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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 West Moves To Secure Further Emergency LNG Supplies

  • Since Russia’s invasion of Ukraine on 24 February 2022, Europe has been racing to secure as much of the world’s regular liquefied natural gas supply as possible.
  • China also began signing massive long-term LNG supply deals with major suppliers a full year before Russian troops moved into Ukraine.
  • Given the potentially sanctions-busting nature of the project, though, the U.S. included the prevention of this Iran-Oman LNG project in its efforts to stop Iran from expanding its hydrocarbons export routes into the booming market of Asia.
Iran LNG

Since Russia’s invasion of Ukraine on 24 February 2022, the race has been on to secure as much of the world’s regular liquefied natural gas (LNG) supplies as possible to compensate for lost energy supplies from the global gas and oil powerhouse. LNG requires much less infrastructure for delivery than gas delivered through a pipeline, meaning not only that it costs a buyer less to establish the facilities needed to benefit from a regular LNG supply but also that quantities can be increased and decreased at very short notice. It can also be bought in the spot market as and when additional urgent supplies are needed. In essence, following the 2022 invasion of Ukraine, LNG supplies have become the ‘swing gas supply’ for the world’s major energy consumers. In a demonstration of prescience so extraordinary as to be unbelievable, China began signing massive long-term LNG supply deals with major suppliers a full year before Russian troops moved into Ukraine, as analysed in depth in my new book on the new global oil market order. However, Western firms have begun to turn the tables on the Russia-China alliance, with several major LNG supply initiatives also underway, including a recent deal with major LNG supplier, Oman. The Sultanate is also a vitally important Middle East hub to both the U.S.-led alliance and the China-Russia one. Related: Russia’s Crude Oil Shipments Jump After Storms Subside

Oman is now a top ten global LNG supplier, with exports having reached a high of 1.16 million metric tonnes in April. The late-November deal with BP will see the Western oil and gas giant receive 1 million metric tonnes per year (mmtpy) from Oman LNG, beginning in 2026 and lasting nine years. More important than the amount of LNG is the fact that a major Western company has been able to strike such a deal against the tide of multiple advances by China to secure ever-greater influence over the Sultanate. For both China and its allies, and the U.S.-led alliance, Oman has an importance that goes way beyond its relatively oil and gas reserves. Crucial to both countries is Oman’s geographically-strategic position, with long coastlines along the Gulf of Oman and the Arabian Sea offering unfettered equal access to the markets of the West and the East. According to a senior source who works closely with Iran’s Petroleum Ministry exclusively spoken to by OilPrice.com, China’s long-held objective in Oman is to use it to secure control over all the key crude oil shipping route chokepoints from the Middle East into Europe that avoid the Cape of Good Hope route (more expensive and more nautically challenging) and the Strait of Hormuz route (more politically sensitive). This is fully aligned with Beijing’s broad strategic goal encapsulated in its ‘One Belt, One Road’ multi-generational power-grab project. 

Even more specifically, China already has much control over the Iran-controlled Strait of Hormuz through its all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and fully examined in my new book. The same deal also gave China a hold over the Bab al-Mandab Strait, through which crude oil is shipped upwards through the Red Sea towards the Suez Canal before moving into the Mediterranean and then westwards. This was achieved as it lies between Yemen - heavily controlled by the Iran-backed Houthis, and now subject to the new China-brokered relationship deal between Iran and Saudi Arabia - and Djibouti, over which China has also established a stranglehold. It is through manipulating proxy forces in these areas, including in and around the Gulf of Oman, that China can dial up or dial down tensions in the global oil and gas sector very quickly and easily, as has been seen recently with the Iran-orchestrated seizure of ships supposedly connected to Israel. 

