Bringing Iranian gas to European market via Southern Gas Corridor: perspectives, limitations and implications

It has been pronounced on several occasions that Iran may join TANAP, a constituent part of the Southern Gas Corridor (SGC), scheduled to supply natural gas from Shah Deniz II to the European market starting from 2019. Rovnag Abdullayev, the president of State Oil Company of the Republic of Azerbaijan (SOCAR), TANAP’s major stakeholder (58%), said that "after the decision on lifting sanctions over Iran, we are ready to consider offers for the sale of part of our shares in TANAP, if we get an advantageous offer”. Pak Ayeen, Ambassador of Iran to Azerbaijan also outlined Iran’s interest in joining TANAP. Turkey's former Minister of Energy and Natural Resources Taner Yildiz said that "Turkey would not close its door to Iran if it wants to join TANAP".

 

Oil and gas pipelines in the region

 

However, the plausibility and degree of Iran’s participation in the SGC must be measured against several commercial and geostrategic criteria - priorities of Tehran’s energy policy in the post-sanctions period, infrastructural capacity, commercial and geostrategic interests of Azerbaijan and geopolitical implications of this venture for Iran.

Iran holds the largest natural gas reserves in the world according to BP Statistical Review of World Energy. It currently produces 160 bcm of gas per year, most of which satisfies demands of its own economy, while only 10 bcm/year is exported, primarily to Turkey via Tabriz-Ankara pipeline. Despite having immense untapped gas reserves, Iran was not able to develop its export potential due to sanctions imposed on its energy sector, resulting in the absence of investment and modern technology. In the post-sanctions period the policy of Iran is to actively seek consumer markets for its natural gas, production of which is expected to increase exponentially once investments and technology will take effect by 2020. Statements of Iranian officials underlining the willingness to join a great number of various gas projects, including SGC, reflects the desire of Iran to get into as more talks as possible in order to have more options for consideration and eventually make the most geo-strategically and commercially viable choices.

As for the potential of bringing Iranian gas to European market in general,one of the hurdles for this is that the latter’s gas market does not lie at the heart of export-related aspirations of the former. Asian market may in fact prove to be more commercially desirable for Iran. Currently Iran-Pakistan "Peace” pipeline is being built with capacity of 22 bcm/year and possible extension up to 55 bcm/year. The importance of this project for Iran is amplified by the peculiar interest of China, who in April 2015 signed an agreement with Pakistan on building a pipeline from Gwadar port to Nawabshah in Pakistan, which might be linked to Iran-Pakistan pipeline and then stretched to Southern China, thereby facilitating the supply of huge volumes of Iranian gas to China. Iran also considers exporting gas to Iraq via a new pipeline to be built. Yet high risks associated with security of the region will likely prevent it from implementation. Furthermore, in March 2014 Iran signed an agreement with Oman on shipping 10 bcm/year of gas via a new pipeline to be built under Persian Gulf.

Another limitation in supplying Iranian gas to Europe lies in the lack of infrastructure linking the north of the country with its south, where the major gas fields such as South Pars are located. The demand of the northern provinces of Iran is satisfied by the gasreceived predominantly from Turkmenistan in the amount of 20 bcm/year and a little amount from Azerbaijan as a part of a swap deal. The absence of the south-north connection presents an essential handicap to supplying huge amounts of gas to European market and necessitates building a pipeline in the south-north direction.

Agreement on ITE (Iran-Turkey-Europe) pipeline, one of the potential projects to bring gas from the south of Iran through Turkey to Europe, was signed in 2008, but remained without any practical steps and was sidelined altogether after the imposition of sanctions by the EU in 2010. Even after lifting of sanctions, a number of hurdles to carrying out this project remain. There is no agreement on the final route of the proposed pipeline, neither feasibility study defining the overall cost of the project was conducted, nor the amount of gas to be pumped was specified. Moreover, building such a pipeline will require a massive investment by the EU, who would not be willing to engage into such an uncertain and costly enterprise as of now.

Besides this, ITE project largely duplicates the route of SGC, which is already set to be commissioned by 2019. From European perspective, the need for ITE project was downgraded after it became certain that TANAP and TAP are to be constructed. This view is supported by the statements of the EU officials, inviting other regional players such as Iran, Turkmenistan and Kurdish Regional Government in Iraq to join SGC. Therefore, the option of ITE pipeline will most likely be off the table for the foreseeable future.

Linking TANAP to Tabriz-Ankara pipeline, thereby pumping Iranian gas to Europe via already existing infrastructure is more cost effective option for all the parties involved. It does not require huge investment, can be done in a relative short-term and facilitate initial deliveries of Iranian gas to Europe, which is an important strategic factor in itself. Alireza Kameli, National Iranian Gas Export company’s managing director, defined this option as the shortest route to Europe. This must be regarded as a further testament that building additional pipelines between Iran and Turkey with a view to bring Iranian gas to Europe is not commercially viable as of now.

