February 16th, 2017
President Trump’s statements about deregulating energy production in the US, as well as recent developments in US LNG capabilities (such as Cheniere Terminal’s first export last spring and the growth of Sabine Pas Terminal), could transform the US from a net LNG importer into a net exporter. This may be a factor in the US acquiring an unprecedented controlling power in the LNG market, enabling it to influence prices.
According to some analyses, LNG will become one of the world’s most used energy by 2035. Besides the market-influencing power that a rise in US LNG exporting will create, it will increase US geopolitical supremacy over its LNG consumers. This may create a new arena of competition between the US and the other world gas giants such as Russia and Iran. The latter countries are pursuing ambitious plans for their LNG sector, especially since they have the world’s top two proven natural gas reserves. However, Russia and Iran do not have an amicable relationship with the US, compared to other active and potential LNG producers such as Qatar and Australia. Even if the new US Administration develops a closer relationship with Russia and Iran, it would probably not eliminate competition in the energy-exporting arena.
Although LNG could be the cause of a new rivalry between the US, Iran and Russia, it could also create a new spirit of cooperation among them. Consider that there is already an organization like OPEC among the gas exporting countries, called the Gas Exporting Countries Forum (GECF). Closer cooperation between these countries could significantly reduce security costs and arms competition, especially between Russia and the US. Because of the good relationship that Trump and his Secretary of State Rex Tillerson have with Vladimir Putin, the world may witness an era of more constructive cooperation between these traditional rivals. This may significantly impact the lucrative business of the giant weapons manufacturing corporations and security contractors, especially those who have already made massive amounts of money by selling the idea of a Russian and Iranian threat to governments from Europe to the Persian Gulf.
Besides the security contracting and arms sales business, the growing cyber security industry may also be hurt by an amicable US-Russia or US-Iran relationship. The media controversy about Russian cyber attacks during the US election, inflamed by some US officials and the cyber security lobby, showed how paranoia about Russia is stoked in the US political environment by partisan interests.
Nevertheless, a sudden jump in LNG exporting could adversely impact its global price. By massively reducing the volume of natural gas and increasing the portable storage capacity, LNG has enabled exporters to reach out to more remote markets, something unprecedented and commercially impossible under the traditional pipeline systems. As much as these developments in natural gas exporting technology appear to be positive, in an oversupplied market like the current one, it could be a disaster, pushing the spot prices even lower. Studies show that there is no near term future growth potential in areas such as China, India, and South East Asia. The reality is that the LNG industry requires substantial capital investment, and its distribution and delivery are especially costly endeavors. The new US administration should realize that any spike in export amounts may cause irreversible damage to the investments in this industry, similar to what happened to the crude oil market in recent years. Other non-conventional and costly segments, like shale gas (and oil) are no exception.
The administration’s political and commercial decisions could also affect investments in the US LNG industry. The US administration’s recent statements have raised some serious concerns about a trade conflict with China. This may not involve any military action, of course. But since the US is China’s largest trade partner, any non-military trade confrontation with the country, since it is a significant oil and gas consumer, could affect US investments in the LNG sector.
If Trump imposes a higher tariff on Chinese goods coming into the US, it could cause China to switch to other energy suppliers such as Australia, Russia, and Iran. Some, like Australia and Iran, may not be capable of large scale exporting right now but due to their investments in LNG industries, they could become some of the world’s major exporters in a few years. Moreover, a tariff increase on Chinese imports may reduce other US potential LNG clients’ confidence by disturbing the pre-existing trade balance and convince them to switch to other suppliers.
On the other hand, China relies very much on its revenue from exports to the US. Hence, it may not initially react to threatened US tariff increases, so as not to hurt Chinese imports to the US. But if a situation occurs where the tariffs undermine China’s long-term policy of keeping the Yuan value low to ensure export competitiveness, they may lose effectiveness. After all, no one wants to export if there is no opportunity for a profit over and above manufacturing and distribution costs. If China feels that the US market is still a lucrative place for its goods, it has a motive to import LNG from the US; otherwise, it is best to get supplies from suppliers in Asia or Oceania.
