1. Your One-Stop Consulting Group in Iran Bijan Khajehpour Istanbul June 2009 Iran’s Strategic Considerations in Assessing the Nabucco Project

2. 2 Objectives Review current data and realities in Iran’s gas sector; Offer some information on gas-related projects and existing and/or planned pipeline infrastructure; Review key positions inside Iran with regard to gas exports, especially the Nabucco project Discuss strategic factors influencing the potential of Iranian gas exports to Europe.

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4. 4 Iran’s Oil and Gas Balance Sheet GasOil Reserves in place47.86 tcm500 billion barrels Recoverable Reserves29 TCM137 billion barrels Rank2 nd after Russia2 nd after Saudi R/P Ratio165 years92 years Share of world reserves16%11.5% Grand Total Reserves: 315 BBOE R/P Ratio: 122 years

5. 5 Iran’s Gas Data 199020002010 (estimate) 2020 (estimate) Production (bcm p.a.) 55110250400 Iran’s production share of world total (in %) 2.23.56.78.9 Total Reserves (tcm) 17253029 Iran’s reserve share of world total (in %) 13.115.816.716.5

6. 6 Iran’s Gas Development Plans Iran has developed its gas resources aggressively and it also has ambitious plans, i.e. an investment volume of $45 billion by 2020; The gas is planned to be used as follows: –Injection into oil fields; –Maximizing domestic use of gas within the energy basket; –Utilization in petrochemicals and other gas-based industries including gas-to- petroleum products; –Export of gas through pipelines and LNG; Sector Investment Volume (in $ billion) Oil 40 Gas 45 Petrochemicals 25 Power Generation 20 TOTAL 130 Investments needed in Iran’s energy sector 2005-2020

7. 7 Critiques of the Current Plans The current gas picture has a number of critiques from different corners: –Many criticize NIOC for lacking a comprehensive gas strategy (both on development side but also on utilization side); –Some argue that Iran’s reserves are inflated and that Iran should be careful with the rapid consumption of its resources; –Others say that it is a big mistake to export gas through pipelines and that Iran should use its gas to develop gas-based industries inside Iran; (central argument: exporting gas is like exporting development!); –A fourth group contend that Iran’s decisions in the oil and gas sector are usually politically motivated and not technically driven;

8. 8 If all Iranian plans including gas exports materialize in the 25 year period up to 2030, then the accumulated gas use would be: This is only 37% of the total present estimate of the country’s gas reserves - so, if the reserve figures are correct, Iran should be fine with all these plans; The main reason for current doubts about exports has been under-performance in the domestic gas sector due to lack of investments rather than lack of resources! Accumulated Gas Requirements

9. 9 Issues: Domestic pressure against export plans, especially due to implementation delays in domestic gas projects; High domestic consumption due to cheap energy prices –Often results in power outages in summers –Supply runs short in winters, interrupting exports Lack of feed for upcoming petrochemical and power projects; Priorities: Development –Main focus on South Pars; Feeding the domestic consumption and increasing the share of gas in the domestic basket; Injection –Depletion remains a main concern; Gas-based Industries; Exports to immediate neighbors (strategic); Further exports; Gas Sector: Priorities and Issues

10. 10 Iran’s Strategic Considerations in the region Over the past decade, Iran’s main emphasis in proposing pipeline routes, has been an extension of Iran’s regional strategy; Iran has viewed pipelines and closer cooperation among regional players as a strategic element in regional relations (economic cooperation as an element in easing regional tensions); Natural gas is increasingly becoming Iran’s main focus in hydrocarbon development, partly due to South Pars being shared with Qatar; Energy and Pipeline politics have been an important parameter in Iran’s external relations (look at Iran’s deals with China and India), though it has been overshadowed by the recent stand-off regarding nuclear technology;

11. 11 Is there a Strategic Shift? However, Iranian officials realize that there are many burdens in the way of pipelines (not the least pressure from the US and geopolitical irritations). As Iran needs to develop a strategy for its excess gas, there seems to be a shift towards focusing on the development of Gas-intensive Industries. Key parameters in this strategy would be: –Creation of a number of special zones for the development of gas-intensive industries (eg. the Jask Region at the Sea of Oman); –Potential Industries: Petrochemicals; Cement, Aluminum, Steel etc. –Investors are encouraged to look at potential of integrated projects; –Prices and rates of return will vary depending on industrial sector; Apart from designating a region, no other steps have been taken in this direction and there is still no contractual framework for such agreements; There is a bill in the Majles that would address the gas pricing issues; The development of gas-based industries does not mean an end to the planned pipeline projects including Nabucco, but one needs to address Iranian concerns;

12. 12 Factor’s Influencing Iran’s Role in International Projects Geopolitical Factors: Concerns over political instability in the region, especially in the light of failed US interventions in Iraq and Afghanistan; Iran could potentially be the key anchor of stability, but developments in Iraq as well as in Israeli-Palestinian conflict are uncertain; Iran-US relations remain a key irritant to long-term development plans; Commercial Factors: Uncertainties relating to Iran’s gas pricing mechanisms; Security of supply as well as security of demand; Legal uncertainties connected to the investment regime in Iran as well as cross-border issues;

13. 13 Specific Iranian Concerns Uncertainty about the future of Iran-EU relations due to the current hiccups emerging from the nuclear stand-off; A desire in Iran, not to compete with Russian interests in Europe in order not to undermine the good relations between the two countries; Concern about an over-reliance on Turkey as a transit country; Alignment of the proposed pipeline with Iran’s long-term objectives;

14. 14 Iranian Reactions to Nabucco So far, the Nabucco project has not managed to attract high-level Iranian confidence in the project; Iran has responded by proposing its own Persian Pipeline (a gas pipeline to Europe) which at this stage is merely a planned pipeline to the Turkish-Iranian border (see IGAT 9 – the blue pipeline on the next page); Iran is also engaging other scenarios, i.e. through negotiations with Greece to look at entering the European grid from the south of Europe; Iran has even looked at a route that would go through Iraq, Syria and the Mediterranean For now, Iran wants to keep its options open; Iranian officials have said on the record that they would consider Nabucco, if the project invited Iranian participation;

15. 15 Jask Special Zone for Gas-based Industries

16. 16 Prospects Nabucco needs to address all different mindsets in the Iranian political structure by addressing issues such as transfer of technology, job creation, demand security etc.; Iran’s geo-strategic considerations will be a key irritant for some time (especially the desire not to compete with Russia), therefore, the inclusion of a Russian player may address this parameter; The project should also include an Iranian partner for all stages rather than just being the contractual party of a sales agreement – it could potentially include some pipeline construction inside Iran as well; Iranian attitudes towards the project will be shaped by the overall political and geo-strategic developments – an opening in Iran-US relations as well as improvement in Iran-EU ties would change the dynamics dramatically; At the heart of the matter remain two core items, i.e. maximization of the use of Iran’s gas resources as well as the Iranian desire to maintain a strategic significance as a future oil and gas exporter to world markets;