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Iran Tries to Wow Investors With Pipeline Plan

Saddled with slumping oil prices, U.S. sanctions and economic troubles, Iran appears to be pushing to entice foreign investment in its energy sector in a bid to woo allies abroad and secure political support at home as its hardline president faces an upcoming re-election battle.

In the latest in a series of such steps the past few weeks, Iranian Oil Minister Gholam Hossein Nozari said the OPEC member, which sits on 16 percent of the world's proven gas reserves, wants to develop its proposed Persian pipeline project — a venture that would feed gas to Europe via links in Iraq and Syria.

The report, like many relating to Iran's oil and gas industry, was thin on details. Still, the comments carried Wednesday on Iran's Press TV and Syria's official SANA news agency, highlight Iran's push to win support in Europe, which was hard hit by a natural gas shortage sparked by a Russian-Ukranian dispute this winter.

It also comes on the heels of other oil and gas agreements involving China and Russia, two powerful U.N. Security Council members that have adopted softer tones concerning Iran's controversial nuclear program. The West believes the nuclear program is aimed at developing weapons, which Iran denies.

"It's part of an effort by Iran to generate interest in its gas industry," said Nikos Tsafos, a natural gas expert with Washington, D.C.-based consultancy PFC Energy. "It's looking to Europe, Russia and China, but none of them have so far been willing to put serious money to these export projects."

Oil Barrels
Oil Barrels

The strategy is not new for Iran, where the impact of the U.S. sanctions has been amplified by crude oil's price plummet. Crude oil sales bring in about 80 percent of the country's foreign revenue.

With President Mahmoud Ahmadinejad facing a tough re-election battle in June against reformers favoring better ties with the West, the deals signal a stepped-up effort to placate an increasingly impoverished population with examples of how Tehran is defying Western pressure.

"The real question is whether Iran can deliver" the necessary export volumes and stick to timetables, Tsafos said.

By most indications, the answer is no.

Gas shortages in some parts of Iran already are common during winter months and demand for natural gas is growing yearly, even as the country struggles to contain production process losses that eat into roughly 30 percent of its gross output and cast doubt on its ability to meet higher export commitments.

In 2007, for example, of the 174 billion cubic meters of gross production yearly in Iran, 16 billion cubic meters were flared (burned off), 20.5 billion was re-injected to sustain oil well pressure, 18 billion cubic meters was lost in what is known as shrinkage, or the reduction in volume due to extraction of some of the gas constituents.

BIG NEED FOR FOREIGN INVESTMENT

In the latest Persian pipeline proposal, Nozari said Iran would transfer gas to Greece and Italy through Iraq, Syria and the Mediterranean, according to Press TV.

The project would almost certainly face competitive challenges from the U.S. and EU-backed prospective Nabucco pipeline that would pump Caspian gas to Europe bypassing Russia. Two other projects — the TGI, the Turkey-Greece-Italy pipeline and the Trans-Adriatic pipeline, which also bypass Russia — are also competitors and all those projects would be vying for the same supplies of gas, including from the Shah Deniz project in Azerbaijan.

For Energy Investors:

In large part, Iran's problems are linked to its need for foreign investment and its struggles with declining oil production in its aging fields. Many of those fields require extensive re-injection of natural gas to sustain well pressure and keep the crude flowing.

At a recent energy seminar in Vienna, Nozari acknowledged that Iran is diverting funds from other sectors of its national budget to maintain oil output at over 4 million barrels a day.

The comment was a clear reference to the country's discomfort with current oil prices, which are about one-third of their mid-July highs of $147 per barrel. But they point to the broader challenges Iran faces: It needs foreign money and expertise — two things it has little access to because of sanctions.

The Iranians "have been facing rising costs," said Samuel Ciszuk, Middle East energy analyst with IHS Global Insight in London. "On top of that is: Iran is coming into a position where it needs very large investments in its oil industry."

Earlier in March, Tehran announced that it had signed a $3.2 billion gas deal with a Chinese-led consortium to produce more than 10 million tons of liquid natural gas over the next 36 months. Iran and Russia also announced a gas swap arrangement in which Russia's Gazprom would deliver gas to northern Iran in exchange for gas deliveries from southern Iran.

The China deal that involves Phase 12 of the massive South Pars gas field is perhaps the most high profile of the ventures. Iran previously said the project would be exclusively for Iranian firms but later opened up the project, an indication of its cash crunch.

More for Investors:

In signing deals with little or no immediate cash outlay requirement, Russia and China, get a toehold in Iran in projects they normally would find themselves too small for. That could give them an advantage when or if sanctions are eased.

The overtures appear to be part of an effort to pressure Western firms. But they're not biting.

French oil giant Total S.A.'s chief executive, Christophe de Margerie, said Thursday in Paris that he doubted talks between the company and Iran over developing the massive South Pars gas fields would ever succeed.

Iran last month rebuked Total, saying it was succumbing to U.S. pressure and "procrastinating" on Phase 11 of the project. Tehran said a new partner would be brought on, but days later said Total was still involved in the project.

"On the Iranian part, they're trying essentially to make companies commit, and they tried various things to do that, including looking to other partners or saying that companies will lose their position if they don't commit," said PFC Energy's Tsafos. "This, at least so far, hasn't quite succeeded in making anyone say, 'OK, we're going to go ahead now.'"

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