Natural Gas Europe - Iranian Sanctions and European Energy Security

Below is my latest article for Natural Gas Europe. Original here.

The news that BP’s Shah Deniz project in Azerbaijan will be exempted from sanctions on Iran is not all that surprising: however, it does shed light on the complexity of Europe’s gas supplies, and offers a hint of what the future could hold.

The Shah Deniz gasfield in the Caspian Sea is controlled by a consortium led by BP, which also includes a number of international firms, and, crucially, the Naftiran Intertrade Company. The huge project is key to the EU’s plan to bring Caspian gas to Europe, with over 1 trillion cubic metres of natural gas in place. The second phase, supplying 16bcm a year, is expected to come onstream by 2017.

The participation of Naftiran, a Swiss subsidiary of the National Iranian Oil Company, had raised concerns that Shah Deniz would be targeted by the new rounds of sanctions being passed by the US Congress.  Under these, any company doing business with the Iranian energy sector will be essentially blacklisted from the US market.

Although Naftiran is essentially a sleeping partner, included back in 2001 to placate Tehran, its presence would have tarnished BP and the other international companies in the consortium by association. Although for Congress to have sanctioned the project would have damaged European energy security, the uncompromising line on Iran among US lawmakers made it a genuine possibility.

However intensive lobbying by EU, UK and BP officials in Washington has averted this scenario. The latest text of the Iran Threat Reductions Act specifically exempts natural gas projects “to bring gas from Azerbaijan to Europe and Turkey”, “in furtherance of a production sharing agreement or license awarded by a sovereign government”, or “for the purpose of providing energy security and independence from Russia”. As Steve LeVine notes, Congress is willing to go easy on Tehran as long as Moscow loses out as a result.

So far, so logical. But the limited scope of the extension and the lobbying required to achieve it suggests that the fight isn’t over yet. Iran’s role in the Caspian energy game means that this scenario will probably crop up again, particularly if the US government takes a harsher line on Tehran (which would be even more likely if the Republicans win in November).

Firstly, the ITRA exemptions only cover natural gas, not oil. Any future oil projects in the Caspian (or elsewhere) which feature Iranian participation would fall foul of sanctions. Secondly, the legislation only applies to projects initiated before the enactment of the sanctions. So any future project in which Iranian companies are involved, even if they are intended to bring Azeri gas to Europe or provide energy independence from Russia, would be theoretically subject to sanctions.

Thirdly, the exemption only covers projects to bring gas from Azerbaijan – no other supplier countries are mentioned. This is despite the fact that the EU’s strategy for the Southern Corridor is to secure gas supplies from as many sources as possible, notably Turkmenistan and Iraq (and even Iran, in the not-too-distant past).

At present, Iranian energy companies have only a limited presence in both countries, and are not involved in any projects as significant for Europe as Shah Deniz. However with regional geopolitics in flux, and Europe’s search for suppliers still underway, this cannot be ruled out. Iranian influence in Iraq is well-known and is only likely to grow as the country adjusts to life after the US presence.

In Turkmenistan, Iran is also keen to develop a commercial and political presence. In January, Deputy Foreign Minister Mohammad Mehdi Akhundzade visited Ashgabat and emphasised the need for mutual dialogue and coordination, possibly seeking to shore up Turkmenistan’s friendship with Iran.

Recently, Iranian officials have also revealed that the Islamic Republic has earned $300 million in the past five years from drilling wells in Turkmenistan. The money was earned largely through Iran’s North Drilling Company, through contracts with Dragon Oil, a UAE-based company.

The cooperation between Dragon and Iranian companies – which also includes oil swap deals – may be targeted by the new sanctions, forcing it to develop workarounds or find alternative partners. Although Dragon’s operations are likely to continue, the case demonstrates how sanctions could easily hamper the development of Turkmenistan’s huge and strategically vital hydrocarbon reserves.

Iran’s efforts to secure a commercial foothold in Turkmenistan are therefore not just for financial reasons: they will also reduce the odds of Turkmen gas making it to Europe, unless Ashgabat is able to resist the lure of Iran’s expertise and investment. Iranian efforts to block a Trans-Caspian Gas Pipeline may now involve demands for Iranian firms to take a share of the project. This would leave it vulnerable to sanctions, essentially poisoning it for European or American firms.

Shah Deniz, in other words, is only a small part of the issue. Exempting the project from sanctions is a good result for BP and the EU, and a rare sign of nuance by Congress; but securing Europe’s long-term energy security will require fully acknowledging and addressing Iran’s role in the Caspian.