How long will it take for the global LNG market to see the consequences of Trump’s energy policies? Tim Daiss, an energy and geopolitics expert, believes that it takes at least a decade to see the results of such decisions. He has cited the US Energy Information Administration report of January 2017, which claimed that by reaching 64.7 mtpa in 2020, the US would become the world’s third major LNG exporter after Australia (85 mtpa) and Qatar (77 mtpa). He argues that since America’s five major LNG projects already have long-term offtake supply contracts for the largest part of their volumes, the first stage of transformation in the US LNG industry will not be affected by Trump’s decisions. Daiss believes that the second stage will occur in a decade, and at that time the market will see the real consequences of Trump’s decisions.
Regardless of the time frame, energy regulations in general and LNG policies in particular are delicate decisions that the new US administration should look at pragmatically, along with a set of balanced commercial and political decisions that won’t jeopardize US relations with its trade partners.
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October 12th, 2016
By Reza Yeganehshakib.
After Iran and the six world powers signed the nuclear deal last summer, the Iranian Cabinet on Sept. 30 approved the general terms for new upstream oil and gas contracts, known as the Iran Petroleum Contract. The aim? Facilitating the inflow of foreign investment. The Oil Ministry presented the Iran Petroleum Contract to more than 300 major international energy investors at the Nov. 28-29 Tehran Summit. However, it seems that parliament is not yet in full agreement with the general terms of the new oil contract.
On Jan. 4, Oil Minister Bijan Namdar Zangeneh said that the parliament’s Committee for the Evaluation of Government Acts’ Compliance with the Law had approved the general terms of the Iran Petroleum Contract, and that work related to the contract had therefore been “finalized.” However, two days later, nine members of the parliamentary committee denied that they had evaluated the general terms. Further twisting the situation, the parliamentary committee does not actually have the power to change the legal status of the general terms of the contract, which have already been approved by the Cabinet.
Al-Monitor spoke with Iman Rajabi, a Tehran-based lawyer, to clarify the legal situation. He explained that when parliamentary action on a document can change its legal status, the latter is considered to be a bill submitted by the executive branch. However, the Cabinet-approved general terms of the Iran Petroleum Contract are not a bill in this sense. Rajabi noted that the Cabinet made an executive decision that simply defines the general terms of a future contract to be signed between Iran and a foreign party. Rajabi said, “At this point, the general terms of the [Iran Petroleum Contract] are only an executive decision, and not an international agreement. Only the Court of Administrative Justice can stop it [the general terms of the Iran Petroleum Contract] from developing into a contract.”
Sahar Seyedipour, another lawyer based in Tehran, agrees with Rajabi. She told Al-Monitor that all government organizations must comply with Cabinet decisions. Of note, based on Articles 77 and 125 of the Iranian Constitution, international agreements require parliament’s approval. However, contracts in which one side is a government entity or company and the other side is a privately owned foreign company are not considered international contracts and are therefore not subject to Article 77. Seyedipour told Al-Monitor, “Even if parliament’s Committee for the Evaluation of Government Acts’ Compliance with the Law rejects the general terms of the [Iran Petroleum Contract], this has informative rather than legal value.” But does this stop parliament from criticizing the Cabinet’s decision?
Ever since being passed by the Cabinet, the general terms of Iran Petroleum Contract have been under attack by the conservative-dominated parliament. Critics, who mostly belong to right-wing factions, argue that the general contract terms violate Articles 44 and 45 of the Iranian Constitution. Article 44 says that the state should be in charge of major industries and large mines, while Article 45 states that anfal — the collective property of the Muslim community, which includes mines — must be managed under the exclusive control of the Islamic leadership for the benefit of the public. Of note, oil and gas reservoirs are considered to be mines. In this vein, critics of the new oil contract terms claim that future agreements will transfer ownership of anfal to foreign companies, either through giving them oil and gas or via excessive payments.
