Iran's Potential As Europe's Alternative for Natural Gas*
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Iran’s potential as Europe’s alternative for natural gas* Laurentiu Pachiu June 2015 For more than a year, the European „energy community” has been focusing on the consequences the status quo in Ukraine had on the continental energy security architecture. The Ukrainian crisis generated a marked speed up in the energy integration processes at EU level and had its peak in the start up of the European Energy Union project. The diversification of the natural gas sources and routes for Europe’s natural gas supply therefore became a politic and strategic priority for the EU. On the other hand, it was mandatory for the Russian Federation to develop an alternative natural gas supply route for its European customers, bypassing Ukraine. Both „energy blocks”, namely the European consumers and the main supplier, the Russian Federation, are thus faced with the strategic conundrum of redesigning energy relations, being currently driven by conflicting feelings with long term irreversible consequences. On this basically geopolitical note, the so-called „Southern Gas Corridor” acquired a crucial strategic relevance (see figure 1). Figure 1: the Southern Gas Corridor Source: http://www.tap-ag.com/the-pipeline/the-big-picture/southern-gas-corridor * The Romanian version of this article was first published on 21 July 2015, on Contributors.ro. http://www.contributors.ro/economie/europa-%C8%99i-op%C8%9Biunea-iraniana-a- gazelor/ 1 The support for the Southern Corridor is manifested both inside the EU through policies linked to the development of interconnectors able to ensure the takeover and distribution of hydrocarbons in the „Magic Triangle” (consisting of the resource abundant regions in the basins of the Black Sea, Mediterranean and Caspian Sea) or otherwise known as the „Strategic Ellipse” (see figure 2) and by a projection of the increasingly active energy policies of various European state and non-state players in the „source” regions in the Middle East and Eurasia. Figure 2: the Strategic Ellipse Source: Iranian Association for Energy Economics, Vienna, 2015 Prior to drawing up a political denouement to what was described as the „Iranian nuclear crisis”, the EU assigned Iran a special role in the European energy security configuration. In the European Commission (EC) communication to the European Parliament on May 28th 2014 regarding the European Energy security strategy (COM 2014) 330, Iran (conditioned by the lifting of sanctions), together with Iraq and Turkmenistan, were expressly mentioned as natural gas supply sources for Europe, the EC recalling an „active business agenda” in the Caspian area for the expansion of the Southern Corridor for supplier countries such as Iraq, Iran and Turkmenistan. Although EU’s framework Strategy for the Energy Union launched in 2015 no longer expressly mentions Iran, the series of political statements of several European and Iranian key factors towards an EU-Iran energy partnership, as well as the increasingly intense „fieldwork” of state and non-state players interested in Iran’s potential as energy partner, reveals a serious interest. The implementation of the Comprehensive Action Plan enacted on April 2nd, 2015 at Lausanne in P5+1 form (i.e. the permanent members of the Security Council of the UN plus Germany and Iran), based on the Regulatory Framework Agreement for the Iranian nuclear file and for lifting Iran sanctions (Interim nuclear agreement November 2013 – Iran and P5+1) could be regarded as a historical opportunity for Iran, for the security balance in the region and for the long and midterm European energy security. 2 About Iran as energy player Iran/Persia can be categorized as being among the few countries and civilizations that managed to preserve their cultural essence and vocation as regional (and at some point continental) player over five millennia. A strong and long standing Persian tradition and cultural expansion to which one can add starting with 1901- at the time of Iran’s most productive petroleum well discovery, known as the “D’Arcy Concession”, by the cumulated efforts of pioneers William Knox D’Arcy, George Bernard Reynolds and Calouste Gulbenkian, and of Anglo Persian Oil Company (BP) – Iran’s strategic relevance as significant crude oil producer and exporter. 