Oman Looks Beyond Iran Sanctions For Gas Lifeline

By Daniel Fineren

Oman’s Foreign Minister Yusuf bin Alawi bin Abdullah addresses the 68th session of the United Nations General Assembly in New York September 30, 2013. REUTERS/Adrees Latif

DUBAI (Reuters) – If Iranian President Hassan Rouhani’s dream of reaching a deal with world powers on Tehran’s nuclear program in six months comes true, Oman, an important intermediary in the dispute, could be a big winner.

There have been too many false dawns in Iran’s decade-old standoff with the West over Tehran’s nuclear program to bank on Rouhani’s call in New York last week for a deal within 3-6 months.

But in the weeks leading up to Rouhani’s first foreign trip since he became president in August, Omani officials have been visiting Tehran in a bid to buy Iranian gas in the hope that some day sanctions on Iran will be lifted and Oman can 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 to buy some of it since 2005 to feed energy intensive industries and liquefied natural gas (LNG) export plants planned before it cut its own reserves estimate.

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

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

Muscat has moved quickly to cement ties since the election of moderate Iranian President Hassan Rouhani improved long-term trade prospects, with Oman’s Sultan Qaboos Bin Said the first head of state to meet Rouhani after his inauguration in early August.

On that trip, the two countries’ energy ministers signed a gas supply agreement that Iran’s energy minister valued at $60 billion over 25 years, which would be by far the biggest trade deal between the two neighbors, if any gas ever flows between them.

“The new government of Iran has a different approach. We are very optimistic that all the political issues between Iran and the West, particularly, will be resolved,” Oman energy minister Mohammed bin Hamad Al Rumhy told Reuters in early September after signing the gas deal in late August.

“This is our wish in Oman and we’re working towards it… The feeling in Oman is that things are changing.”

Sunni Gulf Arab leaders have tense relations with Shi’ite Tehran, but Sultan Qaboos has been on relatively good terms during his 43-year reign. He met Iranian Foreign Minister Mohammed Javad Zarif and top Iranian military officials on his latest trip, and his defense minister signed a military cooperation 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 and Washington in the dispute over Iran’s nuclear program, according to U.S. embassy cables published by Wikileaks dating back to 2006. Tehran dismisses Western 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 would likely be in violation of sanctions since an early trade deal was signed in 2007, 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 would probably be in violation of them, a Western diplomatic source said.

GAS SHORTAGES

The U.S. ambassador to Oman wrote in a September 15, 2008 cable published by Wikileaks that his office would “continue to remind relevant officials as appropriate of the potential applicability of the Iran Sanctions Act,” but noted that “Oman’s urgent need for new gas supplies and dearth of potential suppliers severely limits receptivity to our message”.

Oman started importing Qatari gas through a pipeline across the United Arab Emirates 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 and inevitable” because Qatar and Saudi Arabia had turned down his supply requests.

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

A U.S. official in Washington said: “U.S. concerns have been conveyed to Oman,” but did not elaborate.

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

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

His talks with Iran coincide with continuing negotiations to finalize British energy company BP’s Khazzan project to extract hard-to-reach gas in 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 strategic sense to do the political groundwork even if sanctions hold back progress.

“Given the recent changes in the political leadership in Iran, this is good time to start working towards a mutually beneficial agreement,” Richard Quin, Lead Analyst Middle East & North Africa Upstream Research at consultants Wood Mackenzie in Edinburgh, said.

“The advantage of this being a long term play is that it allows time for geopolitical challenges that exist between Iran and the rest of the world to make some kind of material progress.”

MANY OBSTACLES

Tehran has signed deals to supply gas to Pakistan, Iraq and Oman, but Iran’s own voracious gas appetite has made it difficult to meet existing sales commitments with Turkey and forced Iran to import gas from Turkmenistan.

Delays to an overland link to Pakistan highlight the financial and political obstacles 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 all technically challenging for a country that has only ever laid relatively short pipelines in the shallow waters of the Gulf.

Iranian hopes of using spare capacity at Oman LNG export plants to ship Iran’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 after planned rises in the next few years, are set to remain well below international levels.

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

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

“(The) big questions – much more important than sanctions and the technical side – are what would the price be, and does Iran have any gas to export?” said Jonathan Stern, head of gas research at the Oxford Institute for Energy Studies.

“History is littered with Iranian regional gas pipeline schemes which come to nothing; this is a revival of one of them and I doubt it will make any progress.”

(Additional reporting by Amran Abocar in Seoul and Timothy Gardner in Washington; editing by Philippa Fletcher)

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