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Economy: European Gas Market

Iranian LNG for Europe - Reality or Pipe Dream?

Hopes, Talks and no Results

Iranian LNG for Europe - Reality or Pipe Dream? Iranian LNG for Europe - Reality or Pipe Dream?

Since my very earliest days in LNG, I lived with the specter of Iranian LNG. Iran was always one of the potentially emerging LNG superpowers. Well - sort of at least.

From 1972, when the first LNG project concept was dreamt up until this very day, not one single drop of LNG has been produced on Iranian soil nor has one been consumed. No other country on earth has consistently shown incredible potential for LNG and for so many decades and to this day has left the world disappointed.

With the Ukrainian stalemate, Russian gas supplies into Europe are finally being seen for what they really are, a liability for the old continent. Once more, European politicians, bureaucrats and energy executives are bickering over energy security and the potential consequences of a stop of Russian energy deliveries. Europe needs a new energy partnership or better, it needs a whole basket of them as we probably don’t want to repeat the mistakes of the past and throw all our eggs in one single nest again.

The shale revolution in North America has also made Europeans asking hard questions about energy security and independence. Such independence could not possibly be understood the way a US politician would understand it as even if there would be willingness to go for shale, it sure would be a decade off or more.

We need something else for energy independence and this something else can only be a wide array of solid sources of primary energy. If one single source ever went into problems or even default, it would not hurt so badly. Iran could be an important piece in this entire new energy superstructure if it just could throw its weight.

But is Iran a truly realistic and economic alternative to Russian gas? Let’s run the numbers using one of the more famous future supply options Russia puts on the table - Turk Stream.

Depending on how one looks at it, the Russian pipeline system bringing gas from West Siberia is between 4000 and 4500 km long before it hits the shores of the Black Sea. It’s a pretty old system that looks back on at least 30 years of operations. This means that serious renovation works would have to be conducted in order to keep it in shape but with Gazprom being in bad financial shape now, this looks increasingly difficult to pull off. Not really a recipe to make transport from Siberia any cheaper.

A newly built or refurbished system would have to bear the cost of re-financing. But we are still only at the shores of the Black Sea. Now comes a little less than 1000km of steel tubes in a very deep and very inhospitable offshore environment. After that, we are still deep in the Turkish Balkans, not really the easiest pipeline environment and way more than a thousand km and a wild array of nations to cross before Central Europe may have a sip of Russian gas through this new route.

It’s hard to put definite numbers on this but conventional wisdom holds that starting somewhere between 2500 and 3500km, LNG becomes more economical than onshore pipelines. This means that already well inside Russia, the point of non-economic gas transport has been crossed and we are not even talking about the very expensive offshore section as well as all the countries on the Balkans that would no doubt extract a handy ransom for crossing its territory.

Russia is not going to fool us into believing their gas is going to be the cheap option just because they try to lure Turks with discounts right now. One day they will have to repair the „Druzhba“ and that will be the end of discounts for new pals. We are also not even touching the prospect of a gas supply problem in Russia proper.

Iranian LNG would on the other hand be produced in the Persian Gulf - a healthy 5000 km or more away from Central European markets. Nabucco already showed us that using a pipeline for this distance is economically foolish. But just beside Iran, there is Qatar and it produces LNG for Europe at a profit. If it can, what reason should there be that Iran could not? Right, there is none.

Popular imagination holds that LNG is very, very expensive by nature and it all goes to Asia - but is it really? Qatar produces LNG at a cost point of about 1,5 USD/MMBtu. Put another 1,5 USD/MMBtu on top for transport to North Western Europe and about 0,5 USD/MMBtu for regasification and we have Natural Gas at 3,5 USD/MMBtu. The true price of LNG does not reflect the technical cost of LNG although in some cases that might be a bit closer to the truth. But I digress.

The price of LNG reflects the supply / demand balance of the world. When the world wants more LNG than the world can provide, prices go up and vice versa. That’s pretty much the case for almost anything. Do you think the price of oil reflects extraction and transport costs?

Let’s take this a little further - if LNG is not so horribly expensive in the first place after all, why is it that pipeline gas is cheaper? Is it really? Look at Chile before LNG had hit it. Whatever natural gas existed there was all pipeline gas - mostly from Argentina and there never seemed to be enough of it so prices hit the roof.

So much in fact that LNG looked pretty cheap compared to it. That’s why they got LNG terminals in order to complement whatever expensive gas they had with a more moderately priced resource. Getting some more independence from fickle Argentina sure was a potent driver.

And even if for years most LNG went to the high price Asia, the party seems over now. European terminal see cargos again and many. Every bubble meets its end finally – what remains are the solid relationships.

Back to Iran. The problem there is not technology, nor is it location or even the gas supply problem many experts see on the horizon. Iran will have to reform its domestic gas market in the end which will free up copious amounts of gas to liquefy and export. Besides, there are some islands in the Gulf such as Lavan whose gas is more or less stranded and makes great feedstock for LNG.

In 2008, I was involved in the Iran LNG negotiations and hence got a taste of the real problem. Due to sanctions, Iran tried to force the issue by building whatever they could on their own, surly also in order to retain control over something that was in fact more than they could chew alone. And this was made especially hard by public institutions and ministries on one side and Republican Guards on the other playing the obstruction game at every twist and turn.

It still was an admirably courageous initiative and also one that has cost Iran quite some cash. But if the central piece - the liquefaction train - is missing, it’s just a white elephant in the desert. Could it be brought back to life?

The problem is neither technology nor is it truly finance. The real problem is that in the past, big scale LNG projects took a relationship of trust between a buyer willing to do what it takes to get the LNG project off the ground and a seller willing to do what it takes to make at least some money of his gas that it cannot use otherwise. Today’s LNG, is the stranded gas of the past in the end.

There must be a realization on both sides that posturing, gambling and bluffing is not going to work for any side. No project means nothing for anyone.

And here we touch the heart of the problem. Buyers think they can never trust Iran and must get everything cast in iron before they are really engaging. There needs to be at least one foundational buyer who takes things actively into his hands and does not wait until they happen by themselves. This means cooperation in good faith, help and assistance without nailing every last detail of it prior to the engineers making a move, it means trust between the parties.

And Iran as the seller thinks that it must squeeze potential buyers on price and flexibility to match that what sellers like Qatar do get. However, Qatar was not as difficult a counterparty in the past as it is right now with buyers and partners. It opened its arms and gave those willing to develop the first LNG trains a deal they could impossibly refuse in order to make them do the deed. Only with time, they became what they are now but then the LNG trains were producing at capacity. Now they have something to sell - now they can afford their position. Well, sort of at least.

When Iran announces new contracts being offered to oil companies in September in London, it better has put some of this co-operational spirit into the drafts. If it’s another “It’s my way or the highway” story, the LNG world is going to take note and play the “dragging the foot” game.

Iran has a lot of potential, but no LNG ready to be sold. In order to get there, it needs foundational buyers which will be forced to swallow a bitter pill which is taking the risk on the entire supply chain. Buyers will only consider doing so if Iran offers them a great deal and allows them to skim at least part of the cream on top.

LNG from Iran would be a great alternative to Europe complementing its clean energy portfolio and it’s a very viable option if only those involved can bang their heads together until a compromise that is palatable to both parties is found. But this is another story.




Henry Kissinger,„World Order“, August 2014