Tehran has attempted to manage Moscow's perception of Iranian energy's appeal to European customers, saying it still wants to respect Russia's traditional role as the largest supplier of natural gas to the European market. However, a potential shift in U.S.-Iranian relations is leading more markets to consider Iran as a natural gas supplier, as are trends in the global energy industry, which is trying to re-enter Iranian oil and natural gas plays. Iran's deputy oil minister for international and trade affairs, Ali Majedi, reiterated Tehran's desire to export natural gas to Europe on May 7, citing three possible routes along which Iran could pipe the energy product. In recent weeks, Iran has even discussed transiting Turkmen natural gas to additional markets as well.
According to the most recent data in the BP Statistical Review of World Energy, Iran's proven natural gas reserves are at 33.6 trillion cubic meters, exceeding Russia's proven reserves of 32.9 trillion cubic meters. Tehran has been quick to play up its newfound top spot in global reserves, but Iran lags far behind Russia in terms of investment and production. In addition, close to 35 years of troubled relations with the West, difficult geography and ongoing sanctions have limited Iran's ability to develop meaningful domestic transport and export infrastructure. Iran may have more natural gas than Russia, but Tehran faces many more constraints in accessing reserves and trails far behind Moscow in options for profiting from its natural resource wealth.
Iranian negotiators are hammering out a comprehensive nuclear deal with their Western counterparts as a prelude to lifting U.S. and EU economic sanctions on Iran. During these talks, Iran has worked diligently to attract potential foreign investors, primarily from Europe and Asia, hoping to leverage its large hydrocarbon reserves and potential consumer market to the global economy as it pushes for better terms with the West. Part of that strategy — highlighting Iran's ability to supply energy to Europe — has come into greater focus as European consumers are again re-evaluating their dependence on Russian energy supply. Taking a nod from neighboring Turkey, Iran is also trying to strengthen its negotiating position by highlighting its geographic position, potentially linking Caspian and Central Asian energy supplies to markets in the Middle East, Europe and beyond.
Iran's Natural Gas Ties to Turkmenistan
Europe has long kept an eye on Turkmenistan's large natural gas reserves — 17.5 trillion cubic meters — but these supplies have remained just out of reach for decades. Europeans have struggled to find a transport route for Turkmenistan's supplies to European markets that does not involve the Russian-dominated Caspian Sea or a sanctioned Iran. Iran's generally positive ties with Turkmenistan have resulted in longer and more stable trade and political relations than Tehran has had with its other eastern neighbors, especially in recent decades. One of the best examples of this relationship is the interconnection of natural gas pipelines in northeastern Iran and Turkmenistan's natural gas pipeline networks. Ashgabat helps provide natural gas to the Caspian provincial capital of Rasht and to Mashhad, Iran's second-largest city, through two pipelines with a combined annual capacity of 20 billion cubic meters. Iran's annual imports average roughly half that amount.
Iran imports Turkmen natural gas out of necessity. Mashhad is a former oasis town on an ancient Silk Road route linking Persia with Central Asia. A shrine to Reza, the eighth Shiite imam, has cemented modern-day Mashhad's role as a significant cultural and urban center and as Iran's holiest city. And so Mashhad has been able to develop despite its geographic isolation, though Iran's domestic energy infrastructure still heavily favors moving natