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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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The Birth Of An LNG Superpower

LNG tanker

Given Iran’s huge natural gas reserves, its new-found rapprochement with fellow gas supergiant Qatar, and Russia’s strategy to expedite the ‘Gas OPEC’ global supply and pricing cartel, Tehran’s plans to re-energise a long-stalled plan to establish dominance in the global liquefied natural gas market (LNG) makes perfect sense. “There is still huge demand growth for LNG projected from Asia, and particularly China, in the next two decades, in addition to pipelined gas,” a senior source who works closely with Iran’s Petroleum Ministry told OilPrice.com last week. “Russia’s focus has always been and will remain pipelined gas – to Europe, where this is the basis of its ongoing political power – and to China – where this is the basis of its ongoing geopolitical partnership with Beijing,” he added. “If it [Russia] can also get its partners to corner the LNG side of the market, then basically Moscow will control the global gas market in its entirety,” he underlined.

Last week’s comment in this context by Talin Mansourian, the director of investment at the National Iranian Oil Company (NIOC) that Iran is looking at constructing six small LNG units – with a total 500,000 tons per year production capacity - in a dedicated facility belies the true scope of the plans envisioned. “Back in 2015 – when the JCPOA [Joint Comprehensive Plan of Action] was first agreed in principle, Iran’s aim was to build five major LNG plants by the end of the Iranian calendar year 2018 [ending on 20 March] but when the U.S. withdrew from the deal [JCPOA] last May these plans were put on hold,” said the Iran source. “They were then modified to include a phased approach, whereby Iran would roll out a few smaller units to test the waters and then proceed to building major LNG plants in the second phase,” he added. “This was part of the wide-ranging discussions last year between [Iran’s Petroleum Minister, Bijan] Zanganeh and senior officials from Russia’s state gas giant, Gazprom, including [its chairman and CEO] Alexey Miller, which culminated in the signing of two MoUs [memoranda of understanding] between the NIOC and Gazprom,” he highlighted. Gazprom – which already supplies nearly one third of all of Europe’s gas – specifically agreed with NIOC a two-fold strategy, with the first concerning a gas cooperation roadmap between the two companies, and the second about the construction Iranian LNG facilities in partnership with Iran’s Oil Industry Pension Fund. Related: Why 2020 Could Be A Crisis Year For Refiners

The first part of this co-operation will be the completion of the smaller LNG units, which will presage the roll out of the bigger units. These smaller LNG units are extremely closely based on the designs and technology of a series of ‘mini-LNG’ complexes that were to have been funded and developed by various South Korean entities before the U.S. sanctions hit last year. Indeed, in keeping with all such technology-centric agreements signed by Iran, this agreement - between South Korea’s Minister of Land, Infrastructure and Transport, Kim Hyun-mee, and Zangeneh - involved the patent rights to the technology and the development of required personnel being shared by South Korea with Iran, in the form of its LNG Institute of Tehran University, the Research Center of the Petroleum Industry (RIPI). This deal was to have included a financing mix comprising Exim Bank’s initial €8 billion credit line to Iran and another €2.3 billion from two other South Korean companies geared towards building up a large number of LNG facilities that had production capacities ranging from 2,000 to 500,000 tons of LNG per year. This compares to a typical large scale plant capacity of between 2.5 and 7.5 million tons per year. “Such complexes have three key advantages in the current circumstances,” said the Iran source. “First, they are individually cheaper than the bigger plants, second they are quicker to build and start producing, and third they can be built anywhere and so are difficult to detect even by U.S. or Israeli satellites,” he added.  This, in fact, is what Mansourian was really announcing.

The second phase after this is the roll out of the full ‘Iran LNG Project’, an LNG complex that was actually begun by German engineering giant Linde but abandoned after sanctions were ramped up in 2012, and again when they were reintroduced last year, forcing Linde’s withdrawal from Iran. Originally estimated to cost US$3.3 billion, the flagship LNG export facility near Tombak Port - that was set to produce at least 10.5 million tons per year of LNG – had been 60% completed, with expectations that it would take less than a year to finish. With the implementation of the Joint Comprehensive Plan of Action of 18 January 2016, hopes had been high that Linde would take up where it left off, particularly when Linde was awarded a sweetener contract shortly afterwards for the front end engineering design of the olefin unit of Kian Petrochemical and the subsequent re-opening of Linde’s office in Tehran. Despite the re-imposition of U.S. sanctions last year, though, Linde’s chief executive officer, Aldo Belloni, has signalled that he is not against the project itself, saying last year that the company had to wait to find a way to transfer money out of the country before proceeding with its Iran investment plans. Linde’s involvement – or that of South Korea – nonetheless appears sidelined for the time being but Russia obviously is willing and able to provide all of the necessary technology – in tandem with China if needed – together with the US$4 billion investment estimated is needed to move ahead meaningfully on making Iran a global LNG power. Related: Fed Warns Climate Change Is Biggest Threat To The U.S. Economy

Indeed, the then-NIOC managing director, Ali Kardor, and Gazprom’s Miller, agreed in principle that Gazprom, in the first instance, will replace Linde on the LNG complex, as a natural adjunct of the range of gas exploration and development MoUs that were agreed in principle as part of the wide-ranging co-operation deal agreed last year. At the time of the deal announcement, Zanganeh stated: “Repayment of the finances for developing these projects will be made by selling the produced gas and because of the fact that Gazprom is an experienced company it will consider gas exports either by launching pipelines or construction of plants to produced liquefied natural gas...signature of this MoU is a major step for the presence and partnership of Gazprom in Iran’s gas development projects and the petrochemical ones to be fed by gas,” he added. According to the Iran source last week, all of this agreement still holds. Although Zanganeh did not give a clear answer to whether this would portend closer co-ordination between Iran and Russia on managing their gas exports (“all conditions will depend on future negotiations,” was his response), the Iran source told OilPrice.com that this is precisely what will happen. “Russia wants a much closer say on where Iranian gas goes in the future as its volume begins to grow because if Iranian gas started to make its way in size into Europe then it would undermine Russia’s power over the continent that is based on the ability to turn off the gas taps,” he said. “Also, by acting together they [Iran and Russia] can significantly influence global pricing, which is in line with the original idea behind the ‘Gas OPEC’ of Russia, Iran, and Qatar, which faltered for a while as Qatar moved towards the U.S. but now is back on after Saudi destroyed the U.S. position with Qatar,” he added.

By Simon Watkins for Oilprice.com

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