Sunday, January 25, 2009

Is Oman's Kish gas deal in jeopardy?

Kish Island: Site of an undeveloped 40 Tcf Iranian gas field

A strange little report passed by my Google search yesterday - from IranOilGas news . But its subscription only.

Iran will develop its Kish gas field without Oman (subscription), Iran - Jan 20, 2009
It is not clear against what collateral, and under what terms & conditions, Oman will be financing such a project. PEDEC is in charge of developing Kish gas ...

and on their website:

Managing director of Iranian Offshore Oil Company (IOOC) Mahmoud Zirakchian Zadeh disclosed that developing Iran’s Kish gas field (initially planned to be undertaken jointly by Iran and Oman) ...

It might be that negotiations are getting a bit tense. (for those that don't know, Oman signed several MOUs with Iran to discuss a joint Iranian/Omani development of a part of the field last year. Negotiations have been on-going since). A previous 'indirect Google sample' of the report said the Iranians were proceeding with a Chinese company and without Oman. Hmmm.

Is this just negotiation tactics on the part of the Iranians? Maybe false? Or are the Chinese taking advantage of current low oil prices and diplomatic weight to snatch a deal by offering a better price and execution capability?

Loss of the Iranian gas would be a blow somewhat especially after around 2020 (depends on how screwed they were getting on cost and price though), but might redirect Oman's energies (and a lot less cash) to getting the gas through increased domestic commercial terms, because the Iranian gas was never going to be for less than a few dollars a MBTU. Or perhaps the Qatari's will help? Nope, they're frozen til 2010, and Bahrain is first in the queue. And don't even think of the Saudis, plus they need their gas themselves.

Question is - what would a Chinese company possibly do with a gas field in the Middle East? Either build an LNG plant, or, perhaps sell the gas to the Omani's via pipeline in exchange for liquified cargo ex-Sur(but obviously, for less gas once liquified, so the Omanis get a deal).. That way the Omanis are somewhat protected from dealing directly with the Iranians, and the Chinese pay all the upfront costs.

But, how can Oman sell Chinese/Iranian Gas back to the Chinese?

I'll speculate.

After around 2028 or so, the LNG plants will have lots of spare capacity as their Gas Sales agreements [GSA] expire, and 20% or so capacity is already currently available (as the LNG companies GSAs don't meet the newer and larger capacity at Sur). And the current capacity could be filled almost immediately with Omani gas (by borrowing gas already sold by the Omani Government to someone else in the far future). In that way, Oman could effectively sell the Chinese LNG right now from a gas field that hasn't been developed yet, if the Kish deal is solid enough to pay back the borrowed gas (at a steep premium, obviously).

Now that might be a winning deal...

Plus, because the sweetener would simply be the sale of borrowed gas and not cash, Oman would get cash now by accelerating production and some paper transactions. And the promise of a significant gas stream in the future, with someone else paying the bills.


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