BACKGROUND: The configuration of the Caspian gas market has so far been shaped without Iran’s active participation due to the nuclear sanctions. With the fourth largest known reserves of oil and the second largest natural gas reserves, Iran has a tremendous potential capacity for delivering gas to European and South Asian markets. Tehran has stated clearly on different occasions that it will look for options to deliver gas to both markets as soon as possible.
Brussels has identified the Caspian states as key potential sources of gas in its Southern Gas Corridor program, which was designed to promote supply diversification and reduce dependence on Russian imports. Azerbaijan is set to become the first supplier, while Brussels also needs to access Turkmen gas through a Trans Caspian Pipeline (TCP) to make its diversification scheme workable. Moscow and Tehran have opposed TCP, saying that to build any pipelines through the Caspian, all five littoral states have to agree. Yet, the real reason is that neither of the two wants to give way to competitors. This stalemate has existed for years.
Since last year, Brussels has also stated several times that it will consider the possibility of bringing Iranian gas to Europe, should sanctions be lifted. In January this year, the EU’s Energy Commissioner Miguel Arias Canete repeated earlier statements to this effect, saying that Europe was keeping the possibility of receiving gas from Iran open. For their part, Iranian officials have said they are considering whether to join the Southern Gas Corridor scheme or to open a new route to Europe.
In the South Asia market, Tehran has for a long time expressed strong interest in pumping gas through a multi-billion-dollar Iran-Pakistan (IP) gas pipeline, while Ashgabat is eager to channel its gas output to the same customers via the Turkmenistan- Afghanistan-Pakistan-India (TAPI) pipeline. IP, originally conceived in 1993, included India and was known as the “Peace Pipeline.” In 2009, however, India bowed out, ostensibly due to security concerns but also as a result of its civilian nuclear deal with the U.S. Islamabad has been under strong U.S. pressure to drop this project and focus on TAPI, a long-discussed and complicated project still at the planning stage. In June, Pakistan hinted that that construction of the much-delayed IP gas pipeline, a project strongly opposed by the U.S., will start as soon as sanctions are removed.
IMPLICATIONS: Freeing Iran from sanctions will have a substantial impact on efforts to build pipelines in both European and South Asian directions. Iran will most likely pursue the objective of becoming a part of Brussels’ diversification scheme as both a supplier and transit route. Yet, Iran is currently in desperate need of new technologies and financing to develop its energy resources. With respect to infrastructure, it faces serious constraints due to the geographical distribution of gas fields and markets. According to Iran’s Oil Ministry, about US$ 150 billion in investment in upstream oil and gas projects would be required over the next five years. For example, the country’s largest gas field, South Pars, lies offshore in the south. To send South Pars production to Europe would require building a high-capacity pipeline across the country from the south to the north. Iranian gas will most likely not be available to Europe in the near term, but it may come to play a part in EU diversification plans and export gas to the South Asian markets.
Iran is also likely to continue, along with Russia, to oppose TCP, calculating that this position will support its objective of becoming a transit corridor to Europe. Since last year, Iran has offered to allow Turkmen gas to transit its territory in route to Europe. If this idea appeared unrealistic due to the sanctions, attitudes have changed substantially judging from commentary following the nuclear agreement.
During his visit to Ashgabat in April, the Commissioner for the EU Energy Union Maroš Šefčovič expressed Brussels’ support to TCP but also brought up Iranian options. He stated that the likely reconciliation with Iran could allow the EU to receive Turkmen gas via an overland pipeline through Iran and Turkey. This signals that developments regarding Iran are leading Brussels to look at additional options, with Iran now part of the mix. Indeed, an Iranian route would have a number of advantages over TCP, not least by taking Russia completely out of the equation. Iranian cooperation with Turkmenistan in providing Europe with gas would severely undercut Russian control over shipments of Turkmen gas to the West.
Iran will also push ahead with its proposed pipeline into Pakistan. The IP pipeline is much closer to realization, because the Iranian segment is already completed. Shahid Khaqan Abbasi, Pakistan’s Petroleum Minister, was quoted recently by the Financial Times as saying that gas might begin flowing through IP within two or three years. “Once the sanctions go there is no excuse ... We don’t have a choice; we have to undertake this project. We are looking at penalties of up to US$ 3 million dollars a day,” he said. Pakistan failed last year to meet the deadline for building its section of the line, owing to sanctions, and has incurred penalties for this delay.
Though India could rejoin this project if sanctions were eliminated, this seems unlikely because India wants to pursue its own scheme. In July, New Delhi stated that a deep water gas pipeline would be developed by South Asia Gas Enterprises (SAGE). This project would bring more than 11 billion cubic meters (bcm) per year of Iranian gas to India via the Arabian Sea, bypassing Pakistan. This is close to TAPI’s projected delivery of Turkmen gas to India of up to 13.87 bcm per year.
During his official visit to Ashgabat in July, Indian Prime Minister Narendra Modi also hinted that TAPI is not the only option available. He said that if TAPI did not progress quickly enough, “… we should explore multiple options, including the additional possibility of [a] land-sea route through Iran.” He did not provide details but likely meant that the proposed SAGE pipeline could be used in a swap arrangement, with Turkmenistan gas going to Iranian cities and Iran sending gas from the offshore South Pars gas field to India on Turkmenistan’s behalf.
Hence, the two proposed pipelines starting in Iran would compete with TAPI. If the TAPI project encounters further delays, there is a clear possibility that the Iranian alternative will significantly reduce TAPI’s importance.
CONCLUSIONS: It is clear that the lifting of sanctions on Iran will trigger a cascade of developments involving not only that country, but several other gas suppliers and customers. Iran will probably become a contender fairly quickly – within three to five years, or around the time that the first major gas pipelines connecting the Caspian to other markets are due to come on stream. Iran will most likely continue to oppose the TCP project and seek to secure Turkmen gas deliveries through the Southern Corridor to Europe via its own territory. In the Asia direction, Iran can become a competitive supplier even faster, in about 2-3 years. If the IP pipeline is brought to fruition, it could terminate Ashgabat’s prospect of exporting gas to South Asia via TAPI. With multiple options to markets in both the West and the East, Iran will likely gradually become an important player.
AUTHOR’S BIO: Najia Badykova is a Nonresident Senior Associate with the Russia and Eurasia Program at the Center for Strategic and International Studies (CSIS).
Image Attribution: Wikimedia Commons