Russia’s recent move to cut natural gas supplies to Ukraine was a terse reminder to Europe that, if it continues to pressure Russia in what it considers its backyard, then the disruption of Europe’s vulnerable gas supplies might be next.
This dramatic move, coupled with Russia’s recent $400bn natural gas deal with China, is meant to deliver a blunt message to Europe, as the United States pressures it to impose more sanctions on Russia. Simply put, Russian President Vladimir Putin’s response to toothless US and European Union sanctions is that Russia has other options. The message back from Europe should be just as blunt: So do we. What other options does Europe have? Believe it or not – Iran.
At first glance, the thought of Iran supplying natural gas to Europe seems far-fetched. It is not a country that Western analysts or economists think of as friendly to Western interests. While this analysis on the surface may be true, it lacks depth and context.
Iran has a long, complicated history with Russia. In the 1800s, Persia, now modern-day Iran, ceded all of its claims to the Caucasus which comprised what is now Georgia, Armenia and Azerbaijan to tsarist Russia. As recently as the last century, the Soviet Union propped up and encouraged a separatist, communist government in Iranian Azerbaijan – much like what it is now doing in Ukraine.
A history of conflict
One of the first flashpoints during the Cold War between the US and the Soviet Union was in Iran. It’s difficult to fathom now, but it was then-US President Harry Truman who waged a fierce diplomatic campaign that eventually lead to the withdrawal of Soviet troops from Iran and restored Tehran’s sovereignty over Iranian Azerbaijan. In the 1980s, Iran backed Afghan rebels in their conflict against the Soviet Union. It is a fact that Iran has ceded more territory to Russia than any other country in modern times.
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Indeed, it is the fractured and vitriolic relationship Iran has had with the Western world that has driven it to form commercial and military ties with Russia. Those ties are still tenuous at best. Russian companies have underwhelmed the Iranian market both in the oil and gas industry as well as in the contentious area of nuclear power. The Bushehr nuclear reactor that the Russians built was riddled by delays and cost overruns. Russia has failed to deliver a controversial missile defence system, the S-300, to Iran, which has resulted in Iran filing a $4bn claim against it in an international court in Geneva. The time couldn’t be better to pry Iran out of Russia’s orbit.
Before the EU sanctions on Iran’s banking and energy sector took effect, Iran’s largest trading partners were Germany, France and Italy. Since the imposition of sanctions, they have been replaced by China, Russia and India. These countries have flooded the Iranian market with inferior goods and even worse, poor technology. Should sanctions be removed, the EU could easily become Iran’s largest trading partner again.
More importantly, European energy giants like Total and Eni could help develop Iran’s massive South Pars gas field, the largest in the world. They could begin construction of the Iran-European pipeline, called the Persian Pipeline, that could supply gas from South Pars to Europe via Turkey. Today, Iran supplies Turkey with natural gas via the Tabriz-Ankara Pipeline. This accounts for 18 percent of Turkey’s total gas consumption, while Russia supplies 58 percent , Azerbaijan – 7 percent and Algeria (in the form of LNG) – 9 percent.
Massive foreign investment needed
The EU would have to lift its ban on importing Iranian oil, and Iran would need massive investment in its energy infrastructure on a scale not seen since before the 1979 revolution. The funds will have to come largely from outside Iran.
Iranian Oil Minister Bijan Zanganeh has already indicated to Europe that Iran would be willing to supply gas via Turkey. He has signalled to Western oil companies that he wants them back in Iran by cancelling China National Petroleum Company’s (CNPC) $2.5bn contract to develop the giant South-Azadeghan oil field. Zangeneh has also indicated that Iran’s antiquated buy-back contracts would need to be replaced by the production sharing model favoured by western companies. Chinese, Indian and Russian energy companies have tried to step in since Western companies have been sanctioned out, but have collectively disappointed since they lacked the technical and managerial expertise of industry giants such as Shell, BP and Exxon.
Russia has a stranglehold on Europe’s gas supply. Putin doesn’t have Europe over a barrel but it does have it “under a pipeline”. Russia has every incentive to sign lucrative arms deals with Iran and provide it with technology – inferior as it may be – that it currently cannot get from the West, to make sure Iran never threatens its grip on Europe’s energy market. If Europe could secure an alternative to Russian gas, it could make Russia think twice the next time it engages in destabilising neighbouring countries. It could also show Iran that cooperation and moderation could lead it back to prosperity, and once again become a major player in energy markets.
Amir Handjani is director of RAK Petroleum PCL, an exploration and production company in the UAE. He is also a senior adviser to Karv Communications, a strategic communications firm with a focus on corporate communications, crisis management and public affairs in New York.