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Outside View: Why a Russia-Iran gas fight?

Posted by Kris Roman on April 15, 2008

Iran has stepped up its diplomatic activity, suggesting that its conflict with the West over its nuclear program is losing momentum, and the use of military force to settle it is no longer the only option.

Americans, who are preparing for presidential elections, are more concerned about Iraq and the mortgage crisis.

But when analyzing the situation from the Russian perspective, we should remember that Iran has added energy to the quiver of its military and political arrows. Its advance to the global gas market could disrupt the current balance of interests there.

Iran is the world’s fourth-largest oil producer after Saudi Arabia, Iraq and Kuwait, and has the second largest gas reserves after Russia.

In the past few years, a combination of international sanctions and internal technical and political problems has hindered both gas production and development of Iran’s energy sector. But surging gas prices have spurred foreign interest in Iranian reserves. Tehran has been pursuing a more energetic gas policy, indicating its readiness to cooperate with the European Union, which, eager to diversify its gas supplies, is increasingly willing to separate political from economic questions in relations with Iran.

Portugal has been negotiating with Iran since 2006. Italy’s Edison is discussing supplying Iranian gas to Italy. In mid-March the Swiss electricity group EGL signed a 25-year contract with the National Iran Gas Export Co. on gas supplies worth $20 billion. Soon after that, Austria’s EconGas GmbH signed an agreement on gas deliveries from Iran beginning in 2013.

The Nabucco project, which Europe and the United States view as the main prong in the drive to diversify gas deliveries to the EU, was initially designed to pump gas from Iran’s Caspian coast to Europe, bypassing Russia.

Austrian energy concern OMV planned to develop the South Pars gas field in Iran, the largest in the world (with 3,500 trillion cu m, or 123.55 trillion cu ft), for the Nabucco pipeline. But it shifted its focus to Azerbaijan when relations between Iran and the United States deteriorated.

Azerbaijan, however, does not have enough gas for the pipeline, which needs at least 30 billion cu m (1.06 trillion cu ft) per year to be profitable.

The success of a Russian diplomatic offensive in the Balkans in late February seems finally to have buried the project. Russian officials signed agreements with Bulgaria and Serbia on building a rival pipeline, South Stream, to pump Central Asian gas to Europe.

But the initiators of the Nabucco project have continued to search for alternative gas sources, in particular in Iran.

Aware of its critical importance for Nabucco, Tehran has become more active on the gas market. Iranian Foreign Minister Manouchehr Mottaki said during his visit to Bulgaria shortly after Russia and Bulgaria signed the South Stream contract that Iran’s involvement in Nabucco was “a possible sphere of cooperation with the EU.”

However, Iran would not like Russia to view this as a challenge to its energy strategy in southern Europe. “My words regarding the Nabucco gas pipeline are not spearheaded against a third country,” Mottaki added.

Is this so?

Iran’s advance to the European gas market and its plans to develop its gas reserves could well disrupt the balance of interests on the market, which European consumers question anyway.

Coupled with U.S. plans for developing Iraqi gas reserves, Iranian gas could provide the requisite supply for the Nabucco project. This may be hypothetical at the moment, but the mere existence of potential gas reserves for the pipeline may encourage Russia to step up the South Stream project.

Iran’s contract to deliver gas to Switzerland stipulates the early commissioning of the Trans-Adriatic Pipeline, a joint project between EGL and Norway’s StatoilHydro. In other words, Iranian gas could be delivered to two export pipelines running to Europe: Nabucco and TAP.

This can be interpreted as the struggle for the vast — some say inexhaustible — European gas market. It is true that Europe needs increasing amounts of gas, but it is also working hard and spending mind-boggling sums in an effort to level off its energy balance, cut the share of hydrocarbons in it and introduce energy-saving technologies. In 10 to 15 years these efforts and expenses may lead to a drop in gas consumption.

Competition on the gas market will soon affect prices. This group of risks has come to the fore after Turkmenistan, Kazakhstan and Uzbekistan announced their decision to convert to European gas prices in their contracts with Gazprom. The Russian gas monopoly accepted their prices, although this will inhibit its room for maneuver in the upcoming struggle for gas markets.

Meanwhile, Iran is playing on the EU’s desire to ease its dependence on Russia and save money. NIGEC’s 25-year contract with Swiss EGL has been assessed at 10 billion to 22 billion euros, or 90 to 200 euros per 1,000 cubic meters (35,300 cu ft) of gas. Gazprom sells its gas to Europe at 240 euros and may increase the price to 260 euros by the end of the year.

So far, Iran does not have enough gas to pose a serious threat to Gazprom’s position in Europe. The Russian company satisfies as much as 30 percent of European gas demand (about 150 billion to 160 billion cu m, or 5.65 trillion cu ft, annually). Considering the combined capacity of Nabucco (31 billion cu m, or 1.09 trillion cu ft) and TAP (10 billion to 20 billion cu m, or 353 billion to 706 billion cu ft) and the projects’ deadline set for 2012-2013, they are unlikely to radically change the situation on the gas market, although time will be a crucial factor.

On the other hand, signs of improvement in relations with Iran do not mean that the United States has no complaints. Likewise, Europe has no freedom of choice in the matter, because Washington insists that the Iranian-Swiss gas supply contract be scrutinized for compliance with the provisions of sanctions against Iran. Geneva and other European capitals surely know what this warning means.

This points to one more possible scenario, beneficial to Gazprom: Iran may reroute its gas supplies to China, Pakistan and India. Why should it wait for the United States to change its attitude when there are potential clients in the east with huge energy requirements who will not be swayed by Washington?

Indian Oil Minister Murli Deora has recently said the country wants Iran to build a gas pipeline to India and plans to resume talks with Pakistan on the natural gas pipeline from Iran. The United States is reportedly against that project, but India intends to ignore its objections.

Iran and Russia should probably not compete against each other but rather join hands on the gas market. The Iranian president has more than once suggested to his Russian colleague that their countries coordinate their gas policies and possibly divide gas markets. Moreover, there could be an agreement under which Russia will continue to supply gas to Europe, while Iran will export its gas to the east. This would undermine plans to diversify supply to Europe, which heavily depends on the United States.

There is growing evidence of plans to form a gas cartel, not unlike theOrganization of Petroleum Exporting Countries, at the 7th Ministerial Meeting of the Gas Exporting Countries Forum in Moscow this summer. Iran has drafted the charter of the new organization. Its approval would formalize the many semiformal cartel-type agreements that have allegedly been signed.

(Igor Tomberg is a senior research fellow at the Center for Energy Studies, the Institute of World Economy and International Relations at the Russian Academy of Sciences. The opinions expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.)

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