Why does Russia support Iran sanctions?

Gazprom, the largest natural gas company in the world and the mainstay of the Russian economy, is in deep crisis. By Gazprom’s own estimates, it will not be able to reach the pre-crisis level until 2013. Based on a conditional assessment, for Gazprom to climb back to its former position, it needs to make sure that there is no alternate route for gas supplies to Europe. This, in essence, is the reason why Russia supported the United Nations Security Council sanctions on Iran

In May 2008, Gazprom’s market capitalization exceeded $350 billion. Its current market capitalization is $140 billion, a dwarfish 40% of its former self. The oil sector of Russia is showing signs of coming out of the last year’s financial and economic crisis, but the gas sector is still sluggish. By the end of 2009, the oil production and export of Russia increased marginally, however, the gas exports fell by 11% and Gazprom production decreased by 16% because of the lack of gas demand.

Although Gazprom claims to have practical plans to regain its former position by 2013, the abundant availability of cheaper shale gas in the US, the advancement in LNG liquefaction and transportation technologies and the prospects of accessibility of vast volumes of shale gas in Europe are all stacked against Gazprom ambitions. The markets where Gazprom has near monopoly – the European markets – are not showing any signs of substantially increasing their imports from Russia. On the other hand, the markets that are ready to consume more gas – China and Iran – are not connected with Russia by any pipeline system. Even in the captive Russian market, Gazprom is being challenged by rising stars such as Rosneft and Novatek. Gazprom traditionally had 85% share of the domestic market, but by the end of 2009, it had shrunk to 75%.

As faced with sharply declining export market, Gazprom did the thing only a Russian giant could do: It shot itself in the foot. Gazprom stopped taking Turkmen gas in April 2009 without giving an adequate notice for shutting down of gas intake. As a result, the accumulated pressure in the pipeline system led to a string of accidents in Turkmenistan, causing severe damage to an expensive compressor station, a segment of the main trunk, and 20 gas wells. This suicidal act of Gazprom prompted Turkmenistan to quickly build the second pipeline (Daulatabat-Khangiran) to Iran, increasing the export capacity to 25 billion cubic meters (BCM). Currently the combined export from both pipes (Korpeje-Kurtkui and Daulatabat-Khangiran) is around 9 BCM. It will reach 14 BCM in the coming winter, and to 20 BCM in foreseeable future.

At the time of the accident caused by Gazprom, Turkmenistan was already building a pipeline to China, which came into operation in December 2009. The present flow of gas from this pipe is 5 BCM that will be raised to 13 BCM by the end of 2011 and then there would be sharp increase over the next two years. The existing arrangements between Turkmenistan and China envisage eventual annual export of 40 BCM but the negotiations are underway to go even beyond that. The ultimate exports of Turkmen gas in the Chinese direction could be substantially more than 40 BCM.

Increasing production
Gazprom plans to produce 519,3 BCM this year. The target for 2011 is 528,6 BCM, and for 2012 – 542,4 BCM. The idea is to reach the pre-crisis levels by 2013. However, Gazprom has lowered its gas export forecast for 2010 from 160,8 to 145 BCM, a decrease of nearly 10%. The exports this year would be just 4,35 BCM more than the 140,65 that Gazprom exported last year. While there are efforts to increase production, there is nothing Gazprom can do to increase the export prices, or even hold them at the previous level. The average forecast contract price has been lowered from $326 to $308 per thousand cubic meters.

Nord and South Stream
The Nord Stream gas pipeline is a fundamentally new route for Russian gas exports to Europe. The target markets for gas supply via Nord Stream are Germany, UK, Netherlands, France, Denmark and other countries. The new gas pipeline is very important in terms of meeting the increasing natural gas demand in the European market. Gas imports to the EU countries are anticipated to grow in the nearest decade by nearly 200 BCM or more than 50% . Due to a direct connection between the world’s largest gas reserves located in Russia and the European gas transmission system, Nord Stream will be able to satisfy circa 25% of this extra demand for imported gas. In this regard, back in December 2000, the European Commission had assigned the Nord Stream project the Trans-European Network (TEN) status, which was confirmed once again in 2006. This means that Nord Stream represents a key project aimed at creating crucial cross-border transport capacities with a view to ensuring sustainability and energy security   in Europe.

The Nord Stream project is implemented by Nord Stream AG, a joint venture set up for the planning, construction and follow-up operation of the offshore pipeline. On September 8, 2005, Gazprom and German companies, BASF AG and E. ON AG, entered in Berlin into an in-principle Agreement to construct the Nord Stream gas pipeline. Under the Agreement, the partners set up a joint venture Nord Stream AG, which is 51% owned by Gazprom and 24,5% owned by Wintershall Holding (BASF AG subsidiary) and E. ON Ruhrgas (Ruhrgas AG before July 1, 2004, starting from February 2003 is part of E.ON) each. On June 10, 2008, N. V. Nederlandse Gasunie was added into the Nord Stream AG shareholders register as a new shareholder. Pursuant to the Umbrella Agreement entered into by Gazprom and Gasunie, the Dutch company obtained a 9% stake in Nord Stream AG owing to a reduction in E.ON Ruhrgas and Wintershall Holding stakes by 4,5% each. As a result, Nord Stream AG shareholdings split in the following way: Gazprom – 51%, Wintershall Holding and E. ON Ruhrgas – 20% each, N. V. Nederlandse Gasunie – 9%.

Secondly, the South Stream project is aimed at strengthening the European energy security. It is another real step toward executing the Gazprom strategy to diversify the Russian natural gas supply routes. The new gas pipeline system meeting the latest environmental and technological requirements will significantly raise the energy supply security of the entire European continent.

The project provides for South Stream’s offshore section to run under the Black Sea from the Russian coast (Beregovaya compressor station) to the Bulgarian coast. The total length of the offshore section will be around 900 km, maximum depth – over two km and full capacity – 63 bcm. Two possible routes are under review for South Stream’s onshore section from Bulgaria- one, northwestwards and the other, southwestwards. Blue Stream project success – an example of efficient cooperation between Gazprom and ENI.

Iran Pipe to Europe
While Russia is putting together an elaborate and meticulous plan to remain overseer of the gas market in Europe, Iran has started building its own pipeline in the European direction.
The Iranian pipeline will have capacity of 40 BCM, and expected cost is around $1,5 billion. It is expected to be completed by 2013. It will start from South Pars field and terminate at Bazargon border point with Turkey, a distance of about 1850 km. The oil ministry of Iran will provide some 63% of funding for the project and the rest will come from other sources.

Gazprom’s Fears
Iran is already exporting some gas to Europe and that capacity would increase within the next three years. Moreover, Iran has two pipelines connecting to the gas network of Turkmenistan, and by default, Central Asia. This fact is especially significant if we consider that Iran produces enough gas to meet its domestic demands and any volumes it imports from Turkmenistan are exported to Turkey.

Because of flexible methods of negotiation, Iran can offer betters terms to European buyers of gas. In fact, the existing supply situation and the pipeline infrastructure are such that even today Iran can either supply or transit at least 15 BCM of gas to Europe.

The lucrative and politically pragmatic markets of central and Eastern Europe are in easy reach of Iran, and some buyers are already in talks with Iran. If Iran starts exporting its own gas and transiting Central Asian gas to Europe, the entire gas reserve of Russia would be at risk of becoming “stranded gas”. This possibility is not acceptable to Gazprom.
Gazprom’s fear of receding into irrelevance and Putin’s economic patriotism are the factors that compelled Russia to vote for the fresh sanctions against Iran

By Mostafa Mabrouk, Vice Chairman Assistant for Economic Affairs, Ganope


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