Perspective
Volume XVIII Number 4 (October 2008)

GAZPROM: FRIEND TO THE FRIENDLESS

By Creelea Henderson

(Creelea Henderson is a research fellow at the Institute for the Study of Conflict, Ideology & Policy.)

At the beginning of June 2008, France’s Total, the last foreign energy company with operations in Iran, abandoned its drilling platform in South Pars gas field and left the country. Spain’s Repsol and Dutch Shell shut down operations earlier this spring, as EU ministers met in Brussels to deliberate a new round of sanctions that would target Iran’s massive oil and gas sectors. (1) The retreat of the multinational energy majors sapped Iran’s petroleum industry of capital, equipment and expertise, and left the most vital sector of the national economy devoid of foreign partnership. Straitened circumstances in Iran suited Russia’s Gazprom just fine.
           
The following week, in mid-June, Gazprom officials landed in Tehran prepared to step into the void left by the departing Western energy majors. There they took part in a signing ceremony to mark the conclusion of an agreement between Russia’s state-controlled gas giant, Gazprom, and the National Iranian Oil Company (NIOC). The resulting memorandum envisages a leading role for the Russians in Iran’s oil and gas industries, the future of which will be determined largely by the success or failure of a “full portfolio of projects,” described to the press corps by Iranian Oil Minister Gholam Hossein Nozari: exploitation of untapped gas fields, construction of new refineries, creation of a pipeline network to transport hydrocarbon volumes pumped from wells on the Caspian Sea and the Gulf of Oman… all choice projects and all conceived on a massive scale. (2)
           
On the Iranian side, negotiators seized upon the new partnership as an opportunity to push for delivery of Russian gas supplies to Iran’s energy-starved regions in the north, where industry lies idling beyond the reach of the national pipeline infrastructure that transports fuel drawn from rich petroleum fields in the south. NIOC offered to swap tankers loaded with Iranian oil in exchange for the Russian gas supplies. For Gazprom the proposal has attractions that lie far beyond the gas market in northern Iran: to the west, the Turkish border marks the start of a new corridor for Russian gas flowing to European markets, and to the east, a planned pipeline from Iran to India may one day provide Russia with an eastern route to carry its gas into Asian markets. Thus, for Gazprom, the deal with Iran is a plum.

For the West, the deal is a sign of the emerging partnership between Tehran and Moscow that is bedeviling the attempts of Western nations to force Iran into diplomatic quarantine until such a time as Tehran agrees to relinquish its quest for uranium enrichment. Western powers seem to have united around a general consensus that the most effective means of coercion available to the international community lies in weaving a web of sanctions to isolate this rogue state financially, diplomatically, and politically. (3) If Russia occasionally has lent its voice to the general consensus, it has not committed any actions to support it, as the recent energy deal attests. Instead of joining the West in isolating Iran, Russia has chosen an independent course aimed at balancing the imperative of preventing Tehran’s acquisition of nuclear weapons with a parallel concern for keeping Iran as a strategic partner (if, indeed, this can be done).

Russia’s traditionally ambivalent strategy has some obvious advantages, including exclusive energy contracts for Gazprom. But, by advancing the development of Iran’s vital oil and gas sectors, Russia is, in effect, preventing the implementation of meaningful economic sanctions that represent the best non-violent option still available to the international community. Acting the part of a spoiler, Russia has demonstrated its willingness to compromise the international sanctions regime – a dangerous gambit that ratchets up the likelihood of a military show-down in response to the threat of a nuclear-armed Iran.

It is a gamble Russia appears willing to take, and in so doing, the country has shown itself to be an opportunist par excellence. As the sole foreign state willing to commit to Iran’s petroleum sector in the middle of a growing geopolitical crisis, Russia’s Gazprom has gained a foothold in a country, which is situated  above an estimated 136 billion barrels of oil and 974 trillion cubic feet of natural gas – the third largest reserves of petroleum in the world and the world’s second largest gas reserves, after Russia. (4) Confronted by such dazzling figures, the temptation is strong to throw one country’s billions into the pot together with the other’s trillions, and to entertain, be it ever so briefly, a scenario in which Gazprom joins its own vast hydrocarbon reserves with those of Iran.

But what is the real measure of Iran’s hydrocarbon potential for Russia? At present, Iran’s legendary oil and gas reserves remain just that—a legend—a mythical treasure sealed deep within the earth. Moreover, in spite of optimistic projections laid out in the memorandum of cooperation, Gazprom is not in a position to inject massive sums of capital into Iran’s oil and gas sectors, nor will it be in such a position so long as other priorities command its resources – financial and natural.

For over a decade, Russia’s energy giant has set its sights on European consumers and resisted even the lure of highly touted Asian markets in pursuit of a dominant position in Western downstream markets. (5) The company currently is embarking on a project that may be its most ambitious undertaking to date – the construction of two gas trunklines, one arcing down from the Baltic Sea into Germany, the other stretching west into Austria and south into Italy, in order ultimately to link Gazprom’s Russian gas fields directly to downstream markets in Europe. (See Map of Proposed Bosphorous Bypass Pipelines, page 10.)

