Following on from our recent post, “Iran, the Competition over Eurasian Natural Gas, and the Revival of Classical Diplomacy in the 21st Century,” we want to draw readers’ attention, first of all, to a very thoughtful comment on that post from Ed Chow, our friend and colleague at CSIS. Ed generously notes his agreement with “most of what you said and with much from those you quoted,” and, in particular, with our argument that “U.S. policy should not seek to isolate Iran in its own region, particularly on oil and gas.” However, he cautions against exaggerating the impact of the recent inauguration of a new gas pipeline between Turkmenistan and Iran, noting the problematic past performance of both Ashgabat and Tehran in the previous dealings with one another over natural gas. Likewise, Ed cautions against exaggerating “the ability of TPAO — Turkey’s national oil company — to develop big gas fields in Iran.” In particular, he dismisses the notion of Iranian gas going into Nabucco as “mainly a useful ploy.” (Ed is one of the sharpest analysts we know of the serious commercial challenges that would need to be overcome for Nabucco to become anything more than a “pipe dream.” We have learned much from him on this subject, and largely agree with his analysis of Nabucco’s commercial viability.)
More broadly, Ed notes that
Iran has no surplus gas to export at present, given its internal needs for power generation and reinjection to sustain oil production. The big gas reserves to be developed in Iran are mainly offshore. If they are developed — and here Iran’s commercial obstinacy is more the obstacle than international sanctions — why wouldn’t Iran build liquefaction facilities to ship liquefied natural gas (LNG) to world markets rather than ship gas via a long-haul pipeline through half a dozen undependable transit countries to an inland European market? Nabucco does not make any economic sense with or without Iranian gas. If Iran is to export large volumes of pipeline gas, I find the Pakistan-India pipeline much more compelling.
Ed is a real expert — that is, someone with two decades of high-level industry experience — in the commercial aspects of the international oil and gas business. Certainly, his argument that LNG is commercially and strategically (in the business school sense of the term) preferable to Nabucco as an export outlet for Iranian gas makes sense. So does his argument that, among Iran’s options for exporting gas via pipelines, the proposed Pakistan-India pipeline is more compelling than Nabucco. And he is not the first person from the industry to cite Iran’s “commercial obstinacy.” However, with regard to LNG, we believe that international and domestic political factors have come together in recent years to reduce Tehran’s interest in pursuing LNG export projects — which makes pipelines the most likely channel through which the Islamic Republic might emerge as a gas exporter in coming years.
We have been on record with our assessment that sanctions are a counter-productive policy tool vis-à-vis Iran that will not produce strategically meaningful leverage over Iranian decision-making about the nuclear issue and other matters of concern. However, on the international front, sanctions — especially unilateral U.S. sanctions — place limits on the Islamic Republic’s possibilities for realizing LNG projects. At this point, only Western energy companies — U.S. companies and major European players like Royal Dutch Shell and Total — are capable of and have experience doing LNG trains. Much of the relevant technology remains subject to U.S. export controls. While some European companies say they are capable of carrying out LNG projects without using U.S.-controlled technology, none of these companies to date has been prepared to do so in Iran — almost certainly for a mix of commercial and political considerations. Currently, the most important new investments in Iran’s upstream oil and gas sectors are being undertaken by China’s national energy companies (NECs), which are not yet able to develop LNG trains on their own. As we noted in a monograph on Chinese-Iranian relations that we published with our colleague John Garver in September 2009,
[I]t seems highly probable that China will not only continue to import significant amounts of oil from Iran, but that Chinese NECs will become increasingly involved in the Iranian upstream. On their own, the Yadavaran and Azadegan oil fields have the potential to become major producing assets for Sinopec and CNPC, respectively. As Chinese NECs become more involved in Iran’s upstream gas sector, some companies — e.g., CNOOC — may continue to hold on to ambitions to become involved downstream in the development of LNG trains. But it is likely to take many years before a Chinese NEC would be able to realize such ambitions without Western partners. Thus, it seems more probable that upstream gas projects involving Chinese NECs will ultimately be tied to meeting Iran’s internal demand for gas and/or to pipeline export projects.