China was first able to secure significant influence over Oman around seven years ago when the Sultanate was struggling with funding for its flagship US$8.5 billion 230,000-barrels per day Duqm Refinery Project – and ancillary projects (another US$10 billion or so). Already accounting for around 90 percent of Oman’s oil exports and most of its petrochemicals exports to that point, China was quick to leverage this to sign a US$10 billion investment in the Duqm project - just after the implementation of the nuclear deal with Iran at the beginning of 2016, in fact. The focus of this Chinese money initially was on completing the Duqm refinery, but it was also expanded to include financing for a product export terminal in Duqm Port and the Duqm refinery-dedicated crude storage tanks of the Ras Markaz Oil Storage Park. More Chinese money was also funnelled towards the construction and building out of an 11.72 square kilometre industrial park in Duqm in three areas - heavy industrial, light industrial, and mixed-use.

Aside from its vital importance as a key Middle East hub, Oman had also been identified by Beijing as having another key use for it – which was to enable its core regional client state, Iran, to finally build its own world-class LNG business, with its key customer being China. The plan is for Iran to utilise at least 25 percent of Oman’s LNG production capacity at the Qalhat plant. Such an idea was originally part of the broader co-operation deal made between Oman and Iran in 2013, extended in scope in 2014, and fully ratified in August 2015 that was centred on Oman’s importing at least 10 billion cubic metres of natural gas per year (bcm/y) from Iran for 25 years through an underwater pipeline, as also analysed in my latest book on the global oil markets. That deal was to have begun in 2017, at which time it was worth around US$60 billion. The target was then changed to 43 bcm/y to be imported for 15 years, and then finally altered to at least 28 bcm/y, also for a minimum period of 15 years. The land pipeline of the project that would move gas from Iran’s supergiant South Pars and North Pars fields in the first instance would comprise around 200 kilometres of 56-inch pipeline to run from Rudan to Mobarak Mount in the southern Hormozgan province. The sea section would include a 192-kilometre section of 36-inch pipeline along the bed of the Oman Sea at depths of up to 1,340 metres, from Iran to Sohar Port in Oman.

Given the potentially sanctions-busting nature of the project, though, the U.S. included the prevention of this Iran-Oman LNG project in its efforts to stop Iran from expanding its hydrocarbons export routes into the booming market of Asia. Before the Saudi Arabia-led blockade of Qatar erupted in 2017, the U.S. offered an alternative for Oman, which was that it increased its uptake of gas from Qatar. This would come via the Dolphin Pipeline running from Qatar to Oman through the UAE, or in LNG form, but Oman refused. Oman’s desire to re-energise the plans for the Iran-Oman gas pipeline was also fanned at that time by the UAE’s demands for an increasingly large fee for allowing the transit of gas from Iran through its waters, again part of the U.S. strategy to persuade Oman to take its gas from Qatar.

As it now stands, Oman appears to be playing a similar sort of balancing act between the interests of the U.S.-led alliance and that of China as many other countries in the Middle East have played over the years. On the one hand, May saw Oman make four big deals with Iran as part of a broader plan to jointly develop the shared Hengam offshore oilfield in the Strait of Hormuz. This was the first publicised agreement on cooperation between Iran and a neighbouring country in a shared field, although, as analysed in depth in my new book on the new global oil market order, Iran and Iraq have been closely cooperating on their many shared fields for decades. The Hengam field lies around 70 kilometres off the southern Iranian coast, to the north of Oman, at the juncture of the Persian Gulf and the Gulf of Oman that sits almost exactly in the centre of the Strait of Hormuz. This point is the key global transit route for around 30-40 percent of all the world’s oil at any given moment. On the other hand, November saw Oman sign an amendment with France’s TotalEnergies to extend its partnership with Oman LNG. Located on the northeast coast of Oman, the Oman LNG liquefaction complex comprises two liquefaction trains, each with a capacity of 3.8 mmtpy. It is adjacent to the Qalhat LNG project that China and Iran have long been looking to utilise as part of their joint Iran LNG initiative.

By Simon Watkins for Oilprice.com


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