1 This new status of Persia in terms of what can be known as pristine stage of the hydrocarbon era led to building up nationalist frustrations reaching a climax through the nationalization of the Iranian petroleum industry in 1953 and going further with the Islamic Revolution of 1978. Ever since, Iran’s history experienced an intense and dramatic age, its energy industry taking the stage in the grand sweep of Iranian history and in terms of regional geopolitics. On the background of several trends opening the path to a new international security and energy security order, the need for a tighter „interconnection” between the states and regions relevant in terms of energy capabilities (producing, consuming and transit states) is already self-evident. On this note we have for instance the debates on a „revival” of the Silk Road. However, any political-strategic Silk Road „revival” program would lack long term applicability in the absence of Iran as regional power on the strategic axis (see figure 3) of this economic route and as potential security landmark. Figure 3: The Silk Road Source: www.investiniran.ir 1 Daniel Yergin, The Prize: The Epic Quest for Oil, Money & Power, Free Press; Reissue edition (December 23, 2008). 3 Moving on to why Iran is fundamental in the energy security global and regional scheme, there is, above all, its undeniable geostrategic positioning: the Persian Gulf and the Hormuz Strait, opening to Europe, Russia, Central Asia, China, South-Eastern Asia and Africa. Iran features a mostly young, educated, liberal and dynamic 77.5 million population (85% literacy level). Moreover, the country prides itself on a temperate climate, abounding in natural resources (largest zinc reserves in the world and second place in copper reserves, along with significant iron, chrome, lead, coal, mangane and gold deposits). Although pretty harsh for Iran, the sanctions imposed by the international community, forced Teheran to distance itself from the petro state „curse”, encouraging the development of a multifaceted economy oriented towards cement, steel, textiles, food, cars, electric and electronic equipment (but as we will see, an electro-intensive economy)) and manifesting growth potential in other areas (services, tourism, agriculture). Iran takes first place in the world when it comes to its natural gas proven reserves (34 trillion cubic meters representing 18.2% of the world total as compared to Russia with 32.6 trillion cubic meters representing 17.4% of the total, as per the information in the BP Statistical Review of World Energy, 2015). The natural gas output reached 166 billion cubic meters/year in 2013 with a 0.8% increase representing 4.9% of the world total (while Russia gives 604 billion cubic meters/year, with a 2.4% increase representing 17.8% of the world total). As for the proven crude oil reserves, Iran holds 9.3% of the world reserves (157 billion barrels), 4th place in the world, as compared to Russia which holds 6.1%. Iranian crude oil output reached 3.614 thousand barrels/day in 2014 (increased by 2% as compared to 2012), representing 4% of the world total, while Russia’s output reached 10,838 barrels/day, increasing by 0.6%, representing 12.7% of the world total. The analysis of statistical data shows that the natural gas and petroleum consumption in Iran reached significant proportions, going upwards as per the production levels. Thus, in 2014, the natural gas consumption was of 170 billion cubic meters increasing by 6.8%, representing 5% of the world consumption- same as China, an economy with a GDP significantly higher than Iran’s; the Iranian GDP amounts to 368 billion USD with an annual 2.8% growth rate while China’s GDP reached 9,240 billion USD and a 7% annual growth rate. Over the last financial year, 40% of the natural gas consumption was registered in the household sector increasing by 2% as compared to the previous year. Natural gas holds 70% of Iran’s energy mix, the main gas consumers being households (411 million cubic meters/day), power plants (76 million cubic meters/day), the industry sector (82 million cubic meters/day), and the rest being used for re-injection in hydrocarbon deposits to increase oil recovery. Almost the entire natural gas output of Iran is oriented towards domestic consumption. By importing natural gas from Turkmenistan, Iran managed to export 9, 7 billion cubic meters 4 of gas to Turkey (90% of the total Iranian natural gas exports and 25% of Turkey’s demand). Nevertheless, Iran has been a net natural gas importer since 19972. Teheran has the intention to increase hydrocarbon production (by increasing natural gas production in 2016 to 760 million cubic meters/day, targeting 250 billion for 2020), however such forecasts mainly depend on major foreign investments and technology inflows. What needs to be highlighted is that approximately 85% of the Iranian natural gas reserves are not yet developed. 44 billion natural gas cubic meters are used in the industrial sector and the injection in petroleum deposits barely reached 34 billion cubic meters (insufficient, as the demand was of 175 million cubic meters/day). In 2025 consumption is estimated to increase to 2500 cubic meters/day, which would mean a fourfold increase, Iran being thus forced to import natural gas to ensure domestic consumption. Iran managed to speed up natural gas production by 100 million cubic meters/day in 2014 a similar growth pace being forecasted for 2015 so that in 2020 the production level will reach 1,100 million cubic meters/day as compared to 660 million cubic meters/day at present.