Gazprom’s European campaign has given rise to a looming gas shortfall that threatens to undermine the company’s credibility as a reliable source for the continent’s natural gas supplies. According to the company’s own estimates, Gazprom’s ballooning commitments to foreign and domestic consumers will outstrip its rate of gas extraction by 2012, leaving the company without spare gas volumes to supply Iran’s northern regions. (6) Nor does Gazprom have sufficient sums of hard capital to invest in the development of Iran’s oil and gas sectors at a time when the company is struggling to bring new Russian fields into production to replace mature fields in western Siberia, where output is already sliding into decline. In March, the company announced plans to invest $28.5 billion to support key projects within Russia in 2009, a number that represents a 40% increase over capital expenditures for 2008. (7) Along with the announcement came a pledge to cut back on all non-core expenditures. It remains to be seen whether Iran will be ranked among Gazprom’s core priorities, but at present it seems a remote possibility.
           
If Russia lacks the will and the means to develop Iran’s oil and gas sectors, what, then, is to be gained by sending the energy arm of the Russian state into Iran? Here it may be worth noting that Russia is pursuing parallel relations with countries such as Libya, Nigeria and Venezuela – as famous for their unsavory political regimes, as for their abundant hydrocarbon reserves. With each of those countries, as with Iran, Russia has used its oil and gas resources as a common base from which to establish bilateral relations. Should geopolitical developments warrant a strategic alliance, Russia can easily turn its commercial ties into concrete diplomatic ends. In current events, Russia reportedly is considering a plan to formalize its bilateral relationships with other natural gas exporters by bringing its energy partners into an international cartel similar to OPEC. Iran is said to have already given the cartel idea its wholehearted endorsement. (8)

Such an alliance is patently and latently anti-Western in its aims. The same may be said of Gazprom’s recent energy deal with NIOC, in which Russia issued a blunt rejection to the Western authors of the international sanctions regime. Russia might just as well have raised its Iranian energy contracts overhead like a semaphore to signal its open defiance of Western policies and powers. Nonetheless, it would be a mistake to attribute Russia’s strategic partnership with Iran wholly to a callow will to rebel against a world order dominated by the West. The decision to deepen bilateral relations is at the center of Russia’s independent approach to the Iranian nuclear problem, a policy that seeks to secure Russian national interests through political and diplomatic engagement with a rogue state. By cozying up to the black beast, Russia hopes to avoid its claws.

Such a policy clearly is not in keeping with the approach favored in the West, where priority is given to the establishment of a multilateral consensus and to the application of economic, diplomatic, and political pressures to isolate a rogue state. Yet, in the end it may prove to be an admirably functional policy by virtue of its exclusive application – as Iran’s only strategic partner, Russia has a relatively significant degree of influence with the government in Tehran and a correspondingly greater power to persuade through dialogue than Washington has, for example. The privileged relationship that Russia has been cultivating with Iran has not failed to elicit notice among world leaders, and it has even begun to yield strange fruit for Russia. One month after Gazprom was handed an exclusive energy deal by NIOC, Prince Bandar bin Sultan of Saudi Arabia, son of Crown Prince Sultan and former ambassador to Washington, flew into Moscow for a meeting with the Russian President and Prime Minister. The prince confessed to “a degree of discomfort” at the close ties between Russia and Iran, and, according to a report that appeared in the Russian press, he conveyed an offer to award Russia lucrative arms contracts if the Kremlin would agree to curtail its cooperation with Iran. (9) Russia could not hope for a more flattering tribute to its role as a newly burnished power broker in the Middle East.

Source Notes:
(1) When passed in July, EU sanctions did not contain stipulations against Iran’s oil and gas sectors. “New EU sanctions over Iran’s nuclear program,” MSNBC, 8 Aug 08 via (http://www.msnbc.msn.com/id/26094872/).
(2) “‘Gazprom’podklyuchaetsya k Iranu,” Kommersant, 15 Jun 08 via (http://www.kommersant.ru/doc.aspx?DocsID=912431).
(3) Powers, Thomas, “Iran: The Threat,” New York Review of Books, 17 Jul 08 via (http://www.nybooks.com/articles/21592).
(4) “Iran Energy Profile,” Energy Intelligence Administration via (http://tonto.eia.doe.gov/country/country_energy_data.cfm?fips=IR).
(5) Plans to build pipelines to transport Russian oil and gas to China have been ongoing since 2002. In 2008, impatient with the sluggish rate of progress on the part of Russia, China began construction on a pipeline to carry Central Asian gas from Turkmenistan to China. “Russia signs gas deal with China,” BBC News, 21 Mar 06 via (http://news.bbc.co.uk/1/hi/world/asia-pacific/4828244.stm); “Russia to begin China oil pipeline in 2008 – minister,” Forbes, 7 Sep 07 via (http://www.forbes.com/markets/feeds/afx/2007/07/09/afx3895290.html). Cutler, Robert M. “Gas pipeline gigantism,” Asia Times Online, 17 Jul 08 via (http://www.atimes.com/atimes/Central_Asia/JG17Ag01.html).
(6) “Gazprom predicts global energy shortage after 2012,” CNBC, 23 Jul 08 via (http://www.cnbc.com/id/25816154/for/cnbc/).
(7) “UPDATE 1-Russia’s Gazprom plans 40 pct capex rise in 2009,” Reuters, 31 Mar 08 via (http://www.reuters.com/article/rbssEnergyNews/idUSL3189216220080331).
(8) “Cartel in the Cards,” Kommersant, 19 Mar 07 via (http://www.kommersant.com/p750962/gas_OPEC,_Russia,_Algeria,_Doha/).
(9) Hammond, Andrew, “Riyadh seen trying to wean Russia away from Iran,” Reuters, 16 Jul 08 via (http://www.reuters.com/article/topNews/idUSL1675797420080716?pageNumber=2&virtualBrandChannel=0&sp=true).

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Copyright ISCIP 2008
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