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The day after

Iran and Europe at the Crossroads

Ali Majedi on Iranian Gas for Europe

Iran and Europe at the Crossroads Iran and Europe at the Crossroads
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„Iran will also engage with European countries and other Western states with the goal of reinvigorating and further expanding relations“, according to the Iranian foreign minister Mohammad Javad Zarif in the June edition of Foreign Affairs. Now Iran’s President Rouhani is sending his government’s leading expert on the international oil and gas trade– Ali Majedi, Deputy Petroleum Minister for International Affairs–to Berlin on a new assignment.
The present Iranian government is not only hoping for an end to the sanctions regime imposed by the West, but also on closer economic ties with Europe. Still, with only a few days left on the agenda, the outcome of the 5+1 negotiations currently wrapping up in Vienna remains very much open.
ENERGLOBE recently had the opportunity to sit down in Tehran with Ali Majedi, Iran’s new ambassador to Germany, for an exclusive interview.

An option for Europe

Exactly one day before our interview with Ali Majedi, the energy ministers of the EU met in Brussels to discuss, among other items, their latest draft for a “European Energy Security Strategy”. Iran is mentioned in this document for the first time, officially identified as an important future source of natural gas exports to Europe. “The currently envisaged infrastructure in Turkey could accommodate up to 25 billion cubic meters per year (10 bcm/y by 2020) for the European market. In the longer term perspective, other countries such as Turkmenistan, Iraq and Iran, if conditions are met to lift the sanctions regime, could also significantly contribute to the enlargement of the Southern Gas Corridor. A coherent and targeted Foreign policy vis-á-vis these countries will be crucial.”

Iran seeks gas markets: Iraq, Pakistan, India, Oman and Kuwait

Although Iran may possess the world’s largest total natural gas reserves, as well as the single largest gas field in the world (South Pars, located in the Persian Golf just off the Iranian coast), it has not yet featured among the major gas exporting nations. According to Majedi, the overwhelming proportion of the gas extracted in Iran is still consumed domestically, in power plants and households. Experts estimate that 167 billion cubic meters (bcm) are produced annually for domestic use in Iran, and this volume will continue to rise, though the rate of increase will be determined by future economic and population growth. Still, Iran is taking deliberate steps toward a major upscaling of its gas exports.

Two important gas delivery contracts have already been concluded with Iraq for the suppling of its power plants; the pipelines are currently being built. By the end of the year, and at the latest by mid-2015, the gas should begin to flow.

Iran has also reached an agreement with Pakistan for the construction of an Iran-Pakistan (IP) Pipeline, 1,250 kilometers of which, from the Iranian side, 75 pro cent have already been completed. Pakistan, which has yet to commence construction, cites problems with the project’s financing, attributing this to the Western economic sanctions currently in place. Majedi unreservedly rejects this argument.
Speculation has also surfaced in the international economic press that Saudi Arabia, Iran’s regional rival, recently granted a $1.5 billion loan to Pakistan, on the condition that it distance itself from the pipeline project.
Whatever the explanation, Iranian gas experts, including those whom ENERGLOBE spoke with at the South Pars gas field in the Persian Gulf, agree that the project has stalled.
Majedi claims that, in view of the economic risks increasingly associated with the IP pipeline, it does not count among Iran’s immediate priorities, although Iran continues to have interest in exporting gas to its neighbor. Pakistan, however, must provide financial security. Alternatively, the gas could be sold to Pakistan through a mediator and reliable debtor. “We would prefer to find a third party”, according to Majedi. Iran, Majedi emphasizes, is not opposed to the pipeline as such, but remains uncertain about Pakistan’s ability and commitment to provide or attract substantial investment.

In connection with the project for an Iran-Pakistan pipeline, the idea of extending its reach into India as a “peace pipeline” has been raised. Majedi points out that the Indian government has rejected such proposals and is instead interested in bypassing Pakistan altogether by means of an undersea pipeline leading directly from Iran or via Oman. This has indeed been a topic of recent discussions with Indian firms.
At the same time, Iran is looking its neighbors on the Persian Gulf as future destinations for Iranian gas, and has entered into serious negotiations with Kuwait and Oman on this front. The quantities of gas potentially involved in these contracts are, however, relatively small.

Gas for Europe?

When asked whether, as he has repeatedly claimed over the last weeks, Iran is really in a position to supply Europe with natural gas, Majedi answers clearly and affirmatively. Although it is known that Iran at the moment possess none of the necessary infrastructure – pipelines and functional LNG terminals – Majedi remains optimistic, emphasizing that Iran is seriously interested in the prospects of exporting gas to Europe. Iran’s confidence stems partly from its positive experiences in exporting to Turkey: despite ongoing price arbitration, the Turkish gas company BOTAS has proven a model customer and Turkish infrastructure represents one of the best options for export to Europe.
On previous occasions, when representing the interests of a reform-oriented Iranian government, Majedi has discussed gas exports with the European Commission. He would welcome a revival of these talks, which he sees as a real possibility.
While Iranian gas could be brought to Europe along many potential routes, Majedi regards the path through Turkey as the best option.
When asked about known disagreements between Iran and Turkey on certain aspects of this proposal, Majedi points out that Turkey wants to act as a trade parter, re-exporting or selling gas on to Europe. “We are against the re-export of gas”, says Majedi. Rather, Iran envisages Turkey primarily in the role of a transit corridor. This, along with proposals to expand gas exports directly to Turkey, was the subject of recent discussions between presidents Rouhani and Erdogan during their respective visits to Ankara and Tehran.

