Wednesday, 13 March 2002

HOW DEEPLY WILL IRAN PENETRATE THE EVOLVING EURASIAN ENERGY NETWORKS?

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By Robert M. Cutler (3/13/2002 issue of the CACI Analyst)

BACKGROUND: The European Commission and Iran formed a working group on energy in May 1999, and the two parties soon created a second working group to deal with trade and investment issues. Also in 1999, the European Union's INOGATE program (Interstate Oil and Gas Transport to Europe) established an umbrella agreement for an institutional framework to optimize the use of energy resources to reduce investment risks, increase returns, and promote management practices that correspond with European standards in safety, environment and trade. The basis for this was to be the European Energy Charter, a product of an EU summit from the early 1990s, which encouraged trading Western capital and technology for energy from the post-communist countries in both Eastern Europe and the former Soviet area.

BACKGROUND: The European Commission and Iran formed a working group on energy in May 1999, and the two parties soon created a second working group to deal with trade and investment issues. Also in 1999, the European Union's INOGATE program (Interstate Oil and Gas Transport to Europe) established an umbrella agreement for an institutional framework to optimize the use of energy resources to reduce investment risks, increase returns, and promote management practices that correspond with European standards in safety, environment and trade. The basis for this was to be the European Energy Charter, a product of an EU summit from the early 1990s, which encouraged trading Western capital and technology for energy from the post-communist countries in both Eastern Europe and the former Soviet area. The Energy Charter's purpose has been to diminish Europe's dependence on OPEC and encourage post-Soviet reform by promoting free trade and ensuring access to resources. Its principles were subsequently codified in the Energy Charter Treaty (ECT) with its Secretariat in Brussels, now an institution autonomous of the EU, and periodic meetings of the Energy Charter Conference. The ECT has been signed by essentially the entire membership of "OSCE Europe" and ratified by all but a handful of these countries. The United States has signed but not ratified the ECT. Iran is the only non-signatory of ECT to be invited to participate in INOGATE.  In late 2000, the EU and Russia began extensive high-level commercial talks about the prospects for European importation of Russian energy resources over the course of coming decades. However, Russia's failure to pursue adequate investment in its natural gas industry would require significant capital outlay from the European side in order to increase imports significantly. In essence, an entirely new pipeline system would have to be constructed in order to satisfy Europe's upcoming energy requirements, whether in gas or in oil. Because it is ecologically cleaner, the EU had taken a policy decision in favor of gas. The European Commission began to look still more definitely towards Iran to satisfy at least some of its long-term gas demand, as well as to put price pressure on Russia.

IMPLICATIONS: Europe has for some time been trying to find ways to tap natural gas from the Caspian region. Nevertheless, the EU opposed the U.S.-backed project for a Trans-Caspian Gas Pipeline (TCGP) that would have taken natural gas from Turkmenistan across the floor of the Caspian Sea to Azerbaijan, Georgia, and Turkey, whence it could have been further piped to southern Europe. Paradoxically, the discovery of the gas deposit in Azerbaijan's Shah-Deniz field helped to facilitate the most recent developments by exacerbating differences between Azerbaijan and Turkmenistan over volume allocation within the TCGP project. Despite EU skepticism about TCGP, it supported the Blue Stream pipeline under the Black Sea from Russia to Turkey (in which European rather than American firms were principal contractors), and declared its readiness to import Turkmenistan's gas via Iran and Turkey. Of course, Ashgabat bears the brunt of responsibility for the TCGP's failure, and Iran is much more interested in exporting its own natural gas than in serving as a transport country for Turkmenistan. Officials of the European Commission have also declared their willingness to import Turkmenistan's gas to Northern Europe through Russia and Ukraine, if Russia allows transit.  The EU has used INOGATE to promote an Iranian-Armenian gas pipeline, in order to get Armenia to shut down its Medzamor nuclear power plant for reasons of environmental security. This relatively modest project has had immense difficulties in finding sufficient funding. Discussions about it evoke the possibility of a follow-on pipeline under the Black Sea and through Ukraine, even into Europe as well. Ukraine is historically Turkmenistan's biggest natural gas market, but Iranian gas could also satisfy some Ukrainian demand. Ironically, the EU finds more problems in promoting energy cooperation with INOGATE-member Ukraine than with Iran. Because the latter is not a signatory of the ECT, it is not subject to the international standards and rules of transparency that govern the EU's relations with Ukraine. Greece's role in all this is key. Over the last several years an entente among Iran, Armenia and Greece has developed into increasing trilateral cooperation. Iran's natural gas will reach Southern Europe through Greece, which also funded the feasibility study for shutting down the Armenian nuclear plant. This trilateral cooperation is more economic than military, and branding it as an anti-Turkey axis would be an error. For example, Turkey has not stood in the way of elaborating the project taking Iranian gas to Greece and southern Europe. Like the EU, Ankara pursues its own foreign economic policy in the region, independent of Washington's desiderata. It has for several years not only realized but also acted upon the need to maintain businesslike relations with Teheran in its own interests.

CONCLUSION: The EU and its member-states have initiated energy investment and cooperation with Iran without regard to U.S.-imposed restraints on trade. There is modest progress, motivated mainly by Teheran rather than by the EU, in developing the project to take Iranian natural gas into Pakistan and across Pakistan into India. This project has many obstacles, and much work remains to be done, but the progress to date has been greater than one might have supposed at the outset. Of course, such a pipeline is in direct competition with the project to take Turkmenistan's gas across Afghanistan into Pakistan, to the coast for liquefaction and transoceanic transport, if not to India as well. That project is still only on the drawing-boards, though it has recently resurfaced. In response to these various developments, Vladimir Putin has broached the possibility of a "Eurasian Gas Alliance" since the beginning of the year, most recently at the informal summit meeting of the Commonwealth of Independent States ten days ago. With Azerbaijan's President Heydar Aliev unable to attend for medical reasons, Russia, Turkmenistan, Kazakhstan and Uzbekistan agreed on the desirability of joint efforts to govern the production and transit of natural gas. Alarms about the birth of a Central Asia gas cartel are, however, exaggerated. The leaders concerned merely agreed to promote discussions about coordinating investment, production and transit. Such cooperation rather appears as an umbrella for protecting Gazprom's interests in the region.

AUTHOR’S BIO: Dr. Robert M. Cutler is Research Fellow, Institute of European and Russian Studies, Carleton University (Canada). He writes regularly on cooperative energy security in Europe and Eurasia, and associated regional problems of geopolitics, interethnic conflict and international cooperation and finance.

Copyright 2001 The Analyst. All rights reserved

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