Iran’s distant dream

Iran boasts the world’s second largest natural gas reserves. And supreme leader Ali Khamenei has hubristically threatened to withhold them from the US and EU should sanctions remain in place.

But the Iranian dream of becoming a major player in the natural gas exporters club is far, far from reach even if the EU is now casting its eye towards the Middle East and central Asia for a partial alternative to Russian gas.

For starters, the debilitating western sanctions are still substantially in place although somewhat diluted as a US and EU negotiating ploy. While there is a serious drive from the P5+1 group of powers to reach a deal over Iran’s nuclear programme before the end of this year — as there was for the end of last year — such a deal is not guaranteed. Indeed, opposition is arguably as entrenched among sections of Iran’s riven political and economic elite as it is in the Republican-controlled US Congress. The sanctions regime, while degrading Iran’s economy overall, has created a social, political stratum that benefits from control of foreign trade and smuggling and is averse to the increased competition that a lifting of sanctions would bring.

While Iranian engineers have shown commendable competency in exploration and production activities, Iran desperately needs foreign money and knowhow to boost output at its ageing fields. And that requires a lifting of sanctions, never mind all the talk of building a self-reliant Resistance Economy. Any serious foreign investment in the Iranian upstream will depend on how much Iran is willing to sweeten the deal for IOCs. Iran has promised it will amend the buy-back scheme for production that it has used since nationalisation of its oil industry in 1979. A new contract model has been drawn up and outlined, but full presentation to international firms has been delayed again and again as a pointless exercise while sanctions remain in place.

Even if sanctions are lifted this year, it will take Iran at least a decade to boost its natural gas production significantly enough to allow exports to Europe. As it stands, Iran prioritises reinjecting much of the gas it produces into its oil fields to maximise crude output. It also uses the natural gas as feedstock for its burgeoning petrochemicals sector, an industry identified as a growth priority.

Rising domestic demand, brought about by population growth and subsidies, are another big impediment to increasing gas exports. Iran can barely keep up with its own natural gas demand. Last winter, the country had to turn the tap off on some of its petrochemical industries to meet domestic heating requirements. This even casts a shadow of doubt over Iran’s plans to export natural gas to its neighbours Iraq, Pakistan and Oman. While Iran says it is on track to deliver pipelined gas to Iraq in April, and has even boasted that it wants to export natural gas to Basrah in two years’ time, it has only committed itself to the modest amount of 4mn m³/d of gas, with the intention of gradually increasing to 40mn m³/d.

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