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Iranian Gas Will Not Replace Russian Gas Exports to Europe

Russia’s invasion of Ukraine has met with global opposition, prompting a wave of energy, financial, and banking sanctions on the Russian economy. The United States banned Russian oil and gas imports, and the UK announced that it would phase out imports of Russian oil and oil products by the end of 2022. The European Union (EU) also plans to reduce its dependence on Russian fossil fuels.

Oil and gas prices rose sharply in conjunction with sanctions against Russia. They sent a significant shock through energy markets, prompting the EU to commit to decreasing its imports from Russia and look for alternative suppliers of oil and gas. Meanwhile, hopes for the use of Iran’s energy exports have grown as the nation inches closer to an agreement reviving the 2015 Joint Comprehensive Plan of Action (JCPOA), which would once again allow Iran to sell its oil on the global market.

Iran Gas: A Far-Reaching Goal

Iran has the fourth-largest proven oil reserves and the second-largest natural gas reserves in the world after Russia. However, for various reasons, Tehran cannot, or does not want to, be a substitute for Russia’s gas supplies.

Iran has significant problems in exporting gas due to high domestic consumption. Iran has subsidized all energy consumption, such as gas, electricity, and water, which costs the government roughly $45 million per year. Cheaper energy and higher consumption than the global standard have made it difficult for the Iranian government to supply gas to the country in winter. The increase in domestic consumption caused Iran to cut gas exports off to Turkey in January 2022 due to a pressure drop, and a similar problem has arisen for gas exports to Iraq.

At present, Iran and Russia each have 32 and 47 trillion cubic meters (tcm) of proven world gas reserves, while the two nations, respectively, produce 253 and 693 billion cubic meters (bcm) of gas. Domestic consumption is estimated at 233 and 411 bcm for Iran and Russia, respectively, which prevents the short-term exports of gas to foreign markets in Iran’s case.

Another problem facing Iran is the obsolescence of much of its gas infrastructure owing to a lack of foreign investment. After President Donald Trump withdrew from the JCPOA nuclear deal in 2018, foreign firms engaged in modernizing Iran’s gas industry withdrew from the country, preventing it from upgrading its aging gas terminals. The terminals have grown old and worn out and badly need financing and up-to-date technical expertise to upgrade them.

According to the Iranian oil ministry, the total value of equipment and assets of the country’s oil and gas industry is about $400 billion. The ministry has estimated that it will need $20 billion per year to simply repair, maintain and renovate them. Annual funding for the oil and gas industry before the sanctions reached roughly $8.5 billion or 14 percent of its energy exports allocated to the industry.

Another way to finance the modernization of Iran’s gas industry is to borrow from the government. This idea, however, comes with significant risks; Iran’s economy remains weak and subject to sanctions, and the country’s inflation rate tops 50 percent per year, according to some estimates. In November 2021, Oil Minister Javad Oji said that the oil and gas industry needed $160 billion in investment to prevent the country from becoming a net energy importer.

Distrusting the West

International sanctions have led governments and international companies to refrain from investing in the Iranian gas industry. After Trump departed from the JCPOA, French energy giant Total, which had purchased a stake in the liquefied natural gas (LNG) development at the South Pars gas field, was forced to withdraw from its contract in 2018. With the withdrawal of French funding and technical know-how, Iran still lacks an LNG terminal in the South Pars field. On the other hand, because Iran has only two gas pipelines to Turkey and Iraq, it has no alternative ways to efficiently export natural gas, either natural or liquefied, to the rest of the world.

The Islamic Republic has never regarded itself as a vital exporter of energy. Due to long-standing sanctions, opposition to the United States, and the country’s political and revisionist Islam, it has existed outside normal energy and financial networks for most of its four-decade existence. “[Iranians] never have had a solid strategic plan to become a super energy player. They have all the qualities of a global energy player but their revolutionary Islamist foreign policy will keep them out of world markets,” Alex Vatanka, director of the Iran program at the Middle East Institute in Washington, told the Asia Times.

Indeed, many Iranians do not trust the West, and the “Pivot to the East” policy adopted under President Raisi’s conservative administration has made them increasingly reluctant to cooperate with the West. Tehran’s bitter experience of trusting the United States has led it to prioritize Russia and China, which it regards as safer partners, over further engagement with the West.

Indeed, the combination of Trump’s withdrawal from the JCPOA in 2018, Senate Republicans’ opposition to the Biden’s administration policy of reviving the agreement, Iran’s fear the next US administration might again withdraw from the JCPOA, and Washington’s opposition to the construction of a gas pipeline project, the “peace pipeline” from Iran to Pakistan and India, has made the government, the military, and Supreme Iranian Leader Khamenei reluctant to export gas to Europe in competition with Russia. Iran’s leadership does not see the West as a strategic energy partner, and most evidence suggests that European leaders feel the same way about Iran.

Return of Iranian Oil?

Iran maintains a stronger position in the global oil market. Its natural gas sector is comparatively less competitive. Tehran’s oil industry is far older and more developed than its natural gas industry, and its oil sales are not directly competitive with Russia’s. At the same time, the oil market is less monopolistic than natural gas production, and oil sales are less competitive on the global market due to production quotas set by the OPEC+ alliance, which help control oil prices. By comparison, natural gas exports lack such structural support. Indeed, any future expansion of Iranian gas exports to Europe would face significant obstacles given Russia’s pole position in the European energy market. Moreover, exporting Iranian gas to Europe may draw the ire of Moscow, which could view the move as a challenge to Russia in light of its invasion of Ukraine.

Also, unlike gas, Iran has more capacity to increase its oil production and exports to energy markets. Indeed, after the implementation of the JCPOA  in 2016, Iran increased its oil production much faster than most observers expected. Outside analysts had predicted that Iran would increase its production by 500,000 barrels per day within a year after the lifting of sanctions, but Iran reached this figure in less than four months, and by the end of the year had increased production by nearly one million barrels.

Due to U.S. sanctions, Iran now has more than 80 million barrels of oil in storage. Gradual export of this stockpile can both inject hard currency into the country’s weak economy and affect world market prices. Some sources predict that after sanctions end, Iran could boost its output by 500,000 barrels a day as soon as April or May and by 1.3 million barrels a day by the end of the year.

Increased Iranian gas exports to Europe in the short-term remain unlikely and face political and economic headwinds, even if sanctions are lifted soon. Ideally, Tehran could improve its infrastructure to increase gas production and exports via new pipelines or tankers. However, these same exports could be only directed to Asian importers, or even Iran’s neighboring states. These realities are compounded by the fact that the Iranian leadership does not have the political will to directly compete with Russia for the European gas import market. Any relief Iran could provide to Europe lies only in oil exports.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

Dr. Mohammad Salami holds a Ph.D. in International Relations. He is a specialist in Middle Eastern policy, particularly in Syria, Iran, Yemen, and the Persian Gulf region. His areas of expertise include politics and governance, security, and counterterrorism. He writes as an analyst and columnist in various media outlets. Follow him on Twitter: @moh_salami

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