Iran Analysis: Assessing Europe's Sanctions & Tehran's Oil (Noel)

Writing on Race for Iran, Pierre Noël offers an interesting analysis of European sanctions and Iran's oil and gas position, both regarding exports and imports. In the end, its significance is not as much economic --- Noël does not, for me, get to the heart of the tensions over whether Iran can satisfy its domestic demand, given the gap in imports and production left by the withdrawal of foreign companies, as well as cope with the restrictions on its exports --- as political: "Any issue that allows EU [European Union] member states to present a united front and make Europe exist on the world stage looks like a gift from heaven":

Iran is a country with very large reserves of natural gas, a lot of it relatively low-cost to produce.  With the right investment, Iran could become a gas exporter of global significance in about a decade.  Europe is one of the largest gas markets in the world.  Its combination of liberalized electricity markets and ambitious environmental policies has the effect of favoring gas as a fuel for power generation, at least in the mid-term.  Russia’s position in the European gas market raises concerns about market power and the politicization of gas supplies from Russia.  The EU supports new gas pipeline projects from Central Asia and the Middle East through Turkey to diversify Europe’s sources of natural gas; the availability of Iranian gas could be essential to the success of this diversification strategy.  Russia, on the other hand, should want to prevent or delay the emergence of Iran as a large gas exporter.

However, there are a number of uncertainties, which, taken together, raise serious questions about the practical validity of these interlinked propositions.  First, at the moment we do not know to what extent the latest EU sanctions will add to the difficulties already experienced by the Iranian oil and gas industry to source technology and finance.  These is a log of oil and gas activity going on in Iran, but large-scale gas export projects combining complex financing and cutting-edge engineering are not part of this activity.  This is certainly the case for LNG [liquified natural gas] projects, an area where the relevant technology is still largely controlled by Western companies; it is unclear to what extent big pipeline export projects could be carried on.

Second—and more fundamentally—it is far from certain that becoming a large gas exporter is a strategic priority for Iran, or even a clearly defined objective.  Iran’s potential to become a large gas exporter has been recognized for decades, but that potential has never materialized.  Iran imports roughly 5 billion cubic meters of gas per year (bcm/y) from Turkmenistan and exports roughly the same amount to Turkey.  The Islamic Republic’s small export contract with Turkey is notoriously unstable and has led to numerous rows over price and delivery.  European majors such as Total and Shell have had a terrible experience negotiating with Iran over LNG projects (and, during the 1990s, over oil projects as well).  When the European companies pulled back from new projects in Iran three years ago, ostensibly because of sanctions, the companies were not in a position to make final investment decisions on these projects for commercial reasons.

Becoming a large gas exporter would require a strategic decision by Iran, based on a wide political consensus—such as the one underpinning the Iranian nuclear program—to open the sector for real to foreign investors.  There is deep opposition to such a move in the Iranian political culture and the culture of its oil and gas bureaucracy, rooted in the memories of the U.S.-sponsored coup of 1953 following the nationalization of British oil concessions by the nationalist Mossadegh government.  If becoming a large gas exporter was a strategic objective for Iran, then the Iranian government would appear hopelessly incompetent at pursuing it.  Bu tgeology is not destiny; Iran may not want to be the next Qatar.

Furthermore, Iran is itself a large and fast-growing gas market, now 30% larger than the largest European markets, the UK and Germany.  Iran needs to continue developing some of its reserves simply to supply its domestic market; that is what Iran’s gas-related exploration and production activity has been about for some time and—I would suggest—that is what Iran’s gas-related exploration and production activity will continue to be mainly about.  The existing sanctions have been effective at killing proposed LNG export projects—but these projects might not have gone ahead anyway, in the absence of sanctions, for commercial reasons.  There is no indication that the sanctions have had any impact on the growth of gas production in Iran.  I do not know to what extent the Iranian industry’s exploration and production effort relies on European technology and services that would be made unavailable by new EU sanctions, and would not be replaceable by technology and services from Asian or South American companies.

This does not mean that Iran has no strategic energy policy.  In the context of the standoff with the “international community” over its nuclear program, Iran is obviously trying to use the attractiveness of its energy resources and geographical position to its political benefit.  The growing interest of Chinese oil and gas companies in Iran has been widely documented—but it has not led to any new gas export project.  Turkey’s ambition to increase its access to Turkmen gas via Iran has already been discussed on www.TheRaceForIran.com (see here andhere).  Given how strategic Turkmen gas (and the trans-Caspian pipeline) is to Europe’s Nabucco concept, Iran has an option to provide Turkey with both access to gas and leverage on Europe.  The Iran-Pakistan pipeline project, for which the Pakistani government has just reaffirmed its support, is another example where Iran uses its energy assets strategically to raise the cost of the U.S.-EU Iran policy.

The final point is about Europe’s plans for a large pipeline across Turkey that would bring gas from Central Asia and the Middle East to the EU, especially south-east and central Europe....

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