LNG in the Big League: A Cleaner Feedstock Than Coal or Oil, Liquefied Natural Gas (LNG) Has Also Become a More Economic Choice for Consumers, While Producers Are Attracted by the Long-Term Pricing and Contracts That Normally Accompany Export Deals

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THE RECENT LIQUEFIED NATURAL GAS (LNG) deals between Iran and energy companies in India and China may finally allow Tehran to make the most of its massive gas reserves. A lack of investment in the sector and a combination of geographical and geopolitical problems have hampered efforts to pipe gas to Europe and Southern Asia, but the new contracts indicate that processed gas may provide the best option. They also demonstrate that Middle Eastern producers are finally grasping the size of Far Eastern markets and the potential value of LNG exports.

Iran had originally hoped to transport gas to India via a proposed pipeline that would pass through Pakistan. The project did not proceed because India feared that terrorist groups, from Pakistan or elsewhere, would target the pipeline. The rivalry between India and Pakistan has verged on armed conflict several times in recent years as a result of the dispute over the sovereignty of Kashmir. However, the conclusion of an LNG supply deal between Chinese parastatals and the National Iranian Gas Export Company (NIGEC) late last year seemed to offer a way out of the political impasse.

In January, an Indian consortium led by Oil & Natural Gas Corporation (ONGC), agreed to purchase 5m tonnes of LNG a year for 25 years from 2009 from NIGEC, with an option on another 2.5m tonnes a year. Although the financial arrangements have not yet been finalised, it is understood the gas will be supplied by phase 12 of Iran's South Pars field development and distributed by the Indian gas marketing company Gaff India. ONGC will gain a stake in developing phase 12 as part of the wider agreement.

India has been trying to switch a large proportion of its generating stock over to gas since the 1990s but made relatively little progress. Most of the early projects were developed by private companies but ran into financial and regulatory difficulties. The new deal between state-owned interests may suit Iran much better in that it can negotiate large-scale projects with the Indian government without having to open up its gas sector more fully to private, foreign oil and gas companies.

Iran has the potential to become the gas producer par excellence. It possesses the world's second biggest gas reserves at 812 trillion cubic feet (tcf) but it holds one clear advantage over the owner of the world's biggest gas reserves, Russia, in that it is more centrally placed to supply markets in Asia. Moreover, LNG is not an option for the lion's share of Russian gas that lies in frozen Siberia, far beyond the reach of warm water ports that could serve LNG carriers.

Most of Iran's gas reserves are located on non-associated fields that have not thus far been tapped because of the lack of established markets. Although the National Iranian Oil Company (NIOC) has now achieved some success, Iran's restrictive business environment is likely to prevent large-scale investment by private foreign companies and so the potential of the country's gas sector is likely to remain unfulfilled until private enterprise receives a warmer welcome in Tehran.

UNLIMITED PRODUCTION

While OPEC quotas have curtailed Middle Eastern oil production over the past few years, no such restrictions exist in the gas sector. The demand for piped natural gas and particularly LNG for use as a power sector feedstock has risen relentlessly in many parts of the world over the past decade. A cleaner feedstock than coal or oil, it has also become a more economic choice for power companies, while producers are attracted by the long-term pricing and contracts that normally accompany export deals.

The Middle East is fortunate to be sitting on some of the biggest natural gas fields in the world. Limited volumes have been produced for several decades but most countries with significant gas reserves have now switched their electricity generating capacity from oil to gas, while countries like Algeria and Qatar have also developed massive gas export industries. …