Russia-Iran-Iraq: The Emerging Natural Gas Mini-OPEC

Iran’s natural gas stands in the mind of many as a question mark in the post-sanctions global ties with Tehran. President Obama said in mid-July that Moscow was very helpful in getting the negotiations with Iran to a fruitful conclusion. “I was not sure given the strong differences we are having with Russia right now around Ukraine, whether this (Russia’s role) would sustain itself. Putin and the Russian government compartmentalized on this in a way that surprised me, and we would have not achieved this agreement had it not been for Russia’s willingness to stick with us and the other P5-Plus members in insisting on a strong deal.”, the President said.

But why would Russia do that? If Moscow supplies the EU with almost one third of its natural gas requirements, wouldn’t it be self-damaging to Moscow to introduce another seller to its preferred client in the West?

Iran’s natural gas potentials are enormous. What the experts tell us is that the “natural” market for future Iran exports is Europe via Turkey. That means that Gazbrom is indeed willing to gracefully give up its principle client and that Putin is willing to give up more than 20% of Russia’s budget as tips to get President Obama’s appreciation to his role during the negotiations.

There are two views on this issue. One that explains the Russian attitude in terms of comparisons between Azerbaijan and Iran, a complex map of natural gas pipelines and potential pipelines, and more in-the-box analysis within the existing market parameters. The other explains it in terms of Russia-China- South Asia-Iran views of the emerging world order where the US has a substantially reduced place and along a new concept adapted to the steady rise of Asian markets.

We do not think that the Russians did not know what they are doing. The assumption that Moscow did not calculate precisely the potential gains and losses in the Iranian deal is ludicrous and naïve.

And we do not fully believe the Russian volunteered explanation to be fully true, though we do not take it as fully false neither. Russia’s foreign minister Sergei Lavrov explained his country’s assistance as a contribution to international laws and security.

“It would be more right not to talk about how Russia is going to benefit from this agreement because it is not intended for giving unilateral advantages to anybody. The agreement was initially aimed at working out a comprehensive approach to removing all risks for the nuclear non-proliferation regime and doing it on the basis of internationally recognized right, which is fixed in international documents, of states, specifically Iran, to develop peaceful nuclear activities, including uranium enrichment.”, Lavrov said.

True that Russia has a genuine interest in preventing Iran from becoming a nuclear power. Yet, hard to believe that President Putin may be willing to bankrupt his own mother Russia in order to remove all risks of nuclear proliferation and enact international documents. These are the same documents that apparently did not show up in the Russian radars while planning the Crimea’s invasion.    

And we do not believe that Russia stands to compensate for potential losses in its energy sales revenues, once Iran’s natural gas hits the European markets, by arms sales to Tehran after lifting the sanctions. Russian arms sales to Iran, existing and potential, will bring a fraction of what natural gas sales to Europe brings to Moscow’s coffers.

But how do the Iranians explain their take in regard to this issue.

About 10 months ago, President Hassan Rouhani contributed his view with a careful emphasis on his rejection of the completion with Russia theory.  “Today’s conditions are not such that if Russia stops selling gas to Europe, Iran can serve as an alternative for Russia’s gas exports to those countries,” Rouhani said in an interview with Russia-2 television channel.

Rouhani went further to pledge a steadfast assistance to Russia to break its share of international sanctions. “In the current situation, we will give the Russian government and nation whatever assistance we can provide, and the Russian people will see the Iranian brands in their shops by the next year, once the necessary trade requirements are met. Sanctions are detrimental to all countries, but the sanctioned countries should counteract and the others should also offer help,” he explained.

Russia has in fact some very practical reasons not to worry about possible Iranian gas exports to Europe.

Recently, for example, Moscow slapped European opponents of the Turkish Stream pipeline (Russia’s alternative to South Stream) when oil officials hinted that the project will not remain on the table forever. Energy Minister Alexander Novak said there was a risk that construction of the underwater pipeline to Turkey could be delayed if a related intergovernmental agreement was not signed with the Europeans soon. It is only logical that Moscow wants to press ahead quickly on the project which was supposed to be operational by 2017. Some market analysts expect that Moscow may ease its conditions on gas discounts to Turkey as a tactic pressure to get the project additional traction.

It will practically take a decade for Iran to be ready to make a difference in the European gas market. Iran’s domestic needs will be dramatically increasing and will absorb a substantial portion of the country’s gas output for some time to come.

The assumption of Iran challenging Russia’s market share becomes more questionable once compared with its opposite, that Iran and Russia will cooperate within an OPEC-like formula to influence prices. The two countries have roughly over 40% of world gas reserves. Other countries can join any such arrangement. We saw for example a country like Azerbaijan, which has considerable gas capacity, altering its approach to the international market as it was obvious to Baku that Russia is too close to challenge. Iraq is already a loyal ally to Tehran. The mix of political pressure, geopolitical ties, trade history and technical and financial complications provides a sound base to support such an arrangement.

Furthermore, there is no reason for Iran to give Europe precedence over Asia. Asia ranks first for Iranian foreign trade, receiving 87 percent of Iranian exports and providing 69 percent of Iranian imports, according to the Iranian Business Council. In fact, the first Iranian energy deals will be with both India and Pakistan. There are good reasons to believe that these deals will be followed by export agreements to China.

India now is moving to cancel the Turkmenistan-Afghanistan-Pakistan-India pipeline (TAPI) and considering instead either a Turkmenistan-Iran-Oman underwater pipeline. China said it is ready to construct the Pakistani part of the Iran-Pakistan pipeline as part of its China-Pakistan Economic Corridor. But the Indian offer, and the Iran-Pakistan pipeline point to the fact that the first possible market for Iran’s natural gas will be South and East Asia, not Europe. The Asian market can easily swallow all of Iran’s natural gas production for decades. Furthermore, the Russian supplies to the EU are already integrated in Europe’s network. It is already there and could be increased relatively easy and economically. This East Oriented, not Europe oriented, policy provides proper ground for coordination in the natural gas field between Iran and Russia.

In other words, the assumption that Iran will compete with Russia in exporting gas to Europe, hence improving European energy security, seems to be wishful thinking. What we may see is not competition, but cooperation.

Well, this may explain why the Russians were not shooting themselves in the foot when they helped to reach the nuclear deal. In fact, it is quite the contrary. If they have an agreement with the Iranians, Azaris, Turkmanis, and Iraqis to coordinate gas policies in the post sanctions era, we may find a new natural gas OPEC emerging.

MEB