Ukraine Crisis and Iran’s Position in Europe Gas Supply
By Shuaib Bahman, Eurasia Energy Researcher
The crisis in Ukraine and the concomitant escalation of tensions between Russia and the West has once more pushed to bold relief Moscow’s resort to energy as a pressure lever against European governments. Most European countries worry that Russia would execute its threat of gas cut in retaliation for United States and the European Union economic sanctions imposed on Moscow. Therefore, the European countries further focused on diversifying their sources of energy. To that effect, gas-rich Iran is a major option for the European bloc.
Russia Energy Supply to Europe
Over the past 40 years, Russia has been a major supplier of gas to Europe. Since 2006, Russia’s gas monopoly Gazprom has struck long-term (25-year) gas supply contracts with European countries. Due to its neighborhood with Russia, Europe is obliged to view Moscow as an energy supplier. Therefore, Gazprom is in a position to bring about challenges for many European governments.
In 2008, Gazprom sold 65.5 percent of its total natural gas exports to European countries. Russia’s gas sales to Europe fell in 2010 compared with 2009, but in 2011 and 2012, it sold 156.6 and 151 bcm of gas to Europe. Moscow remains the leading supplier of natural gas to Europe. After Russia, Norway, Algeria and Qatar enjoy a 19, 10 and 6 percent share, respectively in the European gas market.
Based on a long-term agreement signed in early 2009, Russia agreed to supply 120.08 bcm of gas to Europe and Moldavia via Ukraine. Moreover, Russia pumps 50 bcm a year of gas to Europe through Slovakia. With the implementation of Nord Stream gas pipeline in 2012, this pipeline will be able to supply 55 bcm a year of gas, which equals one-third of Russia’s total gas exports to Europe.
Besides revenues from direct gas sales to Europe, Gazprom gets money from European countries in other ways, too. According to a Wall Street Journal report in 2009, European customers owe Gazprom 2.5 billion dollars due to Europeans’ under-consumption because the Europeans customers are required under their contract with Russia to purchase a specific amount of gas.
Russia-Europe Mutual Needs
Preserving and expanding the European market is one of Russia’s main energy strategies. To that effect, Russia is pursuing the following two approaches at the same time in order to maintain its monopoly on gas exports to Europe.
- Energy Security and Diversity: Although Europe favors extension of Nabucco pipeline to use gas produced in Turkmenistan, Iran and Azerbaijan, Russia claims to be able to diversify Europe’s energy sources by exporting gas through other routes. North Stream and South Stream are among projects suggested by Gazprom for diversifying Russia’s gas exports to Europe in order to avoid the impacts of possible gas cut. Moreover, Gazprom has sought to present itself as a reliable partner for the Europeans and has blamed Ukraine for last winter’s gas supply.
- Blocking All Other Gas Export Routes to Europe: Russia is making efforts to block other routes of gas delivery to Europe. To that end, it is trying to transfer Turkmenistan’s gas to its own territory from north. The prices offered by Gazprom for purchasing gas from Turkmenistan are higher than the price at which Iran buys Turkmen gas. In the meantime, Russia is helping China win a share in Turkmenistan’s gas reserves so that part of Turkmenistan’s gas would flow into East Asia before going to Europe. Russia is resorting to all political and commercial tactics in an attempt to have Turkmenistan’s gas exports to Iran cut. The Russians believe that Iran will have to meet its growing domestic demand if Turkmenistan stops supplying gas to Iran and then the Islamic Republic will lose its exports capacity. If possible, Russia and Gazprom would prefer that Iran’s gas totally go to Pakistan. That is why Gazprom has even offered to contribute to Iran-Pakistan gas pipeline project which is currently on hold.
The two aforementioned points make it clear that Russia is ready to strengthen its dominance on Europe’s energy market even at the cost of losing dominance on other markets. The significance of Europe in Russia’s national security and foreign policy doctrine has caused Moscow to view energy as an important tool in its foreign politics.
Meanwhile, the European Union has two reasons to view Russia as a source of energy. The first is that Russia is geographically close to Europe and it is considered the most cost-effective option for energy imports. The second is that Russia is more stable than most energy-rich Persian Gulf and Middle East countries. Unlike Middle East countries, Russia is not prone to crises; therefore it can guarantee energy supply.