To ascertain the validity of these arguments, it is necessary to take a closer look at the general terms of the Iran Petroleum Contract.
First, the Iran Petroleum Contract is not a production sharing agreement because it does not create any right of ownership of reservoirs for foreigners. In fact, the contract is a “buy-back” or “service contract” that offers more incentives to foreign contractors than previous agreements. According to the contract’s Article 3, Section 1, Iran’s right of ownership of oil and natural gas fields and reservoirs, which is managed through the Oil Ministry, should be respected. Article 11, Section 5 also clearly states that any produced commodity is the property of the Oil Ministry.
Second, in addition to being the sole owner of the reservoirs, the Oil Ministry is also the owner of the contractor’s assets. Moreover, all contractor operations are under the supervision of the Oil Ministry. In other words, the contractor is a mediatory vessel through which the Oil Ministry conveys its right of ownership. Thus, the Iran Petroleum Contract is not in violation of Article 44 of the Iranian Constitution because even during the operational phases, the government remains the owner of major industries, which include all contractor operations, assets and the extracted commodities.
Third, based on Article 3, Section 3 of Iran Petroleum Contract, while contractor operations to extract oil and gas do not create a right of ownership for the contractor, the Oil Ministry covers the contractor’s expenses from two sources: a maximum 50% amount of the extracted commodity (not what is inside the reservoir) and from the revenue generated by selling the commodity in the market, based on the commodity spot price. However, the same described methods of remuneration do not apply to paying the fee to the contractor. The fee, which is a reward for each barrel of produced oil or each 1,000 cubic meters of natural gas in excess of the agreed-upon depletion base line, is provided through either cash or delivering commodities or a combination of both. This is to encourage the contractor to expand improved oil recovery procedures and enhanced oil recovery techniques that are crucial for maximizing the amount of extracted oil and gas from fields.
Thus, the question is: Could delivering oil or gas to the contractor be a violation of the laws prohibiting the government from sharing ownership of anfal with foreigners?
The answer is simple. Delivery of oil or gas to the contractor in return for the contractor’s services is no different than the Oil Ministry selling the merchandise on the market and paying the contactor from the revenue of that transaction. This is remuneration and not an automatic right of ownership for the contractor as a result of its operations. Therefore, the argument that Iran Petroleum Contract makes the foreign contractor the owner of anfal has no legal basis, since under no circumstances can the contractor claim ownership while getting paid either in the form of cash or commodities by the Oil Ministry.
Regardless of the legal debate, it can be expected that the war of words between the government and Iran Petroleum Contract critics, and particularly those in parliament, will intensify as Iran’s political environment is heating up ahead of the upcoming legislative and Assembly of Experts elections.
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October 12th, 2016
By Reza Yeganehshakib.
Oil-tankers docking in Rotterdam, Holland.
The oil industry has experienced numerous fluctuations in crude prices during its history. Falling prices in 2014 developed into a historic downturn by 2016, reaching lows that were last seen in the 1990s. As a result, several oil giants were forced to decommission almost two thirds of their rigs, while also dramatically decreasing their investment in the upstream oil industry.[1] Counter-intuitively, the crude shipping industry did not go through the same catastrophic loss as its upstream counterpart. Iran, one of the world’s biggest oil exporters and crude shipping operators, experienced this firsthand.[2] While the country’s oil revenue sharply declined, its crude shipping industry grew. This situation was not without problems, however, as explained herein.
Reza Yeganehshakib holds a Ph.D. in history with a specialization in World and Middle Eastern history at the University of California, Irvine (UCI). He received a B.S. degree in Chemical Engineering from Iran Azad University, and an M.A. in history from UCI, where he serves as a Research Associate at the Samuel Jordan Center for Persian Studies. Dr. Yeganehshakib is a member of the Middle East Studies Association and the International Society for Iranian Studies. He is affiliated with the Persian Language Institute at California State University, Fullerton and was previously affiliated with the National Iranian Oil Company.
