China, Europe, and Natural Gas in Iran

Yesterday, President Obama declared that the international community is “moving along fairly quickly” toward imposing new multilateral sanctions on Iran.  Today, the Obama Administration followed that up by announcing new unilateral financial sanctions against individuals and corporate entities associated with the Revolutionary Guards.  The Administration proclaims that its “engagement” policy has been successful, after all, in that it has enabled the United States to consolidate some measure of Western support for additional sanctions against the Islamic Republic.  In reality, though, U.S. policy on Iran-related sanctions — unilateral, multilateral, and secondary sanctions directed against third-country entities investing in the Islamic Republic — is stuck in an anachronistic model of the global economic order.

In this anachronistic model, America’s ability not just to keep U.S. companies out of Iran but also to limit the willingness of other Western (primarily European) companies to invest there would put real constraints on the Islamic Republic’s capacity to develop its hydrocarbon resources and other important sectors of its economy.  Now, of course, non-Western countries from what we used to call the developing world — e.g., China — have emerged as increasingly critical players in the global economyThis is catalyzing a shift in the worldwide distribution of both economic and political power that has serious implications for the American approach to Iran.

Today, Reuters reported from Beijing that China’s biggest and most internationally prominent national energy company, China National Petroleum Company (CNPC), has concluded a final contract to proceed with upstream exploration and production of Phase 11 of Iran’s massive South Pars gas field.  In June 2009, CNPC signed a preliminary agreement to undertake upstream development for South Pars Phase 11; in doing so, CNPC appeared to be threatening to displace Total, which had originally been slated to oversee both upstream development and downstream exploitation (primarily through the Pars LNG project) of South Pars Phase 11.  Now, it seems that CNPC has displaced Total from at least the upstream segment of South Pars Phase 11; Reuters reports that CNPC could start drilling in the field as early as March, after Chinese New Year celebrations are concluded.

If the Reuters report is accurate, CNPC’s move into upstream development of South Pars Phase 11 would represent an important expansion of the Chinese company’s business activities in Iran.  CNPC began operating in Iran in 2004, signing a service contract with the National Iranian Oil Company (NIOC) to take over development of the aging Masjid-i-Suleiman oil field.  In 2005, the company commenced exploration of the Kudasht oil block.  In January 2009, CNPC entered Iran’s upstream oil sector in a strategically significant way, signing a contract with the NIOC to take the lead in developing the North Azadegan oil field, which has the potential to become a major producing asset for CNPC.  (A Japanese consortium had a similar opportunity in 2004-2006 to develop South Azadegan but withdrew, in large part, because of U.S. political pressure.)  Assuming the lead in developing South Pars Phase 11 would make CNPC a major foreign player in Iran’s upstream gas sector as well.

If the Reuters report is accurate, it would also represent an important next step in the development of China’s energy links with Iran.  As always, for a comprehensive examination of Sino-Iranian relations, including their energy dimensions, we recommend that readers take a look at the monograph we published last September through the Reischauer Center at SAIS with our colleague John Garver, Moving (Slightly) Closer to Iran: China’s Shifting Calculus for Managing Its “Persian Gulf Dilemma.”

There was another interesting piece of energy-related news out of Iran today.  Press TV quotes the NIOC’s (NIOC) managing director, Seifollah Jashnsaz, as saying that “Iran is ready” to start exporting natural gas to Switzerland, via Turkey.  In 2008, Switzerland’s Elektrizitäts-Gesellschaft Laufenburg (EGL, an energy trading and supply company) signed a contract with a NIOC subsidiary to purchase more than 5 billion cubic meters of natural gas per year from Iran for 25 years.  The Swiss company contracted for these gas volumes to help supply the Trans Adriatic Pipeline (TAP), which EGL is developing in a joint venture with Norway’s Statoil.  The TAP — one of several projects envisioned as part of a broader European effort to develop a “southern” corridor for transporting natural gas from the Caspian Basin and the Middle East to European markets — will run from Greece through Albania and across the Adriatic Sea to Italy.  Of course, gas delivered to Italy through the TAP could also be shipped onward to Switzerland or other European markets. 

Now Iran says it is ready to start delivering the volumes for which EGL contracted.  Jashnsaz acknowledged that EGL is still in discussions with Turkey about the delivery of Iranian gas via Turkey to the TAP’s starting point in Greece.  These discussions will, no doubt, be difficult.  But Jashnsaz’s statements, along with the expansion of CNPC’s involvement in Iran’s upstream gas sector, underscore how America’s ongoing efforts to keep Iran’s natural gas reserves in the ground seem increasingly out of touch with the realities of the Eurasian energy scene.

Notwithstanding what many in the oil and gas industry describe as weaknesses in Iran’s historical progress toward realizing its potential as a producer and exporter of natural gas, the resources are there — they will be brought out of the ground eventually, and they will go to market somewhere.  Who helps Iran to get its gas out of the ground, and where those gas volumes that are not consumed domestically are ultimately marketed, are issues of potentially profound strategic significance.

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 in The Race for Iran on 10 February 2010 under a Creative Commons license.

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