Caspian deal breakdown highlights Iran’s gas shortcomings [Gas in Transition]
Provinces in northern Iran are set for deeper winter gas shortages after a disagreement between Azerbaijan and Turkmenistan led to the recent collapse of a tripartite Caspian gas swap deal.
The gas trading arrangement, which has been in place since November 2021, was halted on January 4 with Baku seeing Turkmen gas as surplus to requirements, driven by its own growing export capacity and price differentials that rendered the arrangement far less commercially attractive. While the deal was not intended to have a long tenor, its breakdown hints at frustration from Azerbaijan regarding slow progress from the Turkmen side on the development of the shared offshore Dostluk oil and gas field, which had been agreed to at the same time as the swap. Direct gas sales to Iran have also been halted.
For Iran, while its share of the swap is relatively inconsequential, the larger Turkmen gas flows play an important role in satisfying demand in the north of the country. The impasse also highlights the delicate nature of its domestic gas balance, as shortages have sent the use of Mazut – high sulphur fuel oil – in cement plants and power production rocketing upwards.
Shortfall
Despite being home to 34 trillion m3 of gas, the world’s second largest reserves behind only Russia, its vast resource is located predominantly in the south of the country, leaving areas of the northeast – which experience some of the lowest winter temperatures – most acutely exposed to shortages.
Iran has long claimed to have a gas production capacity of 1bn m3/day, though 2022 production is reported to have averaged 750-800mn m3/d, with 68mn m3/d of losses suffered across a combination of flaring, production and transportation. Of the remainder, a further 49mn m3/d is allocated to exports to neighbouring Iraq, leaving Iran with around 633-683mn m3/d for domestic uses.
Meanwhile, the country is the world’s fourth-largest gas consumer and a lack of investment in diversification has meant that gas accounts for roughly 68% of Iran’s total primary energy mix, more than double the level of fifth placed Canada.
Data published by the National Iranian Gas Co. (NIGC) shows that during the 2022 Iranian calendar year, gas consumption in the domestic heating, business, public, agriculture and small industries sectors intermittently hit 649mn m3/d during winter cold snaps. When taking into consideration demand from the industrial and power sectors, the country found itself at a major deficit – petrochemical feedstock alone is estimated to account for around 10% of total demand.
This past year was milder though. NIGC released data last week that showed total gas consumption across those sectors ran at 165.4mn m3/d in the summer months, but that figure was three-fold higher – 550mn m3/d – during the winter.
However, the broader trend is upwards, at an estimated 5% per year, while upstream production levels are at best stagnant, and Iran may soon become a net energy importer. The gas deficit is growing rapidly; having reached an estimated 250mn m3/d in 2022, it is seen roughly doubling by the early 2030s.
In the face of this ominous outlook, it is little surprise that with all 24 phases of the supergiant South Pars field development now operational, attention has turned to exploration of areas surrounding the field to establish whether and how far the reservoirs extend.
Connectivity
Tehran has expanded its 19,000 km-plus gas transmission network, including most notably the Iran Gas Trunkline (IGAT) system, with NIGC saying in 2020 that 95% of the population benefited from gas connectivity. This was broken down at 97% for urban areas and 82% for rural regions, with the network having a transmission capacity of around 1bn m3/d.
During Q3 last year, this had risen to 98.6% and 86.3%, respectively, according to NIGC MD Majid Chegeni, with 90% or rural areas expected to be linked to the grid by the end of March.
However, there have been widely-publicised shortages – last January, offices, schools and universities were forced to close in Alborz, East Azarbaijan, Esfahan, Gilan, Mazandaran, Qazvin, Qom and South Khorasan provinces because of a lack of gas for heating.
Last week, citizens in the northeastern Golestan province, which borders Turkmenistan, were warned of potential gas shortages. The Golestan Gas Co. urged the public to ‘consume gas correctly”, advising homes to be kept at 18-20°C. It said: “Citizens should take energy efficiency seriously to ensure the stability of gas flow.”
Imports
In 1997, the Korpeje-Kurt Kui gas pipeline was completed, connecting western Turkmenistan to the remote, but industrious northeastern Iranian province. That line has a capacity of 8bn m3/year, but utilisation has rarely come close to this. Volumes grew to around 4bn m3 by 2001 and reached a peak of 5.8bn m3 in 2005.
Supplies were halted in 2017 by Ashgabat, which accused Iran of delaying repayment of debts, and was vindicated when the International Court of Arbitration instructed Tehran to pay $2bn to its neighbour.
Gas flows resumed in mid-2022 following payment, and the latest available data shows that during the first four months of the current Iranian calendar year, Iran received 775mn m3/month of Turkmen gas, comprising around 25.8mn m3/d in direct sales and around another 685mn m3/d by way of in-kind payment for facilitating the swap agreement.
That progress culminated in Iran pushing in late 2023 for direct sales and swap volumes to be increased, both for onward transmission into Azerbaijan and Iraq for which talks have been held on a 25mn m3/d swap. For now though, it appears Iranians are set for another winter of discontent.
Analysis of the latest data from NIGC and various other Iranian public sources suggests that the country’s gas balance sits at a deficit of around 260-280mn m3/d, factoring in the halt of Turkmen flows.
LNG a long way off
All of this provides an interesting lens through which to view Iran’s ambitions of becoming a global power in the LNG market. Late last year, Hadi Amirshaghaghi, CEO of Iran Natural Gas Liquefaction Co. said that the long-awaited 10.5mn tonne/yr Iran LNG project is now 53% complete having been abandoned in 2013 at 38% completion in the wake of sanctions.
The project’s completion – by the end of the next Iranian calendar year – is a major milestone for President Ebrahim Raisi. However, the acute gas shortages faced by the country on what has become an annual basis, clearly power cold water on Tehran’s gas export ambitions.
With that in mind, Amirshaghaghi was quoted by the Ministry of Petroleum’s Shana media outlet as saying that that it would be “possible to reverse a part of the factory process by receiving the final product (LNG) from the sellers and storing it in the storage tanks of the plan and converting it into sweet natural gas”.
Caveating heavily, he added: “According to the physical progress of 99% of the storage tanks and the progress of more than 50% of the marine facilities of the project, if the work is notified and within the framework of the guidelines for attracting investors in order to increase the sustainability of the supply of natural gas notified by the Minister of Oil and of course to provide the required financial resources, it is possible to provide a part of the deficit of the gas network in this way and we can inject gas into the national network as much as two standard phases of South Pars.”
This could offer Iran the ability to import 112mn m3/d of gas, however, would mark an unpalatable admission by the Raisi administration that it had overseen Iran’s transition from net exporter to net importer.