Iran’s Failure to Export Natural Gas
As the site of the discovery of crude oil in the Middle East, Iran has had a long track record of petroleum production. It is easy to forget nowadays, but the first oilfield in the region was discovered in 1908 in Masjed Soleyman, located in Iran’s southern province of Khuzestan. Currently, Iran has nearly 160 billion barrels of proven oil reserves, ranking 4th in the world.
Iran’s place in the world ranking of natural gas is even more impressive. With its estimated 34 trillion cubic meters of natural gas, Iran controls the second-largest gas reserves in the world after Russia. Put differently, Iran has 30% more gas reserves than Qatar, 2.5 times more gas than the US, and 23 times more gas than Norway, which is the biggest European gas producer. Therefore, in theory, Iran should be in a dominant position as a global player in natural gas production.
In reality, Iran’s natural gas industry simply could not take off. Not only has the Islamic Republic failed to leverage its impressive natural resources to make Iran a notable gas exporter, but it has also repeatedly halted the export of gas to neighboring Turkey, causing shutdowns throughout the country.
Figure 1 Link
Despite these huge gas reserves, Iran is falling short in terms of gas production. When we start looking at the global ranking of gas production, Iran lags behind the US and Russia, as shown in Figure 2. In 2020, the US produced more than 3.5 times Iran, even though its gas reserves are much smaller.
Figure 2 Link
To put this situation into perspective, we need to look at Figure 3, which shows the ratio of ‘reserves/production’ (R/P) for these countries. This measure tells us how many years of reserves are remaining if a country continues to produce at the current rates. Experts use these ratios to determine how fast a country is monetizing its gas reserves.
Figure 3 Link
Iran, which uses its gas resources for power generation, domestic consumption, and feedstock for petrochemical plants, is showing an R/P ratio of 127 years. Qatar is showing a higher R/P ratio, but that is to be expected from a country that only has a population of 2.9 Million with limited domestic consumption. But while Qatar has become the second-largest Liquid Natural Gas (LNG) exporter in the world, Iran has failed to establish itself as a serious gas exporter. This failure can be attributed to several reasons:
In the past 30 years, Iran has tried to export its gas to India via pipelines through Pakistan. India & China are considered to be the biggest gas export markets of the future. Starting in the late 1990s, a consortium of international oil companies including Shell, British Gas, and Gaz de France have been negotiating with Iran’s Oil Ministry without any success. Iran even built a gas export pipeline close to the Pakistani border, but could never complete the deal as gas export projects require political support that Iran was lacking.
For many years, the Oil Ministry tried to build Liquified Natural Gas (LNG) export facilities in Iran but all of them failed. At one stage, there were 3-4 competing consortiums that wanted to build LNG terminals in Iran to no avail.
One of Iran’s biggest failures was probably the collapse of the GTL (Gas to Liquid) project. GTL is a smart form of monetizing and exporting your gas reserves; it basically uses natural gas as feedstock and makes products such as Diesel and lubricants. In 2002, Shell teamed up with NPC (National Petrochemical Company, a subsidiary of Iran's Oil Ministry) to build the biggest GTL plant in the world in Iran. NPC was at that time led by Mohammadreza Nematzadeh, an ex-minister with a lot of connections within the Iranian government apparatus. Shell reportedly spent close to $20 million developing the project scope and negotiating with the Oil Ministry but it soon realized that the Iranian government could not provide the right investment framework. As a result, Shell instead partnered with Qatar, which resulted in a $22 Billion investment that became Pearl GTL, the biggest GTL plant in the world.
Iran then turned its attention to exporting gas to the UAE via the Crescent Petroleum contract, which has been covered in one of our articles and turned into a legal dispute that has cost the Iranian people hundreds of millions of dollars.
Another lost export opportunity was in 1999, when a consortium of international companies approached the Oil Ministry and offered to help Iran export and distribute its gas to Turkey, with a view to eventually connecting Iran’s pipelines to Europe. However, Iranian officials decided to ‘do their own thing’ and eliminated the investment offered by these international companies. As a result, Iran only exports a small amount of gas to feed the local demand in Eastern Turkey, which is coincidentally the poorest and least developed part of the country. On the other hand, the Republic of Azerbaijan, one of Iran’s major regional competitors, has managed to get its gas into Turkey and Russia through two separate pipelines (Blue Stream and Turk Stream). To make matters worse, Iran has recently stopped its gas exports to Turkey citing “technical issues”, but experts believe it is because of a cold spell in Iran and gas shortages in the country.
Iran claims its gas exports to Iraq as a success story. There is, however, ample evidence that Iraq has not paid Iran properly for its gas imports.