Background
After the imposition of sanctions in January 2012 that targeted its shipping business, Iran lost a significant number of crude oil clients in Europe and Asia.[3] The major international supertanker companies stopped loading Iranian merchandise, while the European Union banned insurance coverage for any ship carrying Iranian cargo. The latter action was particularly damaging to Iranian cargo ships and crude tankers. Many customers in Asia and Europe replaced Iranian oil with shipments from Saudi Arabia, Russia, and Iraq.[4] After losing this large portion of its market, Iran used its tanker fleet to store the unsold crude oil and other petroleum products,[5] estimated at 53.7 million barrels before the Iran Deal in July of 2015.[6]
In addition to this loss, Iran suffered substantial damage to its profitable oil transporting business, especially that of the National Iranian Tanker Company (NITC).
Iran Crude Shipping Industry
Established in 1955 as a subsidiary of the National Iranian Oil Company, NITC was privatized in 2001 after a consortium of three pension funds purchased its shares.[7] The sanctions banned NITC from any commercial deal, and blocked its access to the world banking and insurance systems, with the result that the company lost many contracts with its traditional clients in Saudi Arabia, Kuwait, United Arab Emirates, Venezuela, Nigeria, Gabon, and Norway.
Customers came up with various ways to handle the insurance problem.[8] In June 2014, India extended its approval for Indian companies to issue their own coverage to Iranian tankers carrying crude to India.[9]
Japanese companies found a different way to bypass the insurance coverage issue. In early 2014, the low amount of imports allowed Japan to use its own tankers, covered by third party insurance companies, to transport oil.[10] Japan then increased its oil imports from Iran from 56,934 bpd in May 2014 to 177,000 bpd in November 2015.[11] Iran currently supplies 5.6% of Japan’s crude oil. Currently, Japan mostly uses its own tankers, insured by third parties, to transport Iranian oil to Japan. Hoping for a significant increase in Japan’s oil imports in the near future, NITC was considering using its Very Large Crude Carrier (VLCC) fleet for further exports.[12] However, this situation improved after negotiations about nuclear issues between Iran and the world powers took a positive turn in 2013.
Following a partial easing of the sanctions on November 24, 2013, China, India, Japan, and South Korea increased their Iranian oil imports from 961,236 barrels per day (bpd) in June 2013, to 1.2 million barrels per day (Mbpd) in June 2014.[13] Since then, Asian imports of Iranian oil have fluctuated a lot, mostly due to the impossibility of securing insurance coverage for tankers carrying Iranian oil during the banking embargo.
However, with the lifting of international sanctions in January 2016, Iranian tankers can now purchase insurance coverage. Since the Iran Deal in July 2015, it is estimated that Iran has sold a large portion of the oil that was stored in its tankers, in particular to South Korea and China. As of January 2016, it is estimated that NITC is still in possession of around 45 million barrels of crude oil and other petroleum products, stored on tankers in the Persian Gulf.[14] With the end of the embargo NITC has announced a plan to renovate its large but aging fleet, with an eye to increasing exports to Europe and Asia, particularly to China—Iran’s largest oil client.
Although China’s economy slowed in 2015, the country is building crude reserves to take advantage of the difference between cheap crude oil and its refined products, while securing spot prices at the current low levels and guarding against future rebounds.[15] Thanks to this significant demand in Asia, especially in China, the world has witnessed a rise in demand for crude tankers.[16]As a result, the crude tanker business is continuing to do well in the current oil and gas market, where oil prices are less than half of what they were last year. Iran has noticed this opportunity, and has made plans for its tanker fleet business accordingly.
