Market forces, national interests cloud Iran's LNG plans

Iran's LNG plans have been in a state of flux and confusion for the past 2-3 years. The problem emerged earlier from the lack of understanding of the LNG business by Iran and the often mistaken view that LNG business is similar to the oil business.

The efforts by the National Iranian Oil Co. (NIOC) to define several LNG projects by upstream phases and geographical destinations were misplaced. The company had earlier defined its LNG projects as Iran LNG, Pars LNG, Persian LNG, and NIOC LNG as four separate projects with some 30-40 million tonnes of LNG exports, each with a dedicated phase of South Pars and each with a set destination.

This approach sent the wrong signals to foreign investors and potential markets that Iranians were being both unrealistic in expectation and lacked seriousness in their marketing strategy.

The departure of the former President of NIOC International who was seen as having a good understanding of the LNG business and the creation of the National Iranian Gas Export Co. (NIGEC) raised concerns in the business as to the ability of the new NIGEC management to take over the task.

In any event, Rokendin Javadi, as managing director of NIGEC, has proven himself to be competent and capable in the span of only a few months.

Finally, the bringing together of the upstream and downstream angles of the LNG business has been a major headache. Pars Oil & Gas Co. (POGC) is in charge of upstream and NIGEC of downstream. The downstream aspects could not move forward because of the inability to move on the upstream part of the package.

Upstream issues

Much better clarity has finally been brought to the upstream issues.

South Pars' Phase 11 was put to bid and packages were opened on Mar. 17, 2003, with bids by BP PLC, TotalFinaElf SA (associated with Petroliam Nasional Bhd., Petronas), Statoil ASA, and Agip SPA.

Phase 12 is left untouched for the time being. Phase 13 is negotiated with Shell and Repsol SA, and Phase 14 is reserved for gas-to-liquids. Phases 15 and 16 are now defined in the northern part of South Pars and are not defined as LNG blocks anymore. Phases 15 and 16 have a lower yield of condensates but have 1 bcfd of gas each.

In all, POGC has now defined 16 phases and 18 bcfd of gas. This seems finally to have brought to an end the continuous redefinition and changing numbers of the phases. There are, however, those who still argue for definition of 26 phases for South Pars.

So far, the upstream phases have proven more prolific than expected. Phases 2 and 3 have shown high condensate output of 43-45,000 b/d/bcfd of gas, and the gas production target has been reached with fewer wells.

NIOC intended to award Phase 11 in late April/early May 2003. Simultaneously, negotiations for Phase 13 were likely to be concluded in a similar time frame.

Downstream issues

On the downstream side, NIOC has made an important change in its thinking.

It has moved from "phases" and "projects" to "trains," but unfortunately, the geographical destinations are still not relaxed, though this may soon change as well.

There is a clear understanding in NIOC that multiple competing projects cannot work. Many projects may be merged to focus on LNG trains and new projects will become new trains.

NIOC considers two trains to be given priority. Priority No. 1 is NIOC LNG and Priority No. 2 is the winner of Phase 11 or a combination of the winner of Phase 11 as well as Shell/Repsol, if a negotiated deal is arrived at.

British Gas PLC is the only one not seeking an upstream interest; all other participants are seeking an upstream role. BG's position as a lifter has been well received by NIOC and has put them in a very strong position.

Here are some scenarios of how things might play out:

Trains 1 and 2 in Phase 11: Additional trains to come from Phase 12, if necessary. Phase 13 might be left unused. If Shell-Repsol negotiations are successful, the deal may be moved to Phase 11.

NIOC LNG involves BG, Enel SPA, and Agip. Agip is the only one bidding for upstream in Phase 11.

If it wins, Train 1 of Phase 11 would be defined for NIOC LNG with Agip as the upstream producer and Agip, BG, and Enel as offtakers. If Agip loses, it is unlikely to be interested in any offtakes without upstream. In this case, Train 2 either goes to Shell-Repsol or is made into a consortium involving Shell-Repsol, BP, and TotalFinaElf.

If BP, TotalFinaElf or Statoil wins Phase 11, NIOC may decide to allow Train 1 to move forward by the winner, and Train 2 to either go to Shell-Repsol or to NIOC LNG.

NIOC understands the economics of building a single train, say at 4.5-5 million tonnes, are not as good as those for building two trains, but the company may opt to build one first and then move to the second one later. If only one is built, then NIOC may reserve volumes from the first train to go to NIOC LNG, until a second train is built.

With NIOC deciding that BG is its preferred LNG marketer in India, there are issues to be resolved with Reliance Petroleum Ltd., which has been part of Iran LNG marketing with BP for the past 2-3 years.

The picture is not as confusing as it appears. NIOC is leaving itself room for a variety of options and will sort things out once a winner of Phase 11 is chosen and the results of negotiations with Shell are understood. The plan is to move with two trains either together or in sequence with priority going to NIOC LNG.

Will this all be decided on schedule? No one knows, and much has been promised and delayed in the past.

Everything from the Iran-Iraq war to domestic politics can slow or delay the process. The intent, however, is to proceed with a target date of 2008 for Iranian LNG to enter the market. Things may be delayed for a year or two, but the path is now set.

LNG pricing

How should Iran price its LNG?

One thing is certain: The cost of building the grassroots train in Iran is likely to be higher than in Qatar because of US sanctions.

Should Iran sell its LNG at same prices as Qatar or lower, particularly into the Indian market? With Qatari prices deemed too high by many in India, should Iran not try to sell it at a lower price?

There is a strong camp in Iran arguing that Iran, as a matter of national pride, should not sell LNG at prices lower than the Qataris. Others agree that Iran should be more competitive and undercut Qatar.

The issue is yet unresolved.

Iran needs to accept the price risk for Train 1 in order to be competitive with Ras Laffan LNG Co. Ltd.'s Trains 2 and 3.

This means the Iranian side should be willing to accept a lower price (say, as low as $.20-$.30/MMbtu as government take) for Train 1 and expect to capture government take, similar to Qatar ($.80-$.90/MMbtu) for Trains 2 and 3.

But, without sacrifice on Train 1, the project may not be economically competitive to move forward. This critical point is understood by a few but not by the majority. It is also a point that is hard to sell to the Iranian parliament and politicians in the country who expect a huge windfall from gas exports.