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Iran and Europe

The puzzle of Iranian natural gas

European-Iranian gas trade is primarily a political question

The puzzle of Iranian natural gas The puzzle of Iranian natural gas
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As European-Russian relations have deteriorated over the Ukraine crisis, Iran’s oil minister Bijan Zangeneh has presented his country as an alternative, announcing that “Iran is always willing to export natural gas to Europe”. Indeed, both in public and private, representatives from the Iranian oil and foreign ministries stress their country’s strong willingness to export natural gas to Europe. Considering that Iran holds the world’s largest reserves, coupled with extremely low production costs, the country might indeed appear as a ‘natural partner’ for a Europe seeking to diversify its imports of natural gas. But questions remain whether – and, in case, how much – Iran could actually supply to the European market.

These are related to the highly uncertain outlook for Iran’s natural gas, which presents itself as an interesting puzzle. Most experts involved in Iranian energy matters frequently stress how difficult it is to forecast patterns of future natural gas production and utilization in Iran.

Reserves and imports

It is true that Iran holds the world’s largest reserves of natural gas. Further, it is also a fact that the country was able to more than double its natural gas production in the past decade to a level of 167 bcm/y in 2013.

At the same time, Iran has been a net-importer of natural gas for most of the past years and essentially any increase in production was directly absorbed by the domestic market. The drivers for this have been economic growth, especially in the energy intensive industries, and vast over-consumption as a result of massive subsidies.

Addressing the skyrocketing domestic demand, Iran has initiated an ambitious subsidy reform in December 2010, aiming to link domestic gas prices to an export price formula. Despite delays, the current administration seems to be eager to continue with the implementation of the reform and has introduced a second round of price increases in spring 2014.

However, it yet remains to be seen how fast energy efficiency will actually increase in response to the rise of prices. While Iran was able to overcome being a net-importer, the country will still need to go some way to create a larger spare capacity, much needed for the realization of export projects.

Domestic demand vs export

Complicating matters further, there is a heated debate in Tehran whether, in the first place, natural gas should be exported at all. From a purely economic point of view, it appears much wiser for Iran to use its gas domestically. Doing so would allow Iran to promote economic growth using its energy riches as a competitive advantage. This view is promoted by powerful domestic players including actors from several ministries, particularly labor as well as industry and mines, members of parliament, provincial governments, and others.

In practice, the domestic use of natural gas was de facto prioritized over exports. Natural gas is extensively used in Iran in a broad range of sectors, amongst others in the petrochemical and energy intensive industries, road transportation or electricity generation. It therefore remains to be seen whether the hopes for exports of the oil ministry, looking for greater earnings, and the foreign policy community, seeking to advance international relations, can prevail over the strong coalition advocating for the domestic utilization of natural gas.

But even if Iran had a spare capacity and the political will to use these volumes for exports, it would be anything but certain that Europe were to become the destination for this gas. In East Asia, international gas prices are roughly twice as high as in Europe. Moreover, demographic and economic growth is causing rapidly increasing Asian demand, while Europe’s needs are stagnating. Against this backdrop, there are voices within Iran arguing that gas, if exported, should actually go to the more lucrative Asian markets.

The political question

All this does not imply that Iranian gas exports to Europe are totally impossible. The geographic proximity and potential political benefits for both sides continue to present good arguments for at least some level of natural gas trade. But this also shows that the question of European-Iranian gas trade is primarily a political one.

In this context, it is interesting to observe that Iran has recently announced to send Ali Majedi, currently Deputy Petroleum Minister for International Affairs, as its new ambassador to Berlin. The nomination of this top oil official for the sensitive ambassadorial post in Germany, coordinating all Iranian diplomatic activities in Europe, can be considered a sign to promote energy relations with Europe.

But despite this move, overall it remains unclear for the time being which volumes could be expected from Iran and over which time line. Uncertainty regarding Iran’s potential to export natural gas prevails. Hence, substantial Iranian gas exports can at best be expected in the mid- and long-term. For now, the future of Iranian natural gas remains very much a puzzle.

David Jalilvand is a research fellow at the Berlin Centre of Caspian Regional Studies (BCCARE) at the Freie Universität Berlin - specialized on energy policy of Iran.




Henry Kissinger,„World Order“, August 2014