Recently, NITC announced that by operating 42 Very Large Crude Carriers (VLCCs), each of which carries up to 2 million barrels of oil totaling 15.5 million deadweight tonnage (DWT),[17] the company surpassed world giants such as Mitsui-OSK (14.4 DWT), Teekay Group (13.5 DWT), and Euronav (12.1 DWT),[18] and became the world’s largest supertanker fleet in 2016.[19] Shortly after this announcement Iranian media reported on NITC plans to increase capacity an additional 6 million tons by replacing tankers, including building and purchasing 25 new tankers (20 of which are slated to be constructed by China).[20]
However, just last week, Ali-Akbar Safaee, the CEO of NITC, told the media that his company is not in a rush to enlarge its capacity anytime soon. He stated that the current 15.5 million DWT capacity is proportionate to the spot demand of the market, and any sudden increase in tanker supply would adversely impact the profitability of the tanker business.[21] In order to renovate the fleet, NITC has decided to dismantle older ships and use them as a source for spare parts.[22]
In addition to this decision not to oversupply the market, NITC faces a challenge that may prevent the fleet from being fully operational in all corners of the world.
Due to its relative absence from the international tanker business because of years of embargo, and also because it was operating an aged fleet, Iran had to rely almost exclusively on insurance issued by Iranian companies. This is a situation that not all countries approve of, and it may create an issue for the NITC in its quest to enter the mainstream spot markets after the lifting of the sanctions.[23]
Iranian tankers, like all other commercial vessels, are required to obtain approval from an accreditation body that verifies their safety and environmental standards; otherwise, they are not allowed to call at international ports or obtain insurance. Although this is a time-consuming process, and may delay their tankers’ re-entry into the international market, the Iranians fully understand its necessity. In fact, Iran approached Italy’s renowned classification body, RINA, about the situation.[24] On January 19 of this year, RINA announced that they would start classifying Iranian ships in a few weeks, which made it easier for Iranian shipping companies to sign contracts with international companies, particularly those seeking longer term agreements.[25]
In the high-demand season of the first half of 2015, the shipping rates for some of the biggest VLCCs transporting oil to markets in Asia for short-term contracts increased to approximately $100,000 a day.[26] This encouraged NITC to seek short-term agreements. However, although the long-term contracts have an average shipping rate of $58,250 a day, and may not seem as lucrative as short-term ones, NITC should probably focus mostly on long-term ones. The reason is that NITC is currently in the renovation and planning phases, and only long-term contracts that secure a reliable source of income for large fleet owners will allow them to create and develop long-term strategies, which guarantee the profitability of the business in the long run. This is not the only benefit of long-term contracts.
Moreover, if Iran signs more long-term agreements, it can secure future profits in case of any increase in the supply of tankers in the crude shipping business. The annual tanker supply growth in 2015 was about 5%, while during the first two quarters of the year the global tanker market witnessed a significant jump of 2.75 million DWT in total capacity. It’s predicted that tanker supply growth may increase by 9-10% in 2016. This is even after accounting for the percentage of demolitions. According to BIMCO, for crude tankers, the total order in 2015 was 12.4 million DWT, 38% of which are due to be delivered in 2016 and 51% in 2017, in addition to what has already been delivered.[27] The orders include 28 units of Aframax and 19 unites of Suezmax, while there were only 17 orders of VLCCs. Since Iran has the biggest world VLCCs fleet, it should consider this growth as putting pressure on freight rates, while at the same time it can take advantage of the current situation in the tanker construction business, especially in China.[28]
Since 2014, the tanker construction business has experienced lucrative growth, reaching a historic record in 2015 and continuing to rise.[29] World tanker orders increased 14% in 2015, to a total of 424 ships. However, not all the shipbuilders enjoyed the same profit.[30] South Korea kept the number of orders constant, to 32.2 million DWT while Japan gained the benefit of a 3% increase in its orders, reaching 29.9 million DWT. In contrast, Chinese tanker construction companies experienced a 46% loss in the amount of orders, down to 29.2 million DWT. If NITC plans to renovate its tanker fleet, it should take advantage of the current down Chinese market, which gives the Iranian party the upper hand in its negotiations for better pricing and quicker delivery. As mentioned before, however, there should be no rush to increase the crude tanker supply, since it may adversely affect freight rates.
