USD 85.4176


EUR 91.4543


Brent 85.16


Natural gas 2.711



Will Iran challenge Russian interests in European natural gas market?

Tehran's intentions to enter the European gas market still remain part of the political game played by Islamic Republic authorities to make the West more inclined to lift sanctions and restore its economic ties with Iran.

Will Iran challenge Russian interests in European natural gas market?

Statements by Iranian officials on Tehran's intentions to enter the European gas market still remain part of the political game played by Islamic Republic authorities to make the West more inclined to lift sanctions and restore its economic ties with Iran. To date, however, these statements seem to have had more effect on the behavior of the Russian government and its hydrocarbon companies than on European companies.

Since the late 1990s, Iranian authorities have been promising to help European countries decrease their dependence on gas supplies from Russia. Between 2006 and 2015, at the least, international sanctions were a major obstacle blocking implementation of projects that were supposed to ensure Iran's access to the European gas market. European corporations, fearing being hit by Western sanctions, did not dare to develop a presence in the Iranian oil and gas sector beyond mere talks and discussions. Nevertheless, the adoption of the Joint Comprehensive Plan of Action and the beginnings of a gradual lifting of limits on cooperation with Iran clearly demonstrated that the core of the issue was not rooted exclusively in the sanctions but rather also involved Iran's energy infrastructure. Iranian natural gas still will not reach the European Union market in the medium term.

Although Iran possesses the largest reserves of natural gas in the world, its extraction capacities and gas transport infrastructure are still underdeveloped. Consequently, Iran is unable to immediately increase its exports abroad. The output of Iran's gas sector is about 251 billion cubic meters per year, of which it exports only about 6 billion cubic meters. At the same time, Iran also needs to import relatively the same amount from Turkmenistan to meet export obligations (which are reportedly twice as big as Iran's export capacities) and satisfy the needs of its northern provinces during winter. Iranian sources told Al-Monitor on condition of anonymity that the estimated investment needed to develop Iran's capacities to extract the natural gas and deliver it to external markets is immense - dozens of billions of dollars - making it difficult to accumulate the necessary funds and implement planned projects in a short period of time. Even in the best-case scenario, it will take Iran 3 to 5 years to reach an output of 307 billion cubic meters.

Nevertheless, such an increase in output does not mean that the export capacities of Tehran will rise adequately. This is largely determined by the structure of domestic energy consumption in Iran, which is dominated by gas. While promising to supply European countries with gas, the Iranian authorities set the satisfaction of domestic gas needs as their real priority. And these needs are high and still growing. For the last several decades, the Iranian government has been actively promoting the idea of the substitution of other energy resources with natural gas. Consequently, the share of natural gas in the country's energy consumption basket is about 60%, while oil's share is below 40%. The government also continues to subsidize natural gas prices to its population, which also leads to a high level of consumption of this resource.

Given that the Iranian authorities are determined to continue the implementation of their programs aimed at decreasing the share of oil in the country's energy consumption by substituting natural gas for petroleum, by 2020 the giant's share of Iran's gas will be still consumed domestically. As predicted by some experts, even if Tehran is able to increase its gas production within the next 3 years, only 27 billion cubic meters will be available for export. The Iranian authorities also keep pursuing their diversification strategy, where the development of the petrochemical industry would likely heavily rely on the gas feed. Apart from that, it is necessary to remember that Tehran is implementing the enhanced oil recovery program, whose goal is to sustain a stable level of oil output at old oilfields by injecting them with gas. This program is also officially given priority over the gas exports.

There is also a difference between statements by Iranian officials about the prospects of natural gas exports and Tehran's real plans. Iranian analysts told Al-Monitor that their government considers any projects aimed at the export of natural gas to distant countries (especially to Europe) as risky and too complicated to implement at the current stage. Instead, Tehran is interested in increasing its gas exports to its direct neighbors. Apart from the obvious economic dividends this would bring, Iranian authorities also want to create an economic leverage of influence on their not-always-friendly neighbors. Under these circumstances, from a mid-term perspective, the European gas market is not a top priority for Iran.

Finally, sanctions have never been completely lifted. US authorities are still reluctant to abolish the restraints put on financial transactions with Tehran. Consequently, European majors are only tiptoeing around potential projects in Iran's oil and gas sector, and are still waiting for the time when they will be sure that there is no risk to work with Tehran. Under these circumstances, some local analysts close to the Iranian government told Al-Monitor, Iran scrounged up funding for small infrastructure projects of secondary importance. However, the main gas projects still remain without necessary funds and foreign contractors.

Russian authorities do not consider the challenge of Iran's natural gas to their interests in the European market as negligible, even though Tehran over the next decade will hardly be able to represent a threat to the Russian presence there. However, Moscow tries to see the situation in the long term. Under these circumstances, the Kremlin does not exclude a scenario where, in the long run, Tehran finally carries out its promises to reach the European market.

However, even seeing Iran as a potential rival in this field, Russia still prefers cooperation to confrontation. Moscow follows the judo principle of staying in full contact with your opponent and keeping him close. Consequently, wherever possible, Moscow tries to ensure that hydrocarbons flow in the direction it wants them to, and at the least tries to make sure that it has a stake in the energy projects of Iran. As a result, Gazprom and other Russian energy corporations demonstrate open interest in the development of Iran's gas production and gas infrastructure. This strategy of involvement in Iran's gas sector is supported and promoted at the top level of the Russian political elite.

During the Baku summit of the Azerbaijani, Russian and Iranian presidents in August 2016, Vladimir Putin called for the necessity of closer cooperation and coordination in the oil and gas sphere, particularly over the shared use of existing pipeline infrastructure and joint development of Caspian hydrocarbon resources. He formulated a plan to supply the northern provinces of Iran with natural gas via Azerbaijan in exchange for Iranian liquefied natural gas that Russian companies will receive in the Persian Gulf. The implementation of this project would allow Iran to decrease its dependency on Turkmenistan as its sole supplier of natural gas to the northern districts, while Russian authorities would be able to ensure that at least some Iranian gas will not reach Europe but instead will be channeled by Russian companies to other regions.