The risk of soaring gas prices and supply disruptions increases as Europe heads into the winter without assurances of plenty of cheap gas from Russia. These gas supplies could be cut off entirely if the European Union (EU) gives final approval to a cap on gas prices from Russia at its November 24 meeting. Russia’s state-owned gas giant Gazprom has said that if the EU introduces this gas price cap, it will suspend all exports of its gas to EU countries. Gas imports from Russia accounted for around 40 percent of the EU’s gas supply in 2021. Aware of the multiple opportunities to exploit this situation in its favor and that of its key ally Russia, Iran made clear last week that it is ramping up its gas production operations at the oversized South Pars natural gas field, with a focus on the controversial Phase 11. According to National Iranian Oil Company (NIOC) Chief Executive Officer Mohsen Khojastehmehr last week: “Activities of the South Pars Phase 11 development project are ongoing and this winter gas from Phase 11 will be available.” This comment echoed the Recent statement by Iranian Oil Minister Javad Owji: “At the initiative of our colleagues in the National Iranian Oil Company, we promise that the first phase of gas production will continue from the South Pars Phase 11 development project, which has only been exchanged paper between various domestic and foreign countries contractors for 20 years, will start this winter.” Owji had said in August that South Pars Phase 11 is expected to produce 10 to 11 million cubic meters per day (mcm/d) in the first phase of development.
From that starting point, with Russia’s help, gas production from Phase 11 and all other 23 phases of South Pars will be dramatically increased, said a senior oil industry official who works closely with Iran’s Petroleum Ministry OilPrice.com last week. With an estimated 14.2 trillion cubic meters (tcm) of gas reserves plus 18 billion barrels of gas condensate, South Pars already accounts for about 40 percent of Iran’s total estimated 33.8 trillion cubic meters of gas reserves (mainly in southern Fars, Bushehr, and Hormozgan) and about 80 percent percent of its gas production. The 3,700 square kilometer (km²) South Pars sector of the 9,700 square kilometer basin shared with Qatar (in the form of the 6,000 square kilometer North Dome) is also critical to Iran’s overall strategy to sustain natural gas production across the country of at least 1 billion cubic meters per day (bcm/d).
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The initial target production capacity of Phase 11 was 57 mcm/day and this is still the production target according to Owji. The first phase of the current development program, according to Iran’s lead developer of the project, Petropars, includes drilling 30 wells and fabricating and constructing two production platforms, each with 15 wells, with a goal of producing 2 billion cubic feet (56.6 mcm/ d) Gas per day and 80,000 barrels liquefied natural gas (LNG). This will require the construction of additional liquefied natural gas (LNG) facilities and two 32-inch pipelines totaling 270 kilometers (km). The second phase of the development program will address the likely pressure drop during the first three years of full production, with the gradual installation of pressure equipment related to various improved gas recovery techniques.
The problem Iran faced in advancing Phase 11, and to a lesser extent all other South Pars phases, was its inability to provide and retain the right equipment, technology, processes and people for the project. Several high-profile international companies were involved at one stage or another in Phase 11 of South Pars, only to withdraw due to the 2011/2012 sanctions tightening or sanctions reintroduction in 2018. Given the size and scope of Phase 11, it became a focus of US attention following its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and during the active re-imposition of sanctions later in the year. At the time, the French supermajor, then Total (now TotalEnergies), held a 50.1 percent stake in the $4.8 billion Phase 11 project and had already invested around $1 billion in it.
According to the Iranian source with whom OilPrice.com spoke exclusively: “On the eve of signing the next round of funding for Phase 11, the US Treasury called senior bankers at the bank that was arranging the money and told them this was the case Funding went ahead, then the US would launch a full historical investigation of all the bank’s dealings since 1979 with every country blacklisted by the US, and they told the French government the same.” Understandably, France withdrew withdrew from Phase 11, after which China National Petroleum Corporation (CNPC) automatically took over Total’s stake (of 50.1 percent) – as automatically provided for in the terms of the agreement – to increase its existing 30 percent stake. The remaining 19.9 percent of the shares were held by Petropars.
CNPC, in turn, was willing to continue the development of Phase 11 given the tremendously favorable terms offered by China, as analyzed in detail in my latest book on global oil markets, and the value of the South Pars field. Its present value at the time was $116 billion shortly after it skyrocketed $135 billion, and now it’s higher again according to the Iranian source. But especially the USA Increased pressure on China in trade war under the unpredictable ex-president Donald Trump. This, coupled with the fact that China was already included in the new supercharged 25-year deal with Iran, as exclusively broken by me in September 2019, prompted Beijing to adopt a lower public profile on highly visible Iranian oil and gas fields wherever possible. At the top of that list was South Pars Phase 11, which is why CNPC publicly withdrew from the project in October 2019.
The key difference now is Russia’s full participation in Iranian gas projects. The foundation for this was laid shortly before Russian President Vladimir Putin’s visit to Tehran in July with the signing of an agreement US$40 billion letter of intent (MoU) between Russian gas giant Gazprom and National Iranian Oil Company (NIOC). Among other agreements included in the MOU, Gazprom has given the NIOC its full support in developing the $10 billion Kish and North Pars gas fields with a view to producing more than 10 million. The MoU also said a $15 billion project to boost pressure in the oversized South Pars gas field on the Iran-Qatar maritime border. Gazprom will also be involved in the completion of various liquefied natural gas (LNG) projects and the construction of gas export pipelines.
These shops were designed by the Kremlin to even exist more control over future gas supplies coming from Iran, which may first have found a home in southern Europe before being transported north to take advantage of the gas supply crisis in European countries. It can be good several interested parties in Europe for gas originating in Russia or Iran but resold through other intermediaries, such as gas from unsanctioned Iraq. In Europe, Iran has used this “renaming” method to sell its own oil as Iraqi oil through decades of sanctions, in order to ship it to some of southern Europe’s less heavily patrolled ports. These included Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia, and from there oil was easily shifted to Europe’s larger oil consumers, including Turkey. Concealing cargo on ships was another successful method Iran used to ship its oil anywhere during the year, and there’s no reason both methods for LNG shipments couldn’t be equally successful if Iran and Russia decide that the time has come to start it.
By Simon Watkins for Oilprice.com
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