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Europe is eyeing Iran's massive gas reserves

The annexation of Crimea and the consequent threats of gas supply cuts by Russia have been a reminder of an inconvenient truth: when it comes to politics, Europe will always be influenced by its dependency on Russian gas.

According to the European Parliament, in 2013 Russia provided 43.2% of the European Union’s gas imports, 31.38% of its oil imports, and 26.7% of its coal imports. But the dependency runs both ways.

As oil and gas exports to Europe account for almost 52% of Russia’s federal budget income (US$515 billion), the EU acts not only as crucial trade partner for Russia but also as vital crutch to its fragile real economy.

With the widening rift between the European Union and Russia over Ukraine and Syria, Vladimir Putin has begun to give Europe the cold shoulder and rebalance gas supplies eastward. Moscow recently signed the single largest deal in its history: a US$400 billion gas contract with Beijing for 30 years. Likewise, Putin’s abrupt abandonment of the South Stream pipeline project, intended to ship Russian gas via the Black Sea to Bulgaria by circumventing Ukraine, proves that Russia is not willing to cave anytime soon.

As a result, European energy companies have a strong interest in developing alternative pipeline routes and finding new gas suppliers. The shift of natural gas supply from Russia to supply from Qatar, Algeria, or Norway is an avenue worth exploring, if the European Union is willing to accept a substantially higher energy bill.

Iranian Gas: Europe’s Long-Term Saving Grace

While the European Union has not imported any Iranian oil and gas to date, the option should be considered. This is especially important given that alternative energy suppliers on par with Russian gas exports are few. With oil prices currently falling below the benchmark price required for the Iranian government to balance its federal budget, a window of opportunity has opened up for the two counterparties to find a way out of their impasse.

According to recent BP reports, Iran holds the second largest natural gas reserves after Russia — equivalent to 15.8 percent of global total gas reserves. It shares the world’s largest offshore gas field, the South Pars/North Dome field, situated in the Persian Gulf with Qatar, which holds an estimated 1,800 trillion cubic feet of natural gas. After the Islamic Revolution of 1979 and the Iran-Iraq war, the country suffered from a notorious lack of sufficient refinery capacity which diminished its total production volume for natural gas to 166.6 billion cubic metres (bcm), of which it currently only exports 9.4bcm. The European Parliament believes Iran’s total export capacity to be more than 150bcm per year compared to current Gazprom exports of 140bcm to the European Union.

The Tabriz-Ankara pipeline running from Iran to Turkey transports gas from the South Pars field to the city of Bazargan at the border with Turkey. Iran is bidding for the continuation of the pipeline network with the construction of the “Persian Pipeline:” A 3,300km network system which crosses Turkey before reaching Italy. Here it splits into a northern and southern section, transporting gas to Germany, Austria, Switzerland, France, and Spain. The capacity of the Persian Pipeline is estimated at about 37-40bcm per year and would require minimum foreign investments of around US$7billion.

This route would bypass Russian territory and allow the EU to import 25-30bcm per year — equal to total Russian gas export to Italy and Germany in 2013. Another long-term energy delivery option for Iran to Europe would be via Liquified Natural Gas (LNG) at an estimated export capacity of up to 10bcm per year over a ten year period designed to strengthen mutual trust between the two trading parties. The gas supply would be transported via a pipeline system to the Omani LNG hub and then shipped to the Mediterranean seaports.

With the trade-offs in previous rounds of nuclear negotiations not attractive enough to shift positions, there is now a chance to expand the pie. Europe’s desire to decouple its gas dependency from Russia provides an opportunity for Iran to negotiate better terms with the Union. Finding a comprehensive solution as part of such a long-term quid pro-quo strategy could develop a trickle-down effect that can greatly affect the peace making process both in Ukraine and Syria.

This linkage strategy between Iran and Europe will require long-term concessions from both parties. The European Union would strike a long-term deal on gas shipments from Iran, which would include investment in upgrading Iran’s refining capacity and the completion of the Persian Pipeline project. In return, Tehran could be more compromising on nuclear negotiations.

If this was agreed, Moscow would realize that its leverage over EU member countries would wane.

Once Iran has “opened up” and its relationship with the West has normalized, it is likely the country would be competing with Russia for a larger share of the EU gas market. With a new gas rival on the block, Russia may try to save as much of its grip over Europe as possible. An option would be to strike a deal over Ukraine in an attempt to preserve its largest gas market, the EU, for the foreseeable future.

In recent years, Russia has been an avid supporter of Iran in nuclear deals, the two recently negotiating a deal for Russia to construct eight new nuclear reactors. However, it is important to note that nations are mainly driven by self-interest and coalitions are formed as part of aligned interests which are subject to modifications at any point in time. The Russo-Iranian rapprochement is a direct consequence of the current global balance of power. While they have close economic and political ties, their relations have historically been far from warm.

Ever since the Treaty of Gulistan in 1813 and the Treaty of Turkmenchay in 1828, the relationship between Russia and Iran has been tense. Following Russia’s military victory over Iran, Crown Prince Abbas Mirza surrendered control of territories in the Southern Caucasus, which include present-day Armenia, Azerbaijan, and Georgia.

Iranians still refer to the Russian annexation of land owned by the Persian Empire as the origin of their uneasy relationship. The Russo-Persian liaison has deteriorated even further after being unable to agree on the status and ownership of the Caspian Sea with Russia, Azerbaijan, Turkmenistan, and Kazakhstan.

As such Tehran is not cultivating closer ties with Moscow because it believes it to be a viable and trustworthy partner; rather, it has found itself with limited options. Its interests today, as in the past, overlap more with the West. The possibility of a rapprochement between Russia, Iran and the EU also has implications for the the peace making process in Syria.

More of a spirit of compromise from Iran, Russia, and the European Union would send a strong signal to the conflicting parties in Syria that the international community was addressing this conflict with a single voice.

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