Iran’s gas exports, Russia sanctions and Europe

Iran’s South Pars gas field may be the largest in the Middle East but Tehran supplies less than one per cent of global natural gas exports and its energy assets need at least $500 billion in investment after decades of revolution, war and sanctions.

After BP, Shell, Total and ENI were forced to abandon South Pars by President Clinton in the 1990s, Iran’s hopes to become a global LNG exporter on Qatar’s model because unrealistic high domestic demand for power generation outdated technology, ageing oilfields and lack of international finance Iran will not become a major gas supplier to Europe or Asia even if sanctions are lifted. Gas export projects are hugely capital-intensive with long payback periods and Iran can simply not attract the funding or technology from Western energy majors even if sanctions are lifted. Qatar’s North Field (called South Pars by Iran) enabled it to become the world’s largest LNG exporter. Iran, isolated by sanctions, squandered its future with its confrontation with the West over nuclear weapons and Lebanon/Syria. So I was surprised to read Foreign Minister Javad Zarif publicly offer Iran as a long-term gas supplier to Europe the day Vladimir Putin sent Russian troops into Crimea. Will the Ukraine crisis enable Iran to replace Russia as Europe’s gas supplier? No. This scenario is a diplomatic, economic and even logistical non-starter.

Iran produces more natural gas than Qatar but it is forced to provide 78 million people with heat, electricity, food and fuel. Domestic gas demand, a mere 26bcm in Qatar, is 156bcm in Iran, making major exports unthinkable even if sanctions are lifted. Iran has actually been forced to import natural gas from Turkmenistan to ease gas shortages. Iran’s winter heating needs are so great it has been unable to fulfill gas contracts with Turkey, let alone LNG exports to Asia.

After the Bolshevik revolution, the Soviet Union was viewed as a strategic threat by both Pahlavi Shahs. Stalin’s Red Army briefly occupied Iranian Azerbaijan and Kurdistan/Mahabad until forced out by the first session of the new UN Security Council. The last Shah of Iran was America’s “grandarme of the Gulf” and a fierce opponent of Marxist Leninism and Soviet subversion in the Arab world and Afghanistan. However, the Islamic revolution forced Tehran to tilt to Moscow once relations with the US collapsed after the embassy hostage crisis in 1979. Putin sold Russian weapons systems and provided diplomatic support to Iran in his quest to advance Russian influence in the Middle East.

The Russians have a vested interest in an Iran that cannot supply natural gas via pipeline to Gazprom’s European clients. So the Kremlin was reluctant to assist with the diplomatic reapproachement between the West and East since the end of sanctions would create another global rival to Gazprom (other than Qatari LNG)

Access to Europe’s energy markets would be a historic event for Iran’s natural gas industry and a historic victory for Zarif-Rouhani’s diplomacy after the Geneva nuclear agreement. The Ukraine crisis therefore is an opportunity for London, Washington, Berlin, Paris and Brussels to rethink the global isolation of Iran. However, the influence of hardline mullahs and the Revolutionary Guard’s anti-reform business interests prevents any real economic perestroika in Iran and the nuclear issue is still not resolved.

The United States and the EU will be reluctant to trust Ayatullah Khamenei’s as a reliable energy supplier even if Iran’s energy infrastructure will be capable of the role, which it is not. It is doubtful if the Western powers will offend Saudi Arabia even if a comprehensive nuclear agreement with Iran is eventually signed. There is also no guarantee that the Rouhani/Zarif reformist faction will not be checkmated by the anti-Western radicals, as President Khamenei’s faction was by Ahmadinejad.

Putin’s vision of a Eurasian Union with states like Azerbaijan and Kazakhstan is also a threat to Iran’s strategic interests in Central Asia and the Caspian Sea. Revolutionary Iran must finally boost economic growth that is only possible if Tehran ends its cold war with the West and once again accesses technology, capital and management expertise from global multinationals. Putin’s vision of a Eurasian Union offers nothing for the reconstruction of Iran’s oil and gas industry, crippled by decades of sanctions in the aftermath of the Islamic revolution and the Iran-Iraq war. Iran’s economic interests lie in closer relations with the United States and the European Union, not Putin’s Russia.

In Iran, as in Ukraine, Putin is “on the wrong side of history”, to use the words of President Obama. If the US and EU impose financial sanctions on Russia, Tehran will find the Kremlin even more marginal as a strategic and economic patron. Unlike the Soviet Union invasions of Hungary, Czechoslovakia or Afghanistan, post-Crimea Russia is vulnerable to Western economic sanctions. This could mean supply risk in the world gas market.

The writer is a Dubai-based research analyst in energy and GCC economics.