Along with crude tanker construction plans, NITC’s recent negotiations with international shipbuilders show its desire to add LNG carriers to its current 15.5 DWT fleet. Iran has plans to launch its first 10.5-tonne (14 BCM) LNG project, known as Iran LNG, in two years.[31] This is a no less difficult task compared to the crude tanker business, because its profitability is a function of Global LNG demand, particularly in South East and East Asia. NITC, on the one hand, is in need of a $10 billion investment to build its LNG carrier fleet, but on the other hand it should closely watch the current trends in the global LNG market — especially the rise of giant suppliers such as Australia and the United States, in addition to the traditional suppliers like Qatar. But how many LNG carriers does NITC need?
According to Ali Kheirandish, the former managing director of Iran LNG, the estimated travel time for a cargo ship from Iran to Korea and Japan is about 28-30 days, while to South China it is 20 days, and to India it is 10-12 days.[32] If each vessel can load 70,000-75,000 tonnes of LNG every 25 days, they can carry up to 13 cargoes a year. This is equal to 1 million tonnes of LNG a year. Therefore, for Iran LNG’s 10 million tonne capacity, 10 LNG carriers are required. If the buyers provide 3-4 of them, Iran still needs 6-7 LNG carriers. This is the capacity the NITC should plan for, if Iran LNG works in an almost full capacity and can successfully sell all its LNG every year.
In addition, NITC needs to consider security and anti-piracy issues in its long-term planning. In 2015, Iranian on-board security forces and Iranian Navy destroyers neutralized more than 70 piracy attacks, mostly in Bab-el-Mandeb, the Gulf of Aden, and around Somalia.[33] Because of the sensitive nature of such operations, there is no access to the data about these security costs.
Conclusion
While Iran, like the world’s other large oil exporters, has experienced a significant loss in revenues due to the decline in prices since 2014, the country’s shipping business has been able take full advantage of the simultaneous boom in the crude tanker market. As described in this article, there are steps that Iran should take in order to secure the profitability of its crude shipping business in the future.
First, the sanctions should not be allowed to affect future business. The government of the Islamic Republic should take appropriate measures to secure this business from adverse impacts of sanctions if they are re-imposed or intensified in the future.
Second, the process of issuing insurance coverage should remain smooth. This is not possible unless safety and quality control measures are taken seriously, and the Iranian fleets have a valid classification from a trustworthy accreditation body.
Third, in the event of any increase in crude shipping capacity, the priority should be to keep it proportionate to the spot demand of the market.
Fourth, long-term contracts should always have more priority than short-term ones, although they may seem less profitable.
Fifth, since pirates may use more sophisticated methods in the future, the industry should not be stingy about the costs to continually upgrade security.
And finally, as more investment goes toward LNG production in the world, the energy shipping industry should consider investing in new LNG carriers, responding appropriately to the rising demand in the global energy shipping market.
JPR Status: Working Paper.
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February 21st, 2016
Reza Yeganehshakib.
After years of negotiations with six world powers, Iran celebrated the official lifting of international sanctions on Jan. 16. Having long awaited this moment, the Islamic Republic acted quickly thereafter, commencing efforts to expand its share of the global energy market and engaging in intensive negotiations with possible clients as well as global oil and gas giants to boost production and develop new means of delivery, including new pipelines and liquefied natural gas (LNG) facilities and tankers. While opportunities abound, however, Iran will have a tough time achieving its goals given the plunge in prices for oil and natural gas.
Summary: Although Iran faces many challenges in the global natural gas market, the industry also presents plenty of opportunities post-nuclear deal.
Absent a good grasp of the current energy market and its problems, and given the existing issues afflicting its own oil and gas industries, Iran will not be able to simply boost gas production and expect success in the market. One of the defining features of the current global gas market is how supply is outstripping demand. A key factor in lowering demand for energy, and particularly natural gas, is the current slow growth of the global economy. This appears to be the aftermath of the 2007-2008 global financial crisis and the 2009 recession, with the effects of the latter clearly lingering. As a result, demand for energy has not increased at the anticipated rate. In addition, recent technological advancements that have increased energy efficiency are resulting in lower fossil fuel consumption across the board, suppressing growth in demand.
