Iran General NewsIsolated, Iran offers to supply Europe with natural gas

Isolated, Iran offers to supply Europe with natural gas


ImageInternational Herald Tribune: In the aftermath of Russia's recent natural gas cuts to Europe, Iran is trying to position itself as a potential alternative supplier through a variety of overtures to the West – moves, analysts say, based at least partly on a desire to strengthen its hand for a new round of diplomacy over its uranium enrichment program.

The International Herald Tribune

By Andrés Cala

ImageIn the aftermath of Russia's recent natural gas cuts to Europe, Iran is trying to position itself as a potential alternative supplier through a variety of overtures to the West – moves, analysts say, based at least partly on a desire to strengthen its hand for a new round of diplomacy over its uranium enrichment program.

Tehran has historically tried to use its gas-export potential for political leverage. Its vast reserves are second only to Russia's, and it is ideally placed both to be a supplier and a transit hub serving Europe, Asia and the Gulf region. But its failure to achieve significant export volumes has so far blunted its efforts.

Now, however, Russia's muscle flexing, combined with the long-term prospect of surging global demand, appears to have prompted President Mahmoud Ahmadinejad's government to make a serious effort to raise the country's natural gas export profile, in a bid to temper Iran's diplomatic isolation and economic woes.

At the height of the Russia-Ukraine standoff in January, Tehran urged Pakistan to sign up quickly to a proposed deal. The long-discussed "peace pipeline" project could supply Pakistan with 2.2 billion cubic feet, or 62.3 million cubic meters, of natural gas a day by 2012 and could later be extended to India. But so far it has been held up by pricing disagreements and Iran's political isolation.

Iran also doubled natural gas exports to Turkey to offset Russia's cuts and offered $1.7 billion to Azerbaijan to buy a 10 percent stake in the second-phase development of the Shah Deniz field – intended to supply natural gas for the planned Nabucco pipeline to the European Union that would bypass Russia. Last weekend the Iranian oil minister, Gholam Hossein Nozari, announced a deal to develop and import gas from the Yolton gas field in Turkmenistan.

Completing its strategy of outreach on multiple fronts, Tehran is also discussing a gas swap deal with the Russian state-controlled energy company Gazprom.

The message was clear: Depending on what deals get done, the security of European natural gas supplies, and the ability of Western governments to contain Iran's nuclear ambitions could both be at stake.

With President Barack Obama offering a diplomatic hand to Iran, the table is being set for a political poker game over nuclear and energy security. In this game, much may depend on whether Iran can deliver on its natural gas proposals in any realistic schedule, and on how the European Union plays its hand.

So far, EU officials seem to be giving nothing away and ruling nothing out.

"If I were Iran, I would also use my gas" as a card, said Ferran Tarradellas, a spokesman for the EU energy commissioner, Andris Piebalgs. "But I don't think that argument will make us change our position. Today, Iranian gas is not desirable."

Still, he added: "If some day we can resolve the enrichment issue though, we obviously don't rule out working with them."

That "some day" may be something of a bluff. Time is tight for all the players in the game. At stake for Europe is the urgent issue of loosening Moscow's grip, in which the €8 billion, or $10.3 billion, Nabucco natural gas pipeline project is intended to play a vital part.

The project proposes to import 31 billion cubic meters a year of Caspian Sea or other gas through Turkey to a distribution hub in Austria, meeting about 5 percent of the EU's anticipated needs. The gas dispute between Russia and Ukraine has sharpened "the public and political awareness for Nabucco," said Reinhard Mitschek, managing director of the Nabucco Gas Pipeline International, a consortium of six companies led by the Austrian oil and chemical company OMV.

For Iran, the speed with which it can step up exports will dictate its diplomatic leverage. Tehran is sticking to a 2020 target of more than tripling its current production to 475 billion cubic meters a year, which would make it one of the world's biggest natural gas producers. At the same time, in a bid to curb skyrocketing internal demand, Ahmadinejad recently announced plans to replace direct fuel subsidies with targeted cash aid to the poor.

