Total Abandons Pursuit of Pars LNG Project in Iran But Leaves Door Ajar

Pars LNG—Becoming a Political Millstone

Total's chief executive, Christophe de Margerie, in an interview with the Financial Times, said that it was now too risky to invest in Iran, making progress on its Pars LNG gas liquefaction project highly unlikely. Saying that “today we would be taking too much political risk to invest in Iran because people will say: ‘Total will do anything for money’,” de Margerie underlined that stakes had become too high—not only in the sense of potential sanctions and the need to sell off U.S. assets in order to escape them—but also because of the reputational risk involved in dealing with a country so clearly on a collision course with the large Western states over the perception of its nuclear programme.

The Pars LNG project has involved plans to develop production of 1.8 bcf/d of natural gas from the South Pars field's Phase 11 and process it into LNG through the construction of a two-train integrated liquefaction plant with a total LNG production capacity of 10 million t/y. The integrated venture was, during the original discussions that ended in 2004, scheduled to come onstream in 2009; however, with political uncertainties and spiralling global costs, a formal final investment decision has been continuously postponed and has become increasingly unrealistic with every new set of United Nations (UN) sanctions, as well as unilateral U.S. sanctions. The decision of several European countries—primarily Total's home country France—to come out strongly in favour of toughened sanctions last year further rendered progress unlikely in the near to medium term. More recent deadlines for the project have been set at 2011-12, which by now was becoming increasingly unrealistic anyway.

Iran's Gas Export Dilemmas

Gas liquefaction technology remains highly advanced and in the hands of a few proprietary rights holders. The narrow group of international companies that have experience of managing the construction of a liquefaction plant makes it close to impossible for Iran to proceed on its own. Sanctions have not only been successful in keeping the technology and components away from the Islamic Republic, but have also cut off most of its financial industry from the outside world, turning the execution of a potential large-scale hydrocarbon project in the country into a major headache for any operator.

With Shell-Repsol's Persian LNG project postponed for perhaps up to a decade, and Total/Petronas's Pars LNG following in its footsteps, Iran is now left only with its own domestically pursued Iran LNG venture, as the China National Offshore Oil Corp. (CNOOC) has showed itself unwilling or unable to get the huge North Pars LNG project off the ground without a Western partner. However, Iran LNG is suffering all the characteristic problems of Iran's technological isolation, with the Iranian companies proceeding with all surrounding facilities and the upstream component, but still lacking any tangible progress on the liquefaction plant itself.

Partner Petronas

Total's Malaysian partner Petronas—which holds a 40% stake in the upstream component but withdrew from half of its 20% stake in the downstream LNG plant a couple of years ago—is likely to follow as part of the Total postponement deal as it becomes official. In the past month the company was reported by Upstream as saying that it did not see the possibility of proceeding with Pars LNG in the current situation, and the fact that it had already relinquished half of its downstream stake a couple of years ago indicates that it has found the political pressure even harder to bear than Total for quite some time.

Leaving the Door Ajar

Shell and Repsol-YPF recently agreed to decouple their downstream Persian LNG venture from Phase 13 of the South Pars field, effectively putting development off for up to a decade (see Iran: 13 May 2008: Iran Reshuffles South Pars Development, Delays Shell/Repsol LNG Project to Salvage Momentum). Total—although there is still not any official confirmation—is now doing the same. As Global Insight reported recently, Total and Petronas have been in talks with Iran for some time over being allocated South Pars phases slated for later development, as a way of avoiding coming under further Iranian pressure to proceed (see Iran: 7 July 2008: Total in Talks to Swap South Pars LNG Upstream Acreage in Iran to Delay Development).

Such an agreement is as ideal for Total and Petronas as it is for the Shell-Repsol consortium, since the companies are then free to return to Iran when conditions become more favourable and do not have to give up these large and vastly important projects. The deal also demonstrates how dependent Iran is on these companies to bring in their technology and expertise to the Islamic Republic, as it has refrained from stripping them of their participation rights—despite sometimes threatening to do so—when they have failed to commit investments, instead preferring to postpone the projects indefinitely.

Outlook and Implications

Total's decision—with Iran's blessing—to postpone the Pars LNG project indefinitely is likely to mean that Iran's wish to become a LNG exporter is set back a further eight to 10 years at best, given the current sanctions situation and the long lead-times involved in these projects. Iran's hope of developing the Iran LNG project by itself will also take a further blow, as originally, Total's development of Pars LNG was meant to serve as a learning ground for Iranian engineers. Sanctions and a lack of know-how now look set to stop those plans altogether, as Iran has serious problems in finding a willing supplier of liquefaction technology.

This leaves Iran with only one remaining large-scale gas export venture that has not yet been scrapped (since the European Union is unlikely to proceed with hooking up Iran to the proposed Nabucco gas pipeline): the Iran-Pakistan-India (IPI) gas pipeline. That project might still go ahead, but will have to fight continuous security concerns over its routing through unstable Pakistani territory, as well as pricing disputes between India and Iran. The pipeline will also become a single focal point in the U.S.-led efforts to isolate Iran, with a great deal of added political pressure on India and Pakistan to sever ties to be expected.

Nonetheless, Total still retains the possibility of coming back to Iran at a much later stage and seems to be able to guard against the project being given to Asian or Russian companies eager for acreage. Indeed, this demonstrates not only Total's wish not to abandon such a large and important project, but also Iran's dependence on the Western majors to provide it with the technology and expertise it so badly needs.

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