Iran's place in the global gas market is intriguing. On the one hand, it has the world's largest conventional gas reserves and is the world's third largest producer of gas-behind the US and Russia. On the other hand, it has been a consistent net importer of natural gas during the last decade, despite only having the world's 36th largest economy. Comparisons with other major exporters, like Russia and neighbouring Qatar, suggest Iran has unmet potential as a significant net exporter of natural gas.
Iran's path to becoming a major gas exporter is fraught with difficulties, including:
- Limiting gas waste in its residential and commercial sectors. Iran has made progress expanding its domestic gas network whilst increasing production. But low domestic retail gas prices have led to gas inefficiency. Iran has tried to address this with tariff reforms but it is uncertain if retail gas price levels will be increased high enough to fundamentally change consumer behaviour.
- Accessing capital, expertise and technology. Increases in Iranian production are predominantly from its giant South Pars field. Sanctions on Iran have played a big role in limiting expansion beyond this field, with capital and technology constraints slowing upstream development.
Implementing more export projects will need greater capital resources and technology. Western sanctions would need to be lifted for that to occur. If Iran can overcome its challenges, the country has significant export potential with:
- Pakistan and India are both potentially large gas markets. For India, in particular, Iranian gas will need to push imported coal out of the merit order and this suggests delivered prices around the 7-8 $/mmbtu level. We think Iran's strongest market position is supplying its closest neighbours and the region to its immediate east via pipeline, and such supplies could meaningfully start early in the next decade.
- The European pipeline market appears closed-off to Iran at the moment due to the construction of both the South Stream and Southern Corridor pipelines. The aftermath from the Ukraine crisis might change this, but Iran's inclusion in the European market will require both sanctions to be lifted and for the EU to stop the South Stream project.
- Completing the Iran LNG project would open access to markets further afield. Sanctions may need to be lifted for Iran to find enough countries willing to buy its output, although this may not be the case given the differences in how sanctions treat oil and gas.
Major pipelines and LNG projects will only proceed if international companies significantly expand their involvement in the Iranian gas sector. That outcome seems remote for now. Iran has the resource base to be a major gas exporter. But it currently lacks the infrastructure to support a rapid expansion of exports in the short-term. Lifted sanctions and a reduction in the political risk associated with business in Iran will be essential to overcome these barriers. If this does happen, Iran could be exporting some 30-50 bcm/y of gas by 2025.