The Iranian alternative for Europe

Feb 26, 2008 01:00 AM

by Derek Brower

One country holds the key in the EU's battle to secure alternative and secure sources of energy: Iran. With over 28 tcm of natural gas in the ground -- around 15 % of the known resource in the world -- Iran's reserves are only exceeded by Russia's 47.65 tcm. In theory, Europe is blessed to be within pipeline distance of both countries, as well as the large exporters of natural gas in North Africa. In reality, Iranian is out of reach.
For Iran, the failure to capitalise on its proximity to Europe is a catastrophe. The country remains a large crude producer (about 3.7 mm bpd), but its oil industry is in terminal decline. Its natural gas reserves, on the other hand, could provide the basis for exports to rival Russia’s. Instead, they amounted to a paltry 5.69bn cm in 2006 -- putting Iran about 20th in the world ranking of natural gas exporters. Even Argentina and Oman, hardly world energy heavyweights, exported more gas. And, by comparison, Russia exported over 150 bn cm.

That only tells part of the story, because Iran intends to increase production and exports over the next few years. A long-discussed plan to build a pipeline to Pakistan and India remains on the table. A multi-phase development of its South Pars field -- the Iranian section of the giant gasfield, the world's largest, that it shares with Qatar in the Persian Gulf -- has been underway for years.
Iran hopes eventually to export liquefied natural gas (LNG) from South Pars. It already produces some gas and condensate from the field for the local market.

Europe's biggest gas hope?
South Pars has been afflicted by technical and other problems. Total’s plans to develop an LNG project there have stalled over a dispute about contractual terms. In the meantime, the French company says the cost of the project has doubled since 1997.
Shell and Repsol also want to export LNG from South Pars, but have been unwilling to sign contracts while Iran's dispute with the West over its nuclear programme persists. The same goes for Austrian energy company OMV: interested but, as yet, reluctant to sign a final agreement about an LNG project. Russia's Gazprom, meanwhile, has added South Pars to its list of international targets for gas projects, saying it would like to develop two or three phases of the field. And Chinese companies -- up to now more interested in oil contracts than gas -- are waiting in the wings.

Neither Gazprom nor the Chinese companies will bring to the Iranian gas sector the expertise in LNG that the country needs. For all their problems in the past few years, the Western majors retain their advantage in that sector. Yet the US-led sanctions against Iran have in practice, if not in principle, prevented them from committing to the country.
For Europe, it could all amount to a colossal missed opportunity. The progress of Russian and Chinese companies in Iran is particularly galling, given that the country provides the best source for the EU to meet its strategic goal of diversifying natural gas imports away from dominant suppliers like Russia.

The sticking point, of course, is Iran's nuclear programme. The International Atomic Energy Agency, the UN’s nuclear watchdog, said that it had information showing that Iran had continued with its enrichment programme after 2003. The date is important, because the National Intelligence Estimate, published in Washington last year, claimed that US spooks had concluded that the programme had ceased in 2003. Iran maintains that it wants to develop nuclear technology for civilian uses. The UN Security Council is expected soon to endorse a tighter package of sanctions against Iran.
With the remaining lifespan of the Bush White House now counted in months, now is the time for the EU to press for a new, more conciliatory agenda with Tehran. It should include incentives -- financial ones relating to an easing of sanctions and normalisation of relations -- for Iran to abandon any ambitions to develop a nuclear weapon. And it should offer a framework, acceptable to Tehran, for international monitors to govern how the country develops its civilian nuclear programme.

And then Brussels should be bold enough to state that it wants Iran to become a close partner in the future of the EU’s energy sector. That last point would be controversial, but it needn’t be. The EU already depends on countries with nuclear weapons (Russia) or with unsavoury governments that have tried to secure them in the past (Libya) for its gas supplies. And Western buyers have never had problems using oil produced in Middle East countries, including Iran and Iraq.
Furthermore, staying out of Iran won’t, in the long-term, prevent its energy sector from developing. Russian and Chinese energy companies won’t lag behind the majors in LNG forever; and sovereign wealth funds will eventually see Iran’s potential as a natural gas exporter as too good an opportunity to miss. So the downside is that Iran meets its potential as an exporter -- but the natural gas flows eastwards, not westwards. In the meantime, the policy of ostracism risks further confrontation and, by providing him with someone else to blame for the economy’s failings, helps keep President Ahmadinejad in power.

The potential upside of rapprochement with Tehran, however, is the prospect of opening a new energy corridor between Iran and the EU. Some pipeline infrastructure already exists between Iran and Turkey; heavy investment in Iran would help build more and, if it ever comes on stream, the Nabucco project could be the first of other pipelines to connect the country with Europe. That would enrich Iran -- but it would also help Europe meet rising natural gas needs. OMV reckons that within the next decade, demand in the EU-27 will increase from around 500 bn cmpy to 800 bn cmpy.
So Iran should top the agenda for the European Commission and its energy commissioner, Andris Piebalgs. It hasn't so far. Instead, Brussels has sought unsuccessfully to engage Turkmenistan and Kazakhstan, in the hope that the large reserves of gas in both countries could eventually be exported directly to the EU. Gazprom has, however, pre-empted that with its own deal-making in Central Asia. Moscow is also eager to prevent Iran from becoming a competitor in the European market. That goal explains some of the Kremlin's strategy with Tehran, one designed to keep any detente between Iran and the West forever out of reach.

But with regime change underway in Washington, Brussels has an opportunity to make its own strategic play in the Middle East.
It should not miss the chance to bring Iran in from the cold.

Derek Brower is a journalist who covers energy politics. He is senior correspondent of Petroleum Economist and a writer for Prospect magazine, among other publications. This article was published by Robert Amsterdam's "Perspectives on Russia, Europe, and International Affairs." www.derekbrower.com

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