Ukraine Crisis and Energy Lever
Ukraine is the most important buyer of Russia’s gas among Commonwealth of Independent States (CIS) countries. In 2007, it purchased 59.2 bcm of gas from Gazprom. Ukraine’s 2008 gas purchase from the Russian company fell to 56.2 bcm. Ukraine’s gas purchase from Russia dropped to 37.8 bcm and 36.5 bcm in 2009 and 2010, respectively. However, Russia sold 44.8 bcm of gas to Ukraine in 2011 and 32.9 bcm in 2012. These volumes of gas sales indicate Ukraine’s dependence on Russia’s gas.
At present, some 80 percent of Russia’s gas exports to Europe are done through Ukraine. This volume is set to decline as Nord Stream and South Stream are close to becoming operational; however, Ukraine’s gas transit network is the second largest in Europe and remains the main route for Russia’s gas transmission to Europe.
Russia’s gas exports to Europe via Ukraine amounted to 116.9 bcm in 2008, 4.3 percent higher than the year before. Russia’s trans-Ukraine gas exports to Europe soared from 8.4 bcm in February 2010 to 9.278 bcm in February 2011. During the first two months of 2011, trans-Ukraine gas exports reached 19.328 bcm. At a time Ukraine is the most important route for Russia’s gas transfer to Europe, the eruption of crisis in this country affected relations between Russia and European countries. The Europeans slapped economic sanctions and Russia held out the possibility of using the energy lever. In a letter addressed to leaders of 18 main gas importing European countries including France, Germany, Italy, Greece, Bulgaria, Turkey, Moldavia, Poland and Romania, Russian President Vladimir Putin warned that Ukraine’s gas debt to Russia threatens gas supply to Europe. The Russian president said Russia would demand advance payment for gas supply to Europe. German Chancellor Angela Merkel also said that the EU has taken Putin’s warning seriously. That indicated that the Ukrainian crisis had largely worried European leaders about Russia’s energy supply.
Iran Gas
Given the European leaders’ concerns about Russia’s possible gas supply cut to Europe and Moscow’s use of energy as a political instrument, the EU seems to be looking for new sources of energy. Among countries with reliable energy reserves, Iran could be a favorable option. Establishing relations for energy cooperation could be a significant step for diversifying Europe’s energy sources. Here are the advantages of the Islamic Republic with regards to gas supply:
First, Iran holds the largest gas reserves in the world. According to the 2012 estimates by the British Petroleum (BP), the world is awash with 187.3 tcm of gas, which would be enough for 56 years only. Russia used to be the top gas holder, but the latest BP estimate said Russia’s gas reserves have declined from 44.6 to 32.9 tcm while Iran’s gas reserves are estimated at 33.6 tcm. Therefore, the European governments can count on Iran’s gas on the long-term.
Second, Iran is a safe and stable country. Security and stability are definitely two important elements in investment and trade. While most Iran’s energy-rich neighbors in the Middle East are grappling with numerous security challenges, the Islamic Republic enjoys stability. Therefore, investment in Iran and construction of pipeline is secure and the European counties can invest in Iran safely.
Third, is Iran's geographical position. Iran is closer to European countries than other energy-rich countries in the Middle East. Therefore, laying out a pipeline from Iran to Europe could be done at low costs.
Despite all these advantages, Iran’s gas exports to Europe face two major hurdles:
First is the shortage of proper infrastructure for the development of Iran’s gas fields at a higher pace. Second is lack of a gas pipeline connecting Iran and Europe.
The main reason behind these two obstacles is Europe’s erroneous policy of obedience to the United States. Over recent years, the European countries have been barred from operating oil and gas projects in Iran due to US embargoes on the Islamic Republic. The Europeans have deprived themselves of access to Iran’s rich energy resources.
The European countries obeyed the US policies, while the Americans are neither dependent on Russia’s gas, nor can they get gas from Iran due to their geographical distance. Due to their submission to US pressure over Iran, the Europeans have had no option but to remain dependent on Russia’s gas. The Europeans could not take any step towards diversification of their energy sources.
Now, if the European countries learn a lesson from the Ukrainian crisis and realize their mistakes, they should move to wean themselves off Russia’s gas monopoly and reconsider their policy vis-à-vis the Islamic Republic so that they would be able to find new sources of energy.