May 6, 2014

Iranian Alternative to Russian Gas. Myth or Reality?

According to the Iranian news agency ISNA, the American analytical magazine Foreign Affairs in late April of this year published an article by the Minister of Foreign Affairs of the Islamic Republic of Iran Mohammad Javad Zarif “Iran's true goals: the foreign policy of Hassan Rouhani's government”. The article is permeated with the idea that Iran, as a mighty power in the region, is of an exclusive importance in world politics, which today is experiencing a difficult transition period. Further, he writes that the Islamic Republic can actively contribute to the process of establishing peace, security and stability not only in the Middle East, but also can play a prominent role in international relations.

Foreign Affairs in late April of this year published an article by the Minister of Foreign Affairs of the Islamic Republic of Iran Mohammad Javad Zarif “Iran's true goals: the foreign policy of Hassan Rouhani's government”
Foreign Affairs in late April of this year published an article by the Minister of Foreign Affairs of the Islamic Republic of Iran Mohammad Javad Zarif “Iran's true goals: the foreign policy of Hassan Rouhani's government”

“This position requires not only taking into account preservation of national security, but also improving the international status of the country, implementation of universal long-term goals.

In general, this policy precludes any opposition and sets the country's direction towards dialogue, constructive cooperation and understanding. This moderate position is based on realism, self-confidence, practical idealism and real cooperation", reads the article.

We'll take the article for a given and will see how Tehran intends to implement its position in reality. We will not consider Iran's practical opportunities globally, but will consider the prospects for Iran to transport natural gas to Western Europe countries, as has recently been stated by the Iranian authorities.

During the meeting with the Head of the Finance Commission of the French Senate Philippe Marini, who arrived in Iran on an official visit at the head of the French economic delegation, Deputy Oil Minister Ali Majedi said that Iran is ready to export gas to Europe and such supplies can be very real if necessary conditions are created. According to him, Iran has huge reserves of gas, and it is important for it to diversify export markets, while Europe, in its turn, seeks to diversify sources of energy carriers. “We want to export gas to Europe through Turkey or via some other routes”, — said the Deputy Oil Minister.

Note: To date, Iran has proven natural gas reserves of about 35 trillion cubic meters. Every day it produces about 700 million cubic meters. For comparison, we will mention that “Gazprom” at the end of last year recorded a record daily volume of gas production over the past almost five years in the amount of 1.6 billion cubic meters, or 230 % more than Iran's daily production. In terms of annual gas production, according to the data published in the Statistical Review of World Energy, Iran is behind the USA and Russia almost four times, having produced in 2011 a little more than 150 billion cubic meters of gas. Plans for the development of the gas industry in Iran in 2014 and 2015 provide for increasing this figure to 895 and 950 million cubic meters per day, respectively. At this, the absolute best part of this amount will be consumed domestically. Although, in the first place, Iran needs to increase gas production for export, the volume of which, according to forecasts by Iranians themselves, must be at least 30 % of the gas produced in the country, or up to 250 million cubic meters per day. That is, the daily volume of gas delivered abroad is planned in the coming years to increase from 35 million cubic meters almost seven times.

In the situation when Russia is actively using gas for Western Europe as a weapon to pressure and blackmail, talks about Europe's soon getting rid of dependence on traditional energy resources, have got activated. But talks remain talks, as in reality, more than half of its energy needs the EU still meets through import. According to Western analysts, up to 2050, about 25% of Europe's energy needs will be met by gas, and the cost of fuel imports in 2030 will reach about 500 billion Euros.

Countries' dependence on Russian gas
Countries' dependence on Russian gas

Today Russia is the largest exporter of energy carriers in Europe, being ahead of Algeria, Norway and other countries. Bulgaria, Lithuania, Latvia, Slovakia, Finland, Czech Republic and Estonia are entirely dependent on Russian gas. Even Germany, where the share of Russian gas in 2013 was only 28 %, depends on it to such extent that it cannot reduce its gas dependence rapidly.

Deliver liquefied natural gas (LNG) to Europe is possible only by sea
Deliver liquefied natural gas (LNG) to Europe is possible only by sea. LNG terminal in the Adriatic Sea off the coast of Italy

Besides, to find a replacement for the export of Russian gas is not so easy. For example, the supply of liquefied natural gas (LNG) from the USA to Europe, for a number of reasons, is expected no earlier than 2019, and it will be not cheap at all. The liquefied natural gas can be delivered to Europe only by sea, but Germany, for example, does not have the necessary infrastructure for receiving LNG at all. But even then the gas from America will not save Europe. Licenses issued by the USA to American companies will allow by 2020 to increase supplies to Europe to 60-70 billion cubic meters of gas, while in 2013 alone Western Europe consumed ten times more gas than these figures.