The overhaul, if successful, would both bolster Iran's export capability and fix a major flaw in the domestic economy. According to International Monetary Fund estimates, fuel subsidies now amount to 17 percent of Iran's gross domestic product and are the single biggest contributor to years of double-digit inflation.

If the government can hold down internal demand, it will have plenty of potential buyers to play with. Asian and Russian companies are eager for development contracts. Natural gas is also proving a valuable asset in building ties to Arab neighbors like Oman, the United Arab Emirates, and Kuwait. Together with Qatar and Russia, Iran is leading an embryonic association of global gas producers that some consumers fear could eventually develop into a cartel, modeled on the Organization of Petroleum Exporting Countries and aimed at controlling the market.

Whatever the future may bring, the change in Iran's supply capabilities in the past year is already striking. Last winter, a dispute with Turkmenistan over gas prices led Iran to cut service to thousands of its citizens as well as its exports to Turkey. This winter, Iran signed a long-term supply deal with Turkmenistan and increased natural gas shipments to Turkey to offset Russia's stoppage. Ankara in return has said it is close to signing gas supply and field development contracts with Tehran worth billions of dollars.

In the past year, Tehran has signed a 25-year supply contract with a Swiss utility. It has also offered to swap natural gas with Russia; to partner with Caspian countries to develop their reserves, and even to expand deliveries to the EU beyond the planned capacity of Nabucco by building a new pipeline to the Turkish border. Total of France, Repsol of Spain and Royal Dutch Shell, an English-Dutch company, have all recently hinted at their intent to re-engage Tehran after backing off from major investments in the past under intense diplomatic pressure.

Still, Iran is talking about exporting more than its total annual current production. And even in Tehran's best-case forecasts, its exports are going to be limited for years while fields and infrastructure are developed and domestic demand growth is reined in.

"When Iran goes to Europe, a lot of people are asking whether this is just talk," said Nikos Tsafos, a European gas analyst with PFC Energy, an industry consultancy based in Washington.

Europe's inability to get Nabucco started may be helping to hide that reality, analysts say. The project has been mired in problems from the start, including disputes over routes and financing and squabbles over the share-out of gas among the partners. Efforts to draft an intergovernmental agreement for the project have been tangled in everything from Turkey's efforts to enter the EU to divisions over the bloc's relations with Russia.

"Nabucco has become a symbol of diversification," Tsafos said. "It's one of those projects nobody can abandon, but few really believe it will pan out in its current form. Ultimately Nabucco is competing for gas and it's one of many options, and not necessarily the simplest or more commercially viable one, so I'm fairly pessimistic."

Still, the consortium expects to put out bids for construction by early next year and to complete the first stage, bringing gas from Azerbaijan to Europe, by the beginning of 2014. A second stage, connecting to gas fields east of the Caspian Sea, should be completed five years later. "I'm very confident that the project can be realized as we have foreseen," Mitschek, of the pipeline group, said.

The consortium will put up 30 percent of the investment and is seeking financing for the rest. "It's not a done deal of course," Mitschek conceded. "It is a challenge to raise the financing." The European Commission last month offered to provide guarantees and help get loans for the project, but put no cash on the table.

Caspian suppliers have made it clear that they need much more than that if they are to risk Moscow's wrath. "There should be more political will, more financial commitment," Azerbaijan's president, Ilham Aliyev, said at Davos, Switzerland, last month.

Caspian natural gas could as easily go to Russia, Asia or even Iran – as Turkmenistan's does now – or to Europe by a rival route. Nabucco is competing against two Russian-backed projects. One, the NordStream sub-Baltic route for Russian gas, is strongly backed by Germany, despite the Ukraine standoff. The other, the South Stream project proposed by Gazprom, would compete directly with Nabucco for Caspian gas.

Nabucco may even end up carrying Russian-controlled gas to make it viable. "In the long run I would not exclude any source," Mitschek said.

The pipeline, he said, would be completed "10 years from now and it has to be politically viable then." Not now.

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