On the domestic front, it appears that political opposition to exporting natural gas in the form of LNG has grown significantly in recent years. If one believes that exporting natural gas amounts to letting foreigners gain control of Iran’s natural resources, it should not matter whether the gas is exported in the form of LNG or through pipelines. But LNG — which, as noted above, still requires the involvement of Western energy companies — has taken on especially negative connotations in Iranian politics. Thus, for the foreseeable future, Iranian ambitions to emerge as a gas exporter are more likely to be focused on pipeline projects than LNG.
Just after we published our “Iran, the Competition over Eurasian Natural Gas, and the Revival of Classical Diplomacy in the 21st Century” post — in which we lamented the relative lack of attention to these issues in the Western media — we came across this UPI piece, “Iran Redraws Energy Map to Defy U.S.,” filed from Tehran on January 14. For the most part, the article reinforces arguments we made in our post. However, the article also notes a potential “fly in the ointment” that could work against Iran’s ambitions to help supply Turkmen — and, perhaps, its own — gas to Europe via Turkey:
Iraqi Prime Minister Nouri al-Maliki offered last summer to supply Nabucco with 15 bcm of gas a year from 2015. If that comes off, the Americans, determined to leave a viable Iraqi state behind them, would undoubtedly throw their weight behind such a project, if only to tighten the squeeze on Iran.
The prospects of Iranian-Iraqi competition to supply hydrocarbons to international markets looms increasingly large on the strategic horizon, both with regard to crude oil and internal dynamics within OPEC and with regard to natural gas markets. We anticipate taking up this topic on this blog on a regular basis. For now, we would point out that any Iraqi gas that might go into Nabucco would almost certainly come from the Kurdistan Region. The commercial viability of natural gas production and export in Iraqi Kurdistan is still to be demonstrated. Moreover, exporting gas from Iraqi Kurdistan to Turkey would require a resolution of fundamental differences between the Kurdistan Regional Government and the central government in Baghdad — differences that have precluded the conclusion of a national oil law in Iraq for five years. It is not clear to us that those differences are any closer to being resolved than they were a year ago or two years ago. If the differences between the KRG and Baghdad were resolved, Turkey would surely look seriously at Iraqi gas as an option; in the absence of such a resolution, though, Ankara has for some time shown itself to be reluctant to strike “separate” energy deals — meaning actual contracts, not just preliminary agreements — with the KRG.
Finally, one reader wrote privately to suggest that we may have overstated our case about Europe’s future need for non-Russian, Eurasian gas, citing the recently released 2009 edition of the International Energy Agency’s World Energy Outlook, to argue that the world will actually experience a gas “glut” with declining prices in coming years. In such an environment, the strategic value of Iran’s natural gas reserves would seem to be significantly diminished. Flynt Leverett was a peer reviewer for the 2009 World Energy Outlook and, while he does not speak for the IEA, we are very familiar with the IEA’s analysis of international gas markets. The IEA anticipates an oversupply of gas, including LNG, in the near-to-medium term, to be sure (this almost certainly contributes to Iran’s diminished enthusiasm for moving ahead with LNG projects in the near-to-medium term). But the IEA also sees serious risks of a supply “crunch” in the medium-to-long term. Furthermore, while the unconventional gas “revolution” will make North America self-sufficient in natural gas, there is not likely to be a comparable unconventional gas “revolution” in Europe. Moreover, IEA officials say that gas self-sufficiency in North America will reinforce the longstanding regionalization of international gas markets — which means that Iranian and Central Asian gas will still be strategically significant for Europe (and China) in coming years.
Flynt Leverett directs the Iran Project at the New America Foundation, where he is also a Senior Research Fellow. Additionally, he teaches at Pennsylvania State University’s School of International Affairs. Hillary Mann Leverett is CEO of Strategic Energy and Global Analysis (STRATEGA), a political risk consultancy. In September 2010, she will also take up an appointment as Senior Lecturer and Senior Research Fellow at Yale University’s Jackson Institute for Global Affairs. This article was first published by The Race for Iran on 18 January 18 2010 under a Creative Commons license.