This article was published in the World Energy Weekly (July 29 issue), a publication of the French think tank Petrostrategies specializing in energy issues.
In late June, frustrated by years of sanctions against their natural gas exports, Iran and Russia decided to join forces and build a north-south gas pipeline across the Caspian Sea to interconnect their gas transmission grids, financed entirely by Russia. The planned pipeline is expected to have a capacity of up to 300 MMcm/d (around 110 bcm/annum) and will be built under a thirty-year gas sales agreement which is to be signed in the near future. Iranian Oil Minister Javad Owji recently said that “implementation of this pipeline will ensure sustainable domestic gas delivery, on the one hand, and will increase the gas export capacity and continuity of it on the other hand”. Some of the imported gas, worth $10 to 12 billion per annum (or about $100 per thousand cubic meters), will be consumed on the Iranian market, while the rest will be exported to other countries, turning Iran into a regional gas hub, said Owji, who added that “the agreement will act as a revolution in the energy and industry scene of the region”. It should be noted that after two and a half years of negotiations, Iran and Russia also claim to have hammered out a “comprehensive agreement” furthering military cooperation, which is due to be signed at this October’s BRICS Summit in Kazan, Russia.
It was Iran that took the initiative for this project, following the imposition of Western sanctions against Russia after its invasion of Ukraine. The planned capacity of the future trans-Caspian pipeline is equivalent to that of Russia’s four Nord Stream 1 & 2 gas pipelines in the Baltic Sea (three of which were sabotaged in Danish territorial waters north of Poland). In short, Iran is offering Moscow a replacement for a large proportion of the market that Gazprom can deem definitively lost in Europe (it was exporting 155 bcm/annum of Russian gas to the European Union before the war). An unspecified amount of future Russian gas would be sold to Iran, which is struggling to increase its domestic natural gas production (some 305 bcm/annum) in step with growing consumption. This is partly because domestic natural gas prices are extremely low, as are also oil and electricity prices. As a result, Iran can’t avoid power cuts although it uses old, polluting oil-fired power plants during peak gas and power consumption in winter and summer.
Iran is finding it difficult to scrape together enough money to expand its natural gas and oil production. From a yearly average of $18 billion/annum in the 1990s, its upstream investments are reported to have fallen to around $5 billion/annum during the 2020s. Iran’s natural gas exports are limited (13.4 bcm in 2023) and the income they generate is stagnating. Its main customer, Turkey, is constantly altering the quantities that it imports and trying to push prices downwards, arguing that Russia offers lower rates. Iraq, Iran’s second major customer, in which the Islamic Republic had placed a lot of hope, imports only limited volumes of natural gas and is a late payer. The major contract signed with Pakistan is going nowhere, as threats of US sanctions have caused Islamabad to repeatedly postpone deadlines and to defer the construction of its section of the Iran-Pakistan gas pipeline.
Russia, for its part, is getting increasingly desperate about the slow progress of its negotiations with two major clients: China and Turkey. Beijing is demanding extremely low prices for any further imports of Russian natural gas via Mongolia (the proposed Power of Siberia 2 gas pipeline). The proposed prices are so low that Gazprom wouldn’t even be able to cover its costs, and would end up subsidizing the Chinese economy. This is upending Vladimir Putin’s grand strategy of increasing exports of Russian natural gas to China, launched well before the invasion of Ukraine and the resulting loss of the European market. The Russians are also getting fed up with Turkey, which is imposing unacceptable terms (in Moscow’s opinion) to act as a hub for Russian gas. Thanks to its geographical position, its natural gas connections with all of the region’s producer states, its own growing gas production in the Black Sea and its skill at playing its suppliers against one another whenever contracts need to be renewed, Turkey demands the right to buy and resell gas with great flexibility in terms of prices and volumes (it submitted the same demand to Azerbaijan as well, apparently).
Due to the natural gas agreement that it has just signed with Iran, Russia can hope for an improvement in its negotiating position with China and Turkey as well as additional satisfactory income, provided that it manages to increase its sales at acceptable prices. In addition to Iran, it may be targeting three more potential markets: Oman, Pakistan and India. Oman has excess gas liquefaction capacity, and the Iranians would like to take advantage of it; but in order to do so, they need to have enough natural gas to begin with, an issue which the new deal with Russia might solve. They would also have to find the financing needed for the required natural gas connection and convince the Omanis to risk upsetting the United States. As for Pakistan, will Iran’s partnership with Russia suffice to convince Islamabad to overcome its fear of US sanctions and import Iranian natural gas – or swapped Russian natural gas? It’s impossible to be sure. The remaining option is India, a country with which Russia has a very close and longstanding relationship. New Delhi may be interested in importing Iranian natural gas, provided that it doesn’t come through Pakistan. If the Iran-Russia deal goes through, could the next step be to build an undersea gas pipeline linking Iran directly to India, and able to supply India with Russian or Iranian natural gas? Alternatively, there are rumors that Russia would be prepared to help Iran to develop its first LNG plant.
So there are still many questions that won’t be answered for many years. For the time being, it’s impossible to know whether the recently-announced Iran-Russia natural gas agreement is really the “culmination of [Iran’s] energy diplomacy”, as claimed by Javad Owji at the Iranian cabinet meeting on July 17, 2024. Respectively, Russia and Iran hold the largest and second-largest proven reserves of natural gas, namely 37.4 tcm and 32.1 tcm, and together control some 40% of global gas reserves, although they jointly account for less than 10% of global exports.
Instead of an onshore solution skirting the sea’s western coast, a route across the Caspian was chosen for the Iran-Russia pipeline. It thus steered clear the Russian region of Dagestan and Azerbaijan for political, security and economic motives that sometimes recall the reasons why the Russians’ decided to build the Nord Stream 1 & 2 gas pipelines in the Baltic Sea, thus avoiding Ukraine and any other transit country. The northern Caspian Sea is quite shallow, ranging from just one to ten meters deep. It reaches depths of up to 1,000 meters between Azerbaijan and Turkmenistan, and then rises to 650m as it nears Iran; in comparison, the Nord Stream 1 and 2 gas pipelines reached a maximum depth of 450 meters north of Poland. The Caspian’s three other coastal countries, Azerbaijan, Kazakhstan and Turkmenistan, could oppose the laying of a Russian-Iranian gas pipeline on environmental grounds, as they are entitled to do under the agreement covering the legal status of the Caspian Sea. However, there is little risk of them doing so unless international relations worsen significantly in the region. In the past, Russia and Iran may have been concerned about setting a precedent that Turkmenistan could invoke to promote its long-mooted plan to build a gas pipeline to Azerbaijan, thus enabling it to sell its own natural gas in Europe; however, they needn’t worry about it, as Azerbaijan itself is finding it difficult to increase its exports to Europe.
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