Your One-Stop Consulting Group in Iran

Bijan Khajehpour

Istanbul

June 2009

Iran’s Strategic Considerations in Assessing the Nabucco Project

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Objectives

• Review current data and realities in Iran’s gas sector;

• Offer some information on gas-related projects and existing and/or planned pipeline infrastructure;

• Review key positions inside Iran with regard to gas exports, especially the Nabucco project

• Discuss strategic factors influencing the potential of Iranian gas exports to Europe.

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Iran’s Oil and Gas Balance Sheet

Gas Oil

Reserves in place 47.86 tcm 500 billion barrels

Recoverable Reserves 29 TCM 137 billion barrels

Rank 2nd after Russia 2nd after Saudi

R/P Ratio 165 years 92 years

Share of world reserves 16% 11.5%

Grand Total Reserves: 315 BBOE

R/P Ratio: 122 years

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Iran’s Gas Data

1990 2000 2010(estimate)

2020(estimate)

Production

(bcm p.a.)55 110 250 400

Iran’s production share of world total

(in %)

2.2 3.5 6.7 8.9

Total Reserves

(tcm)17 25 30 29

Iran’s reserve share of world total (in %)

13.1 15.8 16.7 16.5

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Iran’s Gas Development Plans

• Iran has developed its gas resources aggressively and it also has ambitious plans, i.e. an investment volume of $45 billion by 2020;

• The gas is planned to be used as follows:– Injection into oil fields;– Maximizing domestic use of gas within

the energy basket; – Utilization in petrochemicals and other

gas-based industries including gas-to-petroleum products;

– Export of gas through pipelines and LNG;

Sector Investment Volume (in $ billion)

Oil 40

Gas 45

Petrochemicals 25

Power Generation 20

TOTAL 130

Investments needed in Iran’s energy sector 2005-2020

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Critiques of the Current Plans

• The current gas picture has a number of critiques from different corners:– Many criticize NIOC for lacking a comprehensive gas

strategy (both on development side but also on utilization side);

– Some argue that Iran’s reserves are inflated and that Iran should be careful with the rapid consumption of its resources;

– Others say that it is a big mistake to export gas through pipelines and that Iran should use its gas to develop gas-based industries inside Iran; (central argument: exporting gas is like exporting development!);

– A fourth group contend that Iran’s decisions in the oil and gas sector are usually politically motivated and not technically driven;

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• If all Iranian plans including gas exports materialize in the 25 year period up to 2030, then the accumulated gas use would be:

• This is only 37% of the total present estimate of the country’s gas reserves - so, if the reserve figures are correct, Iran should be fine with all these plans;

• The main reason for current doubts about exports has been under-performance in the domestic gas sector due to lack of investments rather than lack of resources!

Category of Use Use in TCM from 2005 to 2030 Domestic Consumption 6 Gas Injection 2 Gas Based Industry 0.6 Export (Pipeline & LNG) 1.5 TOTAL 10.1

Accumulated Gas Requirements

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Issues:• Domestic pressure

against export plans, especially due to implementation delays in domestic gas projects;

• High domestic consumption due to cheap energy prices – Often results in power

outages in summers– Supply runs short in

winters, interrupting exports

• Lack of feed for upcoming petrochemical and power projects;

Priorities: • Development

– Main focus on South Pars;• Feeding the domestic

consumption and increasing the share of gas in the domestic basket;

• Injection– Depletion remains a main

concern;• Gas-based Industries;• Exports to immediate

neighbors (strategic);• Further exports;

Gas Sector: Priorities and Issues

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Iran’s Strategic Considerations in the region

• Over the past decade, Iran’s main emphasis in proposing pipeline routes, has been an extension of Iran’s regional strategy;

• Iran has viewed pipelines and closer cooperation among regional players as a strategic element in regional relations (economic cooperation as an element in easing regional tensions);

• Natural gas is increasingly becoming Iran’s main focus in hydrocarbon development, partly due to South Pars being shared with Qatar;

• Energy and Pipeline politics have been an important parameter in Iran’s external relations (look at Iran’s deals with China and India), though it has been overshadowed by the recent stand-off regarding nuclear technology;

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Is there a Strategic Shift?

• However, Iranian officials realize that there are many burdens in the way of pipelines (not the least pressure from the US and geopolitical irritations).

• As Iran needs to develop a strategy for its excess gas, there seems to be a shift towards focusing on the development of Gas-intensive Industries. Key parameters in this strategy would be:

– Creation of a number of special zones for the development of gas-intensive industries (eg. the Jask Region at the Sea of Oman);

– Potential Industries: Petrochemicals; Cement, Aluminum, Steel etc.– Investors are encouraged to look at potential of integrated projects;– Prices and rates of return will vary depending on industrial sector;

• Apart from designating a region, no other steps have been taken in this direction and there is still no contractual framework for such agreements;

• There is a bill in the Majles that would address the gas pricing issues;• The development of gas-based industries does not mean an end to the

planned pipeline projects including Nabucco, but one needs to address Iranian concerns;

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Factor’s Influencing Iran’s Role in International Projects

• Geopolitical Factors:• Concerns over political instability in the region, especially in the

light of failed US interventions in Iraq and Afghanistan;• Iran could potentially be the key anchor of stability, but

developments in Iraq as well as in Israeli-Palestinian conflict are uncertain;

• Iran-US relations remain a key irritant to long-term development plans;

• Commercial Factors:• Uncertainties relating to Iran’s gas pricing mechanisms;• Security of supply as well as security of demand;• Legal uncertainties connected to the investment regime in Iran

as well as cross-border issues;

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Specific Iranian Concerns

• Uncertainty about the future of Iran-EU relations due to the current hiccups emerging from the nuclear stand-off;

• A desire in Iran, not to compete with Russian interests in Europe in order not to undermine the good relations between the two countries;

• Concern about an over-reliance on Turkey as a transit country;

• Alignment of the proposed pipeline with Iran’s long-term objectives;

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Iranian Reactions to Nabucco

• So far, the Nabucco project has not managed to attract high-level Iranian confidence in the project;

• Iran has responded by proposing its own Persian Pipeline (a gas pipeline to Europe) which at this stage is merely a planned pipeline to the Turkish-Iranian border (see IGAT 9 – the blue pipeline on the next page);

• Iran is also engaging other scenarios, i.e. through negotiations with Greece to look at entering the European grid from the south of Europe;

• Iran has even looked at a route that would go through Iraq, Syria and the Mediterranean

• For now, Iran wants to keep its options open;• Iranian officials have said on the record that they would

consider Nabucco, if the project invited Iranian participation;

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Jask Special Zone for Gas-based Industries

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Prospects • Nabucco needs to address all different mindsets in the Iranian political

structure by addressing issues such as transfer of technology, job creation, demand security etc.;

• Iran’s geo-strategic considerations will be a key irritant for some time (especially the desire not to compete with Russia), therefore, the inclusion of a Russian player may address this parameter;

• The project should also include an Iranian partner for all stages rather than just being the contractual party of a sales agreement – it could potentially include some pipeline construction inside Iran as well;

• Iranian attitudes towards the project will be shaped by the overall political and geo-strategic developments – an opening in Iran-US relations as well as improvement in Iran-EU ties would change the dynamics dramatically;

• At the heart of the matter remain two core items, i.e. maximization of the use of Iran’s gas resources as well as the Iranian desire to maintain a strategic significance as a future oil and gas exporter to world markets;