The threat of sharply rising gas prices and supply problems mounts as Europe heads into winter without the reassurance of plentiful cheap gas from Russia. Those gas supplies could come to a complete halt 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% of EU gas supplies in 2021. Aware of the many opportunities to exploit this situation in its favor and in favor of its key ally, Russia, Iran last week clarified that it is ramping up its gas production operations at the South Pars supergiant natural gas field, with a focus on its controversial Phase 11. According to National Iranian Oil Company (NIOC) Chief Executive Officer Mohsen Khojastehmehr last week: “The South Pars Phase 11 development project activities are ongoing and this Phase 11 winter gas will be available.” This comment echoed the recent statement by Iranian Petroleum Minister Javad Owji: “By the initiative of our colleagues at the National Iranian Oil Company, we promise that the first phase of gas production from the South Pars Phase 11 development project, which only paper has been exchanged between several domestic and foreign contractors for 20 years, it will start this winter. Owji 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 this starting point, with Russia’s help, gas production from Phase 11 and all 23 other phases of South Pars will dramatically increase, said a senior oil industry figure working closely with the Iranian Ministry of Petroleum OilPrice. com last week. With an estimated 14.2 trillion cubic meters (tcm) of gas reserves in place plus 18 billion barrels of gas condensate, South Pars already accounts for approximately 40% of the total estimated 33.8 tcm of gas reserves in the country. ‘Iran (mostly located in the southern Fars, Bushehr, and Hormozgan regions) and about 80% of its gas production. The 3,700 square kilometer (sq km) South Pars sector of the 9,700 sq km basin shared with Qatar (in the form of the 6,000 sq km North Dome) is also central 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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Phase 11’s original target production capacity was 57 mcm/d and this is still the production target, according to Owji. The first phase of the current development program, according to the Iranian lead developer of the project, Petropars, involves the drilling of 30 wells plus the fabrication and erection of two production platforms, each containing 15 wells, with the aim of producing 2 billion cubic feet (56.6 mcm/d) of gas per day and 80,000 barrels of liquefied natural gas (LNG). This will require the construction of additional liquefied natural gas (LNG) related facilities and two 32-inch pipelines, totaling 270 kilometers (km) in length. The second phase of the development program will address the likely pressure drop during the first three years of full production, with the phased installation of pressure equipment related to several advanced gas recovery techniques.
The problem Iran faced in carrying out Phase 11, and to a lesser extent all other phases of South Pars, was its inability to put in place the right equipment, technology, processes and people for the project and to keep them there. Several top-tier international companies had been involved at one stage or another in the South Pars Phase 11, only to withdraw due to either increased sanctions in 2011/2012 or the reimposition of sanctions in 2018. Given the size and scope of Phase 11, became a focal point of US attention in the aftermath of its unilateral withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in May 2018 and during the active reimposition of sanctions towards the end of that year. At the time, French supermajor, then Total (now TotalEnergies), held a 50.1 percent stake in the $4.8 billion Phase 11 project and had already invested about $1 billion in it.
According to the Iranian source spoke exclusively to OilPrice.com: “On the eve of signing the next round of Phase 11 financing, the US Treasury Department telephoned senior bankers at the bank that was arranging the money and told them that if the funding went ahead, then the US would instigate a comprehensive historical investigation of all bank reports since 1979 to all countries that had been blacklisted by the US, and said the same to the government French. Understandably, France withdrew from Phase 11, at which point China National Petroleum Corporation (CNPC) automatically bought out Total’s stake (of 50.1%) – as it did automatically in the terms of the contracts – to add to its stake existing by 30%. The remaining 19.9% stake was held by Petropars.
CNPC, in turn, was ready to move forward with the development of Phase 11, given the enormously advantageous terms it was being offered by China, as explored in depth in my latest book on world oil marketsand the value of the South Pars field. The current value at the time was $116 billion, shortly after that jumped to 135 billion dollars, and is now higher again, according to the Iranian source. Basically, though, the United States he stepped up pressure on China during the trade war under the unpredictable former president, Donald Trump. This, coupled with the fact that China was already locked into the new supercharged 25-year deal with Iran, as routed exclusively 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 this list was South Pars Phase 11, so CNPC publicly withdrew from the project in October 2019.
The key difference now is Russia’s unrestricted involvement in Iran’s gas projects. The groundwork for this was laid shortly before a visit to Tehran in July by Russian President, Vladimir Putin, with the signing of an agreement $40 billion memorandum of understanding (MoU) between the Russian gas giant, Gazprom, and the National Iranian Oil Company (NIOC). Among other agreements contained in the memorandum of understanding, Gazprom pledged its full assistance to NIOC in the US$10 billion development of the Kish and North Pars gas fields ahead of the two fields’ production of more than 10 mcm/d . The memorandum of understanding also promised a $15 billion project to boost pressure at the South Pars supergiant gas field, on the maritime border between Iran and Qatar. Gazprom will also be involved in the completion of various liquefied natural gas (LNG) projects and the construction of gas export pipelines.
These deals were engineered by the Kremlin to even the score greater control over future gas supplies originating from Iran which may have initially found a home in southern Europe, before being transported north, to take advantage of the gas supply crisis in European countries. There could be several interested buyers in Europe for gas originating in Russia or Iran but sold through other intermediaries as, perhaps, gas originating in Iraq not authorized. In Europe, Iran has used this “rebranding” method to sell its oil as Iraqi oil through decades of sanctions in order to move it to some of the less strictly controlled ports in southern Europe. These have included those of Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia and from these oil has been easily transferred to the largest oil consumers in Europe, including Turkey. Hiding cargoes on ships has been another successful method by which Iran has been able to move its oil anywhere it wants throughout the year, and there’s no reason both methods couldn’t have the same success for LNG shipments when Iran and Russia decide the is the right time to start them.
By Simon Watkins for Oilprice.com
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