One of the strengths that BG can offer to Iran is its understanding of the gas market around the world and its ability to develop gas markets in India, South America, Egypt, and other regions

British Gas has a very long history in natural gas industry going back to over a hundred years. It is primarily a gas major and that is what distinguishes it from other oil companies. Worldwide, if you look at the new BG about half of our revenue comes from downstream gas operations, distributing and marketing gas, and about half of the revenue comes from the upstream exploration and production. But within that 50% of E&P, the vast majority is natural gas. In volume terms, about 70% of our production of hydrocarbons around the world is natural gas and 30% is oil. That’s a reverse of what you would expect from a traditional oil company.
British Gas, until recently consisted of two separate parts: There was the gas utility in Britain, consisting of hundreds of thousands of miles of pipes, and there was the international arm. The gas utility in Britain was wholly regulated, because it is a public utility. The business is relatively a low-risk one and expectedly, yields a low reward. There is some growth, but it is really quite a mature market.
The international arm, however, has higher risk operations in more than 20 countries around the world. In the past few years it has become very different from that low-risk utility in terms of its management culture and management style. As the two business units were diverging so much, proper decisions were taken to actually split the two companies completely.
The two companies, both of which would be quoted on the stock exchange, are among the hundred top companies in Britain. This was another reason for their separation: it was very difficult for the stock exchange to know if the company was a utility company or an international company.
BG International is now focused on international operations, exploration, production and liquefied natural gas. Our gas markets are spread around the world in South America, Europe, North Africa, and power projects in countries which are a mix of emerging markets and developed, mature markets. We have a very wide geographical spread, and our main business is the natural gas. We think our natural gas skills distinguishes us from traditional oil companies.

Will you elaborate on the activities of BG International in the Middle East and Iran in particular?

We have been in the Middle East for quite a long time and Iran is an important part of our strategy. We were doing a series of studies, but not focussing on any particular investments. The board of British Gas early this year took a deliberate and informed decision that we would make a determined effort to find investment opportunities here in Iran. The motive for that was the enormous reserves in Iran: 800-900 trillion cubic feet of gas is the biggest reserve outside Russia. We thought there were opportunities in Iran for a natural gas company like BG, and we have expertise and knowledge to bring into Iran so that both parties can benefit.
One of the things that particularly attracted us about Iran was its proximity to the market in India, which is an increasingly important part of BG’s business. We have been in India for some time and own about 65% of a gas company which is the largest private gas company in India. We also have a 50-50 joint venture with the Gas Authority of India to operate the gas distribution company in Bombay. Moreover, BG has a joint venture in Gujarat state which is suitable for our LNG import terminal. India is energy-short in general, gas-short in particular. The existing indigenous supplies are going into the decline phase. There would be huge potential demand if gas could be available. We have been working on energy import scheme in India with our partners.
In our mind, there is a natural linkage between Iran with its huge reserves, and India which is in a relatively short distance away in terms of shipping costs for LNG. It is a highly competitive field. We believe we have something unique to offer in this field. That’s a main focus of our activity at the moment.
Earlier this year we signed a memorandum of understanding with Oil Industries Engineering and Construction Company (OIEC), which is a private joint stock company owned 40% by NIOC. Under that MoU, we agreed to look jointly for investment opportunities including upstream, downstream, gas, oil, etc. The combination of two companies is a very good fit: We have good natural gas skills and OIEC is a strong engineering company.
We signed a joint venture agreement in September to work together on the LNG export project, and to pursue that as a partnership. I reiterate that we have not got the project yet. We have to compete for that and we have to win it. Alongside the agreement to pursue the LNG project, we signed another agreement to jointly pursue South Pars phases 11 and 12, which have been designated by NIOC as the feedstock for LNG exports. Again, here is another project that we are aiming for in the face of a lot of competition involving serious players.

What are the estimated costs and implementation periods of these projects?

An LNG project is two trains with about 6-7 million tons of capacity and that will cost about $1.4 billion and South Pars 11 and 12 could be about the same number or a bit less. The two combined, they could be $2.5 billion of gross capital expenditure. So these are very big projects that are very dependent on the market. Natural gas is not like crude oil. You need to know what your market is, you cannot simply put it in tanker and simply trade it.
Speaking of timing, natural gas projects do take a long time. The LNG project in Trinidad, in which I was the marketing director of the first train, took us about five years from the start of serious marketing to first gas. This a lot depends on technical issues as well as marketing issues as how easily a market can be found.

Despite holding the world’s second largest gas reserves, Iran is yet to become a gas exporter. What specific strengths can BG bring into the Iranian gas sector?

We believe one of the main strengths we can offer to Iran is our understanding of the gas market around the world and our abilities to develop gas markets in India, South America, Egypt, and other regions. What must be added is our skills in engineering, design, operation and distribution in a more cost-effective manner. You must have a knowledge of what potential customers can benefit from natural gas both in cost terms and in pollution terms, and targeting those customers. Another point is understanding what is required technically to convert an existing factory from oil use to gas use, which we have a long history of.
We have an understanding of which industrial processes would benefit from natural gas, because there are some industrial processes like glass manufacturing, ceramics, etc. where controlling the heat is very important and with natural gas, controlling the temperature can be done very accurately.

How do you refer to the role of Pakistan in transferring gas from Iran to India through a pipeline?

The pipeline project has been under discussion for quite some time. There are some political issues between Pakistan and India, and these are not engineering or marketing issues. Our view is that India would want to do the LNG project first, since it is politically easier because of the good relationship between Iran and India, and subsequently the pipeline project. This would establish Iran as the most reliable supplier of gas and it is very important to the natural gas buyers since they need to be sure about the suppliers. Natural gas contracts naturally run for 20-25 years and a large part of the contract’s terms are concerned with ensuring the security of supply. And a country which is new to gas business should establish its reputation as being a reliable supplier.

And what’s next?