In a climate where supply is outstripping demand, competition among exporters is naturally fierce. Thus the reality is that Iran faces very tough competition with established rivals, including Russia, Qatar and Turkmenistan. None of these countries has suffered from sanctions the way Iran has, and they have had ample time to establish themselves as significant producers and exporters. Of note, because of sanctions, Iran has not had access to needed foreign investment, financing and advanced technology, leaving plenty to be desired for its gas industry.
Iran — which holds the world’s second-largest proven natural gas reserves and seeks to pursue LNG production — faces competition in particular from major LNG producers like Qatar and the United States. Qatar has been the world’s largest LNG exporter since 2006, with a 30% share of the market in 2014. Although the United States has never been among the world’s top 10 gas exporters, it has sought to increase exports by gaining access to distant markets via LNG, particularly in East Asia.
In addition to traditional natural gas exporters and LNG producers, Iran is also facing competition from re-exporters, that is, countries that buy natural gas and then sell it onward on global markets. Spain and the United States are among the nations most engaged in this practice. The considerable increase in gas re-exporting countries has further reinforced the supply side of the global gas market equation, thereby contributing to a further decline of prices.
Beyond the supply and demand disequilibrium, the global gas market is also affected by the global geopolitical situation, which poses risks to security of the energy supply and distribution cycles. Indeed, the recent string of conflicts around the world reveals genuine concerns among producers, exporters and consumers alike. For instance, the conflicts between Russia and Ukraine and between Russia and Turkey have convinced European markets to decrease their dependency on Russian gas and find more politically stable and amicable sources. In this vein, the current global geopolitical situation presents both opportunities and challenges for Iran.
On the positive side, Iran enjoys an amicable relationship with China and could use massive Chinese financing and investment resources for the development of its energy projects. For example, Chinese companies could finance new pipelines and the construction of LNG facilities, including such infrastructure as storage and terminals. Moreover, Iran can pursue exporting its relatively cheaply produced natural gas to neighboring countries, among them Iraq and its southern Arab neighbors. In addition, it can pursue new gas-swap contracts with neighboring Azerbaijan, Russia and Turkmenistan. Moreover, in terms of re-exporting, Iran could import gas from producers to its north and then either convert it to LNG for delivery to clients in Europe or India via the Persian Gulf and the Gulf of Oman or pump the gas to clients in South Asia through planned deepwater pipelines traversing the Arabian Sea.
The geopolitical situation also presents challenges for the Islamic Republic. The recent negative developments in Iran’s relations with Arab states in the Persian Gulf may adversely affect Tehran’s plans for gas swaps with those neighbors and also its ability to use their LNG facilities, with the exception of Oman.
Despite the many challenges, there are steps that Iran could independently take to strengthen its position. For instance, the Islamic Republic would be wise to take advantage of its relatively low gas production costs to develop new pricing and marketing strategies to open up new markets. It should also reduce its massive domestic consumption by raising prices in country. The freed-up gas from such a step — along with added production from the giant South Pars natural gas field — can be directly exported or used as petrochemical feedstock and possibly even in gas-to-liquid facilities to be converted into such high-value products as gasoline, diesel fuel and methanol. Excess natural gas could also be used in gas-generated electricity plants, producing electricity for export to neighboring countries. This could strengthen Iran’s geopolitical position in the region. Another positive development for Iran is the revival of its gas condensate exports, which were almost halted due to the sanctions. Investment in this sector is certainly an opportunity that Tehran should pursue.
While Iran’s efforts to boost its natural gas industry to seize a greater share of the global energy market will face obstacles, opportunities abound, and the Islamic Republic can pursue such opportunities despite the climate of low global prices and geopolitical risks.
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