an amount equal to the entire output of Qatar, the world’s biggest producer, according to Barclays and RBC.
“Australia is set to eclipse Qatar as the world’s leading supplier of LNG,” RBC analysts led by Greg Pardy said in a May 22 report.
The wave of new projects will probably drive down prices, enabling North American producers to supply Asia for as little as $11 per million British thermal units by 2015, compared with long-term contracts linked to crude that are now at about $17 per million Btu, Shiyang Wang, a New York-based energy analyst at Barclays, said by phone June 11.
Spot prices for LNG in Asia, the largest market for liquefied gas, were at $15.60 per million Btu as of July 8, according to data from the Energy Intelligence Group. They averaged $16.12 in the last six months.
Gas at the Henry Hub in Louisiana, the benchmark for U.S. prices, fell 0.3 cent today to $3.6903 per million Btu, according to IntercontinentalExchange Inc.
While shale gas from the U.S. may affect the future supply and price of the fuel, the impact “should not be exaggerated,” Qasemi, Iran’s oil minister, said today. In addition, other countries may not be able to employ the technologies needed to extract gas from shale, he said.
Iran and the other 12 members of the Gas Exporting Countries Forum said in a June 28 statement that U.S. exports of LNG would struggle to compete in Europe and Asia. The group, which supplied almost two-thirds of the world’s LNG last year, cited the high costs of building liquefaction plants and transporting the fuel.
Falling prices could prevent Iran from matching the success of neighboring Qatar, with which it shares the biggest undersea gas field. Qatar’s expansion over two decades into the largest LNG exporter has made it the world’s richest state, while Iran, with 34 percent more gas than Qatar, is a net importer of the fuel, according to data from BP. Qatar’s per capita income was $102,769 last year, almost eight times Iran’s average of $13,104, according to the International Monetary Fund.
“There are some obstacles because of sanctions,” said Abbas Araghchi, the foreign ministry spokesman, referring to Iran’s gas strategy at a June 25 news conference in Tehran. “We can’t deny them, but the Oil Ministry has tried to overcome these issues.”
Of the four LNG projects Iran originally envisioned, it’s pushing ahead with one, a 10.5 million-ton-a-year facility known as Iran LNG, at Tombak near the Gulf port of Assaluyeh. The government is working alone on the $3.3 billion project after suspending a contract with its Chinese partner, Mehr news agency reported in September.
The size of Iran’s gas reserves and rising global energy demand suggest the Islamic republic may yet have a role to play as a future supplier.
“If Iran gets itself sorted out with Western powers and gets itself back into alignment with the rest of the world, the sky is the limit for them,” said Zach Allen, president of PanEurasian Enterprises Ltd., a Raleigh, North Carolina-based tracker of LNG shipments. “The high cost of entering that market comes from the need to build all new infrastructure. They don’t have the skills to build that on their own.”
Iran could build pipelines to export dry gas even without capacity for liquefied gas, Allen said by phone June 20. While piped gas usually fetches lower prices than LNG, pipelines are cheaper than liquefaction plants. The country broke ground in March on a link to Pakistan and is building a separate network to Iraq.
Much of Iran’s gas would be easier to extract than either shale deposits in the U.S. or so-called tight gas in Australia, though developing and selling it as LNG will probably take another 20 years, Allen said.
Strong global demand for LNG may favor Iran. Chevron Corp. expects worldwide LNG use, led by East Asia, to exceed output near the end of this decade, Chairman and Chief Executive Officer John Watson told analysts in New York March 12.
Still, abundant new supply may come from the eastern Mediterranean region, where Houston-based Noble Energy Inc. is developing gas in Israel, and from Africa, where Chevron began exporting LNG from Angola last month and Rome-based Eni SpA plans to exploit discoveries in Mozambique. Such developments may eclipse Iran’s potential because international companies avoid the country.
Engineers working for Shell in Iran a decade ago were barred from using U.S.-made geophones to detect underground vibrations while making seismic surveys, said Robin Mills, who worked on the company’s projects there from 1998 to 2003. Geophones, cylindrical devices placed on the ground or buried, detect vibrations from nuclear explosions, so U.S. authorities classified them as dual-use items and banned them from Iran, Mills said.
Shell backed out of a project called Persian LNG in 2010, as did Repsol. Total withdrew from the Pars LNG venture a year earlier.
“The main hurdle now for Iran is that they don’t have the technology and the expertise to build liquefaction plants,” Mills, currently head of consulting at Manaar Energy Consulting and Project Management in Dubai, said by phone on June 23.
Globally, the construction of LNG plants will add 93.5 million tons of capacity to the existing 296 million tons by 2018, according to data compiled by Bloomberg Industries. The U.S. may approve seven export projects for liquefied fuel by mid-2016, Morgan Stanley said in a May 20 report. Gas in the U.S. costs less than a quarter as much as LNG sold into Asia.
“If you want to build an LNG plant today you must not just compete with Australian LNG that’s expensive, but you must compete with the Americans who aren’t very expensive,” Thierry Bros, an analyst at Societe Generale SA in Paris, said in a June 4 e-mail. “U.S. LNG will displace Iranian LNG even with regime change.”