DISCLAIMER: all opinions in this column reflect view of the autor(s), not of Vocal Europe
by Madalina Sisu Vicari & Azime Telli ( PhD, Lecturer at Ondokuz Mayis University, Turkey)
Iran’s agreement with P+5 (the five permanent members of the UN Security Council and Germany) to curtail its nuclear program in exchange for the lifting of the economic sanctions is an historic deal as it would give Teheran the window of opportunity to re-enter the global energy markets. Though geopolitics had been given Moscow and Tehran a strong sense of common cause against the West and Russia played an important part in securing the deal, the end of sanctions may be a new challenge for the Russian-Iranian strategic relation, with significant consequences on its energy dimension.
So far, Russia and Iran have not competed neither in the sphere of the crude oil and natural gas exports, nor in the field of the control of the Caspian Basin’s huge energy reserves.
According to BP, Iran holds the world’s largest natural gas reserves, with 33.8 trillion cubic meters-or 18.2 percent of the world’s total proven reserves. Despite its vast gas reserves, the current the level of both Iran’s production and exports is low mainly due to the lack of investment and technological capacities. Hence, Iran is a marginal player in the global gas trade, as it exports 30 million cubic meters of gas per day, mostly to Turkey. Though Iran had signed several memorandums of understandings and pre-agreements for gas exports with Bahrain, Oman, Kuwait, Iraq and Pakistan, so far none of these deals materialized.
Due to its low gas production (172.6 billion cubic meters in 2014) and its high domestic demand, Iran currently imports nearly 10 billion cubic meters of gas per year from Turkmenistan and it plans to increase the import supplies in the near future. At the same time, the projections of Iran’s future domestic gas consumption show a sharp rise; thus, in 2025, the country would need 20-30 billion cubic meters of gas to satisfy its domestic energy needs. The Iranian natural gas production expects to increase in the coming years as new phases of the South Pars gas field-one of the world’s biggest gas fields, which holds nearly 40 percent of the overall Iran’s gas reserves- would be developed. However, the Iranian gas industry would need significant and large-scale investments in order to develop the country’s domestic gas production. The estimations are that Iran would need $100 billion to upgrade the current level of its gas production-nearly 800 million cubic meters per day- at the target sought by Teheran authorities for the upcoming years, 1.2 billion cubic meters per day.
Lesser pipeline competition but bigger LNG rivalry
The European Union has been actively pursuing to enhance its energy security through the diversification of the energy supplies-mostly the gas ones- a movement accelerated by the Ukrainian crisis. The Energy Diplomacy Action Plan, approved on July 20, 2015, emphasizes the Southern Gas Corridor as one of the key priorities of European Union’s energy diplomacy. Therefore, at the first glimpse, and by taking into consideration its vast gas resources, Iran may appear as a future and large gas supplier for Europe and consequently a strong competitor for the Russian gas on the European markets. Nevertheless, the large amount of abovementioned financial investments necessary to re-build the Iranian gas industry, coupled with the additional investments required for the construction of pipelines, would impede Iran to become on short-term a viable gas supplier for Europe through pipelines. Iran primarily plans to export its gas regionally but the likelihood to compete with Russia on these markets is only marginal in near future. A stronger competition could occur on the Turkish market, but that is unlikely to happen on short-term. Currently, Iran is not able to challenge Russia on Turkey’s market, neither with regard to the amount of supplies, nor with regard to the gas price, as Turkey and Iran are in the middle of international gas dispute arbitration at the International Court in Switzerland. On the other hand, the prospects of supplying Europe with the Iran’s LNG may occur in the next 5-10 years, as the Iranian officials announced it recently.
Though the recent projections on Europe’s future gas demand are rather contradictory -some scenarios envisage a surge of the gas demand, whereas other forecasts see a decline of the gas demand- it is acknowledged that Russia is striving to preserve its European gas market share in either case. Russia takes into consideration to compete on European market also with its LNG supplies; in this regard, Gazprom recently agreed a deal with Shell to develop the Sakhalin II LNG plant and signed a framework agreement with the Netherland’s Gasunie to develop small-scale LNG projects in Europe. Therefore, on the medium-term, if certain conditions would be reunited-mainly the revival of the abandoned Iranian LNG activities and the development of the Russian LNG projects in Europe-Teheran and Moscow may clearly compete on the European energy market.
Opposing to get the Turkmen gas to Europe: common stance, but would it last?
Despite their possible rivalry on the Europe’s LNG gas market in the future, Russia and Iran may have a far-reaching reason to cooperate on short term. The focus of this cooperation would relate to Russia’s intention to deter the achievement of the Trans-Caspian gas Pipeline (TCP), which should link Turkmenistan-the holder of the world’s fourth largest gas reserves –to Europe via the Southern Gas Corridor. In 2014, Turkmenistan and Turkey signed a deal to supply the Turkmen gas to the Trans-Anatolian natural gas pipeline project (TANAP). In order to pump its gas into TANAP, Turkmenistan should connect to Azerbaijan with a 300-km pipeline under the Caspian Sea. Planned since the 2000s, the TCP was a project that Russia continuously opposed and attempted to deter by using mainly two means: by arguing that the pipeline cannot be build in the absence of the legal status of the Caspian Sea and through the expression of environmental concerns.
Until this year, the TCP prospects seemed tiny, but two major events may change its course. The first one is the Ashgabat Declaration signed on May 1, 2015 between Turkmenistan, Azerbaijan, Turkey and the EU to cooperate in ensuring the supply of the Turkmen gas to Europe. The second important event is the agreement reached by Turkmenistan and Kazakhstan at the end of May 2015 on their maritime border in the Caspian Sea, which enhances Turkmenistan’s claim of using its national maritime sector for whatever purpose it wishes, including building a pipeline, without the approval of the other Caspian littoral states. Though the European Commission Vice President, Maros Sefcovic declared that Europe expects to receive the Turkmen gas supplies beginning with 2019, the TCP is far from achievement. However, Russia would not acquiesce to the TCP’s construction and consequently it may attempt to raise a range of obstacles against it, mostly legally grounded, as for instance the filling of a legal charge. So far, Teheran backed the Russian stance on the TCP but the maintaining of its position depends on a wide puzzle of variables such as: the possibility of transporting the Turkmen gas to Europe through the Iranian territory; the ambition to become a bigger gas supplier for Turkey; the aim of other Caspian suppliers (notably Azerbaijan’s) to acquire a greater share of the Turkish market once the TANAP’s capacity would be expanded; and the pursuit of Iran’s interest in purchasing stake in TANAP.
Could the gas-related challenges weigh significantly on Moscow-Teheran strategic relation in the future? Would they hold the potential to re-shape it? It remains to be seen.