However, if Iran joins TANAP through Tabriz-Ankara pipeline, the amount of gas that it will bring to the Southern Gas Corridor by 2023 will be no more than 4-5 bcm/year, bearing in mind the following factors. Firstly, the capacity of Tabriz-Ankara pipeline might be upgraded from the current 10 to 14 bcm/year, adding 4 bcm/year of Iranian gas earmarked for the European market. Secondly, 10 bcm/year of gas from Shah Deniz II in Azerbaijan in the first stage of TANAP and TAP pipelines is already contracted for European market by 2045. The forecast of natural gas production in Azerbaijan suggests that TANAP and TAP pipelines upon their expansion stages (24 and 20 bcm/year respectively) in 2023 may be filled with more gas coming primarily from Absheron field (4-5 bcm/year), which is estimated to go on stream around that time. Thus, Azerbaijan may add approximately 4-5 bcm/year of its gas to the European market via SGC by 2023, leaving room for 4-5 bcm/year of gas that may be obtained from Iran.

Thirdly, the ultimate decision to bring Iran on board of TANAP rests with SOCAR, which is a lead stakeholder of TANAP with the 58 per cent of shares and is naturally interested in ensuring geostrategic and commercial interest of Azerbaijan in the first place. Some of the SOCAR’s statements indicate that it can sell only 8 per cent and will keep at least 50 per cent of the shares in TANAP, which demonstrates the importance of retaining control over the pipeline. Nevertheless, a majority of statements reveal the willingness to engage Iran in SGC, reaffirming the paramount geostrategic importance of this project for Azerbaijan. If Iran is to join SGC, it will contribute to the success of SGC as a geopolitically and commercially justified project in the longer term, in case Azerbaijan will not deliver sufficient amount of gas during the next stages of expansion of TANAP and TAP pipelines. On a commercial side, SOCAR as the de-facto owner of the pipeline will extract benefits of transportation fee for the passage of the Iranian gas through TANAP.

Overall, Iran’s participation in TANAP must be viewed in a larger context of improvement in the Azerbaijan-Iran relations since 2013. Enhancing relations and stirring up regional cooperation after long years of mutual suspicion and misgivings is in the interest of both sides. Hence the removal of sanctions against Iran, given the current regional dynamic, is considered by Baku and Tehran as a chance to give a new impulse to regional cooperation, including in the sphere of energy. Furthermore, facilitating Iran’s inclusion into SGC will bolster the role of Azerbaijan as a leading strategic partner of the West in the Caspian basin, capable of not only facilitating diversification of pipeline routes to Europe, but also forging source diversification by partnering with and bringing other significant players such as Iran into this process.

By joining TANAP, albeit with mere amount of gas in the first stage, Iran will take an initial stride towards European gas market. Joining TANAP will also facilitate regional integration of Iran and enhancement of relations with Azerbaijan and Turkey, long-standing partners of the West for delivering energy resources from the Caspian Basin onto European market. This will set a good ground for Iran to build further confidence in the post-sanctions period both with Europe and countries of the region.

Involvement of Tehran into the project of such a paramount regional significance may come at the expense of its relations with Russia, its long-standing ally. Iran’s venture to European market, though with insignificant amount of gas initially, may contribute to undermining Russian monopoly on European gas market in the longer term. Iran’s participation in SGC will also present a threat to the strategic and geopolitical interests of Russia in the South Caucasus. Moreover, Iran disposes of a potential to serve a transit country for the Turkmen gas on its route to Europe in future. The likelihood of this idea increases as the prospects for the Trans-Caspian pipeline project, unfeasible due to the tensions between Azerbaijan and Turkmenistan over oil and gas fields in the Caspian, the absence of legal delimitation of the Caspian Sea among its five littoral states and political pressures emanating from Russia, are growing vague. Therefore, the factor of the Moscow-Tehran strategic relations and their value for Iran will be weighed against the prospects of engagement to the European gas market.

Presently Iran depends principally on Turkey for the exports of its natural gas. Grand pipeline projects such as ITE, if implemented, would increase the influence of the latter over Iran and give it more bargaining power on other essential issues. Hence Iran would be disinclined to cement the influence of Turkey over itself by expediting the passage of significant amount of its gas through the territory of the NATO member state. Therefore, by starting to transport its gas to Europe via Tabriz-Ankara and TANAP pipelines in the modest amount, Iran will reach the goal of entering European gas market, while being able to opt for other more commercially and geopolitically preferable routes for its major gas resources.

Although European gas market does not constitute the top priority of Iran’s energy policy in the post-sanctions period, supplying 4-5 bcm/year of its natural gas to Europe already by 2023 through existing infrastructure will facilitate introduction of Iranian gas to the European market, setting a propitious ground for further cooperation with Europe and contributing to the diversification of European supply sources away from Russia.

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