The Russo-Iranian Energy Pact

Writing on Japan Focus, M K Bhadrakumar points out the patently clear quid pro quo going on between Russia and Iran in energy and geopolitics. Extensive high quality analysis after the cut.

In fact, how Moscow proceeds with the reconfiguration of Russo-Iranian relations could well form the centerpiece of the geopolitics of energy security in Eurasia during 2008. The dynamics on this front will doubtless play out on a vast theater stretching well beyond the Eurasian space, all the way to China and Japan in the east and to the very heart of Europe in the west where the Rhine River flows. …

The month of May stood out as the watershed when the geopolitics of energy in Eurasia decisively turned in Russia’s favor. At a tripartite summit meeting in the city of Turkemenbashi (Turkmenistan) on May 12, Putin and his Kazakh and Turkmen counterparts signed a declaration of intent for upgrading and expanding gas pipelines from Kazakhstan and Turkmenistan along the Caspian Sea coast directly to Russia. The president of Uzbekistan, Islam Karimov, also signed up separately on May 9 for a modernization of the Turkmenistan-Uzbekistan-Kazakhstan-Russia pipeline. Both pipelines are components of the Soviet-era Central Asia-Center pipeline system bound for Russia. The quadripartite project essentially aims at the transportation of Turkmenistan’s gas output, which almost in its entirety would be bought up by Russia for a 25-year period.Subsequently, the US and EU have made herculean efforts to get Ashgabat to resile from the commitment to the project with Russia, but have failed. During the past year, 16 high-level delegations from Washington visited Ashgabat in this regard. Thus, when Russian Prime Minister Viktor Zubkov finally signed the agreement relating to the Caspian littoral pipeline on December 12 with his Kazakh and Turkmen counterparts, the curtain came down on one of the grimmest struggles of the great game in the post-Soviet era. Moscow came out the winner by far, reasserting its pre-eminent position in the Caspian.The commitment of Turkmen gas to Russia has broader implications. For one thing, the fate of the US-supported proposals for a trans-Caspian pipeline and the Nabucco pipeline depended significantly on the availability of Turkmen and Kazakh gas. Their future is now up in the air. That, in turn, means Europe is increasingly left with only one serious option for diversifying its gas imports – Iran.…In such an overall context, during the months ahead Moscow can be expected to make robust efforts to coordinate with Iran over its oil and gas output and exports. The rationale for such a coordinated strategy involving Iran is very obvious. First, Moscow is intensely conscious of the Western awareness of Iran’s enormous untapped hydrocarbon reserves as an alternative to Russian supplies. Russia will strive to stay ahead of the European, and eventually American, overtures to Iran.Second, the hydrocarbon sector in Iran is firmly under state control and Moscow and Tehran are in harmony in this regard. Third, the two countries will be coordinating their energy policies for wider geopolitical purposes within the broad framework of their strategic cooperation. Furthermore, market forces dictate the rationale of Russia-Iran cooperation. Moscow would simply like to avoid competing with Iran, and vice versa. Russia and Iran control roughly 20% of world’s oil reserves and close to half of the world’s gas reserves, and it makes good sense to accommodate each other.Iran is indeed an important energy partner for Russia for many reasons. Russian oil companies, flush with funds, are keen to invest abroad. The Iranian upstream oil and gas sector and Iran’s energy ventures, such as pipeline projects, offer an attractive proposition for Russian investment. Again, Iran’s geographical location is ideal as an export outlet for expanding Russian energy exports, especially its ambitious developing liquefied natural gas (LNG) industry. Besides, Iran is an influential member of the Organization of Petroleum Exporting Countries, whose decisions have bearing on price stability and Russian export volumes.But the most important consideration for Russia will be that Iran’s energy policy should not come into conflict with Russian interests. Once the US’s engagement of Iran commences, Tehran will have plenty of choice while accessing foreign capital and advanced upstream oil and gas technology. Iran is bound to probe gas markets such as Turkey, the Balkans and central and east Europe. Also, Iran is keen to develop a new LNG industry. Over and above, Iran could well end up competing with Russia as a major oil and gas route connecting the Caspian and Central Asian energy producing countries.Cooperation with Iran is no less important for Russia in terms of Caspian Sea issues. True, the two countries have divergent views on how the Caspian Sea should be divided. Russia prefers a median line solution, whereas Iran has insisted on an equal share (20%) solution for each littoral state regardless of the length of coastline. All the same, Russia and Iran are in profound agreement in their opposition to the US-led trans-Caspian pipeline projects.Russia’s number one priority in energy cooperation with Iran will be for upstream participation by Russian companies. Gazprom has had some limited participation so far in the early phases of Iran’s massive South Pars gas fields with an estimated aggregate cumulative production range of a stunning 13 trillion cubic meters. Moscow will be keen to promote greater involvement. Gazprom has shown interest in the Iran-Pakistan-India pipeline project not only as a contractor but also as an investor.The South Pars FieldBut the big-ticket item will be the future development phases of South Pars, which Tehran has earmarked as feedstock for producing and exporting LNG for the European and Asian markets. Without doubt, Moscow will be keen to develop a role in Iran’s nascent LNG industry so that it doesn’t end up competing with Russia’s own LNG industry.Following his talks with Lavrov in Moscow last week, Mottaki stressed that the unfolding expansion of relations between Iran and Russia stems from a highly strategic decision taken by the leadership in Tehran. Specifically, Mottaki proposed the setting up of a joint gas company with Russia. Moscow would be favorably inclined towards the Iranian proposal, as it broadly aims at eliminating the possibility of the two countries competing with each other in the range of activities related to gas exports such as production, transportation, sales and prices.Over and above, Moscow would be pleased at the present orientation of Iranian energy exports toward the Asian market. On the one hand, this would ease the competition from China for gaining access to Central Asian energy producers and on the other, it reduces the likelihood of Iranian energy flows to Europe, which may otherwise cut into Russia’s market share.Equally, Russia would actively promote an Iranian gas pipeline to China via Pakistan and India. But the project is stalled due to US pressure on India. Konstantin Simonov, the chief of Russia’s National Energy Security Fund, alleged recently that by opposing the Iran-Pakistan-India gas pipeline, the US is principally trying to deny China easy access to Iranian energy reserves.To be sure, Moscow began anticipating several months ago that with the inevitable collapse of the United States’ policy of containment of Iran and with Iran’s ensuing arrival as a gas exporting country, an altogether new scenario would shape up on Eurasia’s energy map. Moscow would also have taken stock of the 1979 Iranian revolution’s ideological struggle between “black Shi’ism” and “red Shi’ism”, which has, significantly enough, resumed lately. The West has always been an interested party in the outcome of this struggle.Two former Western-oriented Iranian presidents – Hashemi Rafsanjani and Mohammed Khatami – have joined hands in an unlikely alliance of conservatives and liberals. A regime change in Tehran holds out the possibility that the two energy superstars – Russia and Iran – could find themselves being set against each other by the West, or end up treading on each other’s toes.Thus, Putin’s historic visit to Tehran on October 16, the first-ever bilateral visit by a Russian leader – Tsarist or Bolshevik – falls into perspective as a landmark event in the geopolitics of energy in the coming period. On whichever turf he has so far touched on energy security, Putin has left his unique personal stamp – that of the keen anticipation of a chess player blending with his swiftness as a black belt in judo. But the Persian chessboard is no easy turf. Putin’s moves will therefore be an absorbing sight to watch. Perhaps they are destined to form yet another of his fine legacies in post-Soviet Russia’s historic transformation as a great power in the 21st century.