Because Turkey receives most of its gas from Russia, it is noteworthy that Majedi alleges Russian attempts to obstruct the expansion of Iranian gas exports to Turkey and, potentially, onward into Europe.
Over the preceding weeks, Majedi has downplayed talk of an emerging strategic gas-export rivalry between Iran and Russia. “Iran will not be a rival for Russia in exporting gas to Europe”, he asserts. The conflict is nonetheless apparent, even as Russia plays a key role in the ongoing 5+1 negotiations, which will decide the fate of the Western-imposed sanctions currently burdening Iran’s economy.
This is not a matter of conflict, emphasizes Majedi, simply a question of normal competition. European businesses can choose their suppliers on the basis of classic competitive criteria: price, sustainability and reliability. However, as Majedi also points out, in light of the lingering crisis in the Ukraine, the EU will inevitably seek to diversify its sources of gas. Iran stands to potentially profit from these developments.

How much gas and where to?

Despite the numerous delays arising from the sanctions regime over the previous years,  Iran is seeking to further expand production at the vastly rich South Pars gas field in the Persian Gulf. This area, off Iran’s southern coast, has been divided into 29 sub-fields, of which 24 are in the planing stages. Each of these “phases”, as the parcels are called, are projected to have an annual output capacity of approximately 10 bcm. Ten phases are currently active, while phase 11 has recently lost its Chinese investor.
In the past, Majedi has placed the potential capacity of future Iranian gas exports to Europe within the range of 4-50 million cubic meters (mcm) per day, which would correspond to a generous range of 1.5-18 bcm/y. By way of comparison, the gas that Europe hopes to import from the Caspian Sea via the southern gas corridor is projected to flow at an annual rate of 9-10 bcm from 2019. When asked for a more precise and up to date assessment of potential gas delivery to Europe, Majedi points to the ongoing development of phases 12-18 at the South Pars field, due to be operational by 2016.

Further considerations revolve around the question of Turkmenistan, which so far has exported gas to Iran, but which may want to begin exporting to Europe by way of Turkey. Should this be the case, Turkmenistan would have the choice between transiting its gas through Iran or via the Caspian, an option that both Iran and Russia oppose. Majedi explains that Iran would be prepared to discuss a swapping arrangement, whereby gas from Turkmenistan would be consumed within Iran on a larger scale, thus freeing up more Iranian capacity for export to Turkey and beyond.

Majedi sees no major obstacles to the development and expansion of pipeline capacity in the direction of Turkey, and, ultimately, to the prospect that Iran could thus pump an additional 25 bcm/y westward. This would correspond to 10 bcm/y for Turkish consumption and 15 bcm/y for transit to the EU, which would in fact match the remaining capacity of the southern corridor’s proposed TAP pipeline project. Iranian experts have in fact indicated to ENERGLOBE that the pipeline infrastructure they would require could be completed within three years.

LNG - the alternative?

Of the three originally planned projects for the export of liquid natural gas (LNG) from Iran, one is indefinitely stalled in the construction phase; the German firm involved has been unable to acquire a license required under the current sanctions regime.
When asked about the realistic prospects of delivering LNG to Europe, Majedi says that the key focus of his upcoming tenure as Iran’s ambassador in Berlin will be to identify with Germany and the EU the most suitable means of export. Whether by pipeline or by ship as LNG, Iran is prepared to adapt, he emphasizes.   

Europe or Asia? Political crossroads

The export of natural gas is not an issue without controversy in Iran: on the one hand, it is argued that gas resources should remain exclusively at the disposal of national industry and agriculture and should thus help generate domestic economic growth. On the other hand, numerous Iranian analysts argue that, viewed from a purely economic standpoint, the idea of delivering gas to Europe offers no real mid- or long-term advantages, as the European gas market is not expected to grow considerably within this time scale and the potential and the prices of Asian markets are considerably greater and higher. In this sense, the decision to commit to exporting gas to Europe has been viewed as a political one, or at least as having an important political dimension. “Of course”, says Majedi, the political aspect is the “main question”.

In his opinion, the price discrepancies between gas markets in America, Europe and Asia will level somewhat over time, and if Iran can export gas to Europe, under stable and reliable conditions for a perhaps middling price, then it is willing to do so. 

Above all, Majedi views these questions within a larger political context. Should the sanctions be lifted, one of Iran’s main strategic objectives is the forging of closer ties with Europe, and not only in the matter of gas exports.
However, should the sanctions regime be sustained or even tightened, Majedi sees no alternative for his country other than to turn to Russia and China for strategic partnerships of some kind. This, he argues, would encourage the formation of geo-strategic blocs, analogous to those that defined the fronts in the Cold War. 

Berlin

When asked about his upcoming role as Iran’s ambassador to Germany, Majedi reiterates his conviction that “Germany is the key country for the economy of the EU”. He thus sees in his future role an ideal opportunity to discuss and engage with major economic issues. However, Iran also sees Germany as a key political force in Europe, a view expressed in the context of the 5+1 negotiations. The “+1” in the formulation represents Germany, a country with which Iran currently has better relations than with the other parties to these discussions, and which therefore perhaps represents an opportunity to shift the status quo.

(ENERGLOBE was assisted in preparing for the discussion with Dr. Ali Majedi in Tehran by the Friedrich-Ebert-Stiftung, the Berlin Centre of Caspian Regional Studies (BCCARE) and the Institute for Political and International Studies (IPIS), Tehran.) 

»THE CRISIS IN THE CONCEPT OF THE

WORLD ORDER (IS) THE ULTIMATE

INTERNATIONAL PROBLEM OF OUR DAYS.«

Henry Kissinger,„World Order“, August 2014