Norway, as an exporter of energy carriers, will not significantly expand supplies of gas in case of a significant reduction in purchases from Russia. In 2013, Norway was producing 110 billion cubic meters of gas, while gas production by 2020, is planned to be increased to 130 billion cubic meters. There are no other sources of diversification in Western Europe. In this situation there are two options — to buy gas from “Gazprom”, or search for the exporter to the East.

Scheme of routes LNG exports from Qatar and Yamal
Scheme of routes LNG exports from Qatar and Yamal. Qatar in Northern Europe is a long way, at the same time transportation from Yamal to Europe - a relatively small

The largest gas exporter in the East is Qatar, where delivered over a quarter consumed in the EU liquefied gas, but in numbers shipments Qatari gas although lower competitiveness of Russian raw materials is insignificant. It should take into account the fact that the Doha favors long-term contracts with Asia and South America.

Qatar boosted LNG production by 80 milliard cubic meters per year for 10 years
ЗQatar boosted LNG production by 80 milliard cubic meters per year for 10 years

Another country that could supply gas to Western Europe Azerbaijan is actively advocated as an alternative, but that is not able to compete with Russia. In the long term, even with the successful implementation of projects TAP and TANAP, Baku will meet the needs of the EU’s natural gas by only 4 %. Natural gas reserves, Azerbaijan ranks 28th place, behind Turkmenistan.

Turkmens do not intend to invest in the construction of the Trans-Caspian gas pipeline and reoriented their long-term contracts to China. Besides, Turkmenistan seriously considering a draft of its gas supplies to Afghanistan, then to Pakistan and India.

So, how Iran would deliver its gas to Europe?

Minister of Industry, Trade and Mines of Iran Mohammad Reza Nematzade said that Iran does not intend to compete with Russia, but it wants to get their part of the European gas market.

Note: Today, Iran is the largest gas exporter in Turkey, supplying daily about 28 million cubic meters of gas, which is slightly more than 10 billion cubic meters per year. Russian gas supplies to Turkey are about 26 billion cubic meters.

Existing pipeline allows pumping up to 40 million cubic meters of Iranian gas per day to Turkey, but its capacity is used by only 70-75 % (about 28 million cubic meters). It is suggested that reserves bandwidth can be used for the transit of Iranian gas to Europe. But the crux of the matter is that Tehran does not intend to trust Ankara, and intends to have its own “independent” pipeline.

It is about creating strategic “gas corridor” to Europe through Iran friendly Arab states (Iraq and Syria) with access to the Mediterranean coast. The agreement to build the pipeline, known as “Islamic Gas”, was signed by the parties in July 2012. The pipeline through Iran is 225 km, Iraq — about 500 km, Syria — 600 km. According to the project capacity will be 110 million cubic meters of gas per day.

The pipeline, also known as the "Islamic gas" can compete with the South Stream and Nabucco
Seven international investors are ready to invest in the design and construction of the Iran-Iraq-Syria-Europe gas pipeline. The pipeline, also known as the "Islamic gas" can compete with the South Stream and Nabucco

It is planned that Iraq and Syria will buy every day from 20 to 25 million cubic meters of gas. A certain amount of gas through the Arab gas transportation system will be delivered to Lebanon and Jordan, the other 50-60 million cubic meters of Iranian gas can be contracted for Europe.

But not all so simple. Iran plans to set foot here in conflict with the interests of Qatar and the United States. Iranian project implementation makes it unnecessary to build a gas pipeline from Qatar to the Syrian Mediterranean coast. Pipeline “Islamic gas” does not suit the U.S. and the Gulf monarchies are not going to allow Iran too close to Syria and to establish control over the energy region almost the entire Middle East.

The West still cannot persuade Tehran to gas cooperation, thereby having beaten Russia's export of its European market. Proposal made by President Ilham Aliyev during his recent visit to Tehran to mediate in organizing the supply of Iranian gas to Europe, bypassing Russia, Tehran categorically rejected. Iran does not want to exploit the current situation to their advantage, contrary to Russia’s energy interests.

The main obstacle to transport Iranian gas to Europe, in addition to the existing more than one year sanctions prohibiting investments in Iranian gas industry is an embargo on the supply of natural gas from Iran imposed by the EU. This decision concerns the import, purchase and transport of gas, as well as financing and insurance activities related to the gas industry. Prior to the abolition gas blockade of Iran any arguments on Iranian gas to Europe meaningless. But if Europe is interested in Iranian gas, instead of Russian and consider possible to lift the embargo, Tehran really consider transporting gas to Europe.

Ali Majedi said that Iran was a long time away from international markets, but today, in connection with the negotiations between Iran and the countries of the “5+1” on the Iranian nuclear program appears very real hope for positive results of these negotiations and the return of Iran to the above mentioned markets.

Responding to a question from a member of the French delegation about the impact of the situation on the gas market for shale gas production in the U.S., Ali Majedi noted that this gas will allow Americans to meet their own energy needs and refuse to import gas.

As for Europe, it needs will only grow and Iranian gas would, as ever, come in handy.