Iran as a Gazprom Monopoly Killer

iran041608.jpgWe’ve done several blog posts here about the geopolitical importance of Iran in terms of EU energy security vis-à-vis Gazprom’s dominant position, and the careful dance between Moscow, Tehran, and the international community over nuclear issues. Today, as world leaders meet in Shanghai to discuss Iran (and likely not make much progress), one of the issues of enormous concern to Moscow, but not picked up by many in the media, is the proposal to boost the EU-Iran energy trade. Analysts argue that Moscow has an interest in making sure these bellicose tensions between Iran and the West last as long as possible to stall progress on Iranian gas (hence their moves in China today) – but they are not so committed to Tehran that progress on the Bushehr reactor site isn’t slowed by every imaginable bureaucratic snag.

Iran is perfectly positioned to deliver natural gas directly to one of the world’s most attractive markets, and it is possible to imagine that deepening this economic cooperation could result in more stable political relations … despite the fact that this globalization-makes-peace theory has been stretched to its limits by other examples. Both Total and Royal Dutch Shell are being pressured by Iran to finalize their offers for the South Pars gas field, which have been delayed due to doubts and pressures related to Iran’s poor relations with the West. Reuters reports that “Western firms in particular have shown increasing reluctance to invest or expand operations in Iran because of its nuclear row with the West, which accuses Tehran of seeking atomic bombs despite Tehran’s denials.“Ryan R. Miller of the Atlantic Community takes a look at the EU-Iran energy trade, arguing that European gas markets represent an important “carrot” for Iran to abandon its pursuit of nuclear capabilities:

Energy Carrots for Iran: Killing Two Birds with One StoneWhen major powers meet in Shanghai on Wednesday to discuss Iran’s nuclear program, Washington should work with European capitals and leave the door open to greater EU-Iranian energy trade as a potential reward for Iranian good behavior. For post-communist Central Europe, disproportionately exposed to Russia’s energy monopoly, such a strategy could kill two birds with one stone.Ryan R. MillerGazprom, Russia’s state-controlled gas monopoly, supplies roughly two-thirds of Central Europe’s natural gas. This constrains competition and fosters concerns in the region about Russian political and economic influence. Iran, sitting atop the world’s second-largest gas reserves, is Gazprom’s natural competitor. The Iranian government’s pursuit of the atom and support of nasty groups in the Middle East suppresses this competition. Still, Iran hopes to supply the European market with natural gas in the near future. And European officials have for some time desired to import Iranian gas. This coalescence of interests should be leveraged in support of the West’s negotiating position with Tehran. To be blunt, European gas markets should be offered as a carrot.Under the right circumstances, Iranian gas could one day reach Central Europe via the Nabucco pipeline – a planned gas conduit sponsored by Brussels and Washington that avoids Russia. The Nabucco consortium is having difficulty pinning down sufficient gas supplies, and the Iranians have expressed an interest in supplying the pipeline. Liquefied natural gas (LNG) is the other option for getting Iran’s hydrocarbons to European consumers. Poland or Hungary, for instance, could access Iranian LNG via proposed terminals in the Baltic and the Adriatic.To be sure, there are no guarantees that Tehran will go for these carrots. But if the United States and Europe make an earnest effort, then at least they can say with confidence that no avenue was left unexplored.At present, U.S. policy complicates the use of energy carrots in dealing with Iran. The threat of unilateral sanctions – applied extra-territorially to non-American companies – is brandished to make foreign (mostly European) firms to think twice about doing business in Iran’s energy sector. Congress is also considering a ratcheting up of sanctions legislation. Though American officials support new pipelines like Nabucco, they have also said this support would be withdrawn if Iran is the named supplier. Because of U.S. pressure, Central Europeans could forego their Iran option entirely.Long-term, of course, Iran will probably become a net-exporter of gas regardless of U.S. sanctions. Energy markets are tight, and demand for natural gas is growing, suggesting it to be only a matter of time before the country’s gas deposits make it onto international markets. In practice, unilateral sanctions seem to encourage Chinese energy companies to fill the gap. Though the “China option” is not ideal from Iran’s standpoint (Chinese firms lack the sophisticated technology of Western oil and gas majors, and Iranian gas interests have their eye on European customers), Iran will have little choice but to look eastward if cut off from Europe’s lucrative markets.From a U.S. perspective, there’s a strong case to be made that it’s better to let Iran’s gas flow to America’s friends than to its rivals. U.S. leverage over China is limited, and it’s maybe wiser to let the Mullahs sell to those whom Washington can sweet talk when necessary. It also makes sense to help U.S. allies in Central Europe diversify their energy imports. Indeed, if Gazprom is allowed to pursue a policy of “divide-and-conquer” with individual EU customers, should not the Central Europeans be able to balance two producers (Iran and Russia) off one another? For these reasons, the United States should consider dropping its opposition to Western gas deals with Iran as part of a broader package of incentives to entice the Iranians to cooperate.Ironically, right when Central European capitals support U.S. plans for a shield to counter Iranian missiles, the Islamic Republic could offer some in the region a shield against Russian monopoly power. U.S. and European diplomats must seize the opportunity to set up a win-win for all sides, help diffuse the nuclear standoff and bolster European energy security in one fell swoop.Ryan R. Miller is a research analyst with the Center for European Policy Analysis (CEPA) in Washington, D.C.