Oman looks beyond Iran sanctions for gas lifeline

Reuters

* Oman laying political foundations for future gas imports

* Sanctions, price disagreement, technical challenges big hurdles

* Iran liquefied natural gas exports from Oman unlikely

By Daniel Fineren

DUBAI, Sept 29 (Reuters) - If Iranian President Hassan Rouhani's dream ofreaching a deal with world powers on Tehran's nuclear program in six monthscomes true, Oman, an important intermediary in the dispute, could be a bigwinner.

There have been too many false dawns in Iran's decade-old standoff with theWest over Tehran's nuclear programme to bank on Rouhani's call in New York lastweek for a deal within 3-6 months.

But in the weeks leading up to Rouhani's first foreign trip since he becamepresident in August, Omani officials have been visiting Tehran in a bid to buyIranian gas in the hope that some day sanctions on Iran will be lifted and Omancan finally get the supplies it desperately needs over the Strait of Hormuz.

Iran sits on the world's largest reserves of gas and Oman has been trying tobuy some of it since 2005 to feed energy intensive industries and liquefiednatural gas (LNG) export plants planned before it cut its own reserves estimate.

Price disagreements, Western sanctions that have stunted Iranian energyprojects and U.S. pressure on Oman to find other suppliers have prevented anyreal progress with the pipeline project since then.

But Oman is ahead in a queue like that which formed at Myanmar's door assanctions against the southeast Asian state were eased.

Muscat has moved quickly to cement ties since the election of moderateIranian President Hassan Rouhani improved long-term trade prospects, with Oman'sSultan Qaboos Bin Said the first head of state to meet Rouhani after hisinauguration in early August.

On that trip, the two countries' energy ministers signed a gas supplyagreement that Iran's energy minister valued at $60 billion over 25 years, whichwould be by far the biggest trade deal between the two neighbours, if any gasever flows between them.

"The new government of Iran has a different approach. We are very optimisticthat all the political issues between Iran and the West, particularly, will beresolved," Oman energy minister Mohammed bin Hamad Al Rumhy told Reuters inearly September after signing the gas deal in late August.

"This is our wish in Oman and we're working towards it... The feeling inOman is that things are changing."

Sunni Gulf Arab leaders have tense relations with Shi'ite Tehran, but SultanQaboos has been on relatively good terms during his 43-year reign. He metIranian Foreign Minister Mohammed Javad Zarif and top Iranian militaryofficials on his latest trip, and his defence minister signed a militarycooperation deal in Tehran in mid-September, Oman's state news agency reported.

Oman is a close U.S. ally and has acted as a go-between for Tehran andWashington in the dispute over Iran's nuclear programme, according to U.S.embassy cables published by Wikileaks dating back to 2006. Tehran dismissesWestern suspicions it plans a bomb, saying its nuclear aims are purely peaceful.

U.S. officials have been warning that building a gas pipeline to Iran wouldlikely be in violation of sanctions since an early trade deal was signed in2007, according to U.S. Embassy cables published by Wikileaks.

Although the political environment has improved since Rouhani came to power,sanctions remain firmly in place and any company involved in the project wouldprobably be in violation of them, a Western diplomatic source said.

GAS SHORTAGES

The U.S. ambassador to Oman wrote in a Sept. 15, 2008 cable published byWikileaks that his office would "continue to remind relevant officials asappropriate of the potential applicability of the Iran Sanctions Act," but notedthat "Oman's urgent need for new gas supplies and dearth of potential suppliersseverely limits receptivity to our message".

Oman started importing Qatari gas through a pipeline across the United ArabEmirates in 2007. But it was not enough. A U.S. embassy cable dated May 6, 2009,quoted Minister Rumhy saying gas imports from Iran were "necessary andinevitable" because Qatar and Saudi Arabia had turned down his supply requests.

The U.S. embassy and Oman energy ministry in Muscat declined to comment onthe latest gas deal but the Western diplomatic source said it had not been donewith U.S. approval, despite a brighter outlook on relations with Tehran.

A U.S. official in Washington said: "U.S. concerns have been conveyed toOman," but did not elaborate.

Oman's ever-growing gas appetite has already taken a bite out of itspotential LNG exports and unless it can find a lot more feedstock those exportscould dry up altogether over the next decade, analysts say.

Iranian officials have said they expect gas exports to Oman to start inunder two years, but Rumhy has said it is unlikely construction of thephysically challenging subsea pipeline could even start in that time.

His talks with Iran coincide with continuing negotiations to finaliseBritish energy company BP's Khazzan project to extract hard-to-reach gasin Oman that could supply around 1 billion cubic feet a day by 2018.

Oman will still need more imports in the longer term, so it makes strategicsense to do the political groundwork even if sanctions hold back progress.

"Given the recent changes in the political leadership in Iran, this is goodtime to start working towards a mutually beneficial agreement," Richard Quin,Lead Analyst Middle East & North Africa Upstream Research at consultants WoodMackenzie in Edinburgh, said.

"The advantage of this being a long term play is that it allows time forgeopolitical challenges that exist between Iran and the rest of the world tomake some kind of material progress."

MANY OBSTACLES

Tehran has signed deals to supply gas to Pakistan, Iraq and Oman, but Iran'sown voracious gas appetite has made it difficult to meet existing salescommitments with Turkey and forced Iran to import gas from Turkmenistan.

Delays to an overland link to Pakistan highlight the financial and politicalobstacles to any such project as long as Tehran is in Washington's bad books.

The Oman route has not yet been decided. But the options available are alltechnically challenging for a country that has only ever laid relatively shortpipelines in the shallow waters of the Gulf.

Iranian hopes of using spare capacity at Oman LNG export plants to shipIran's gas to a global market are even more distant dreams, analysts say,because sanctions-wary Western companies hold shares in them.

The biggest obstacle could be reaching agreement on the value of Iran's gas.Gas prices in Oman are fixed at below the costs of most producers and even afterplanned rises in the next few years, are set to remain well below internationallevels.

The LNG part of the project would improve the economics from an Iranianperspective, because it could open access to the markets of east Asia whichcurrently pay five times more for gas.

But analysts say it is hard to see Oman's LNG project partners agreeingterms with Tehran, and unless Iran agrees to supply gas to Oman at a price belowthe low levels set in long-term LNG export deals Oman has signed, they say itwould make more economic sense for Oman to stop exports of LNG instead.

"(The) big questions - much more important than sanctions and the technicalside - are what would the price be, and does Iran have any gas to export?" saidJonathan Stern, head of gas research at the Oxford Institute for Energy Studies.

"History is littered with Iranian regional gas pipeline schemes which cometo nothing; this is a revival of one of them and I doubt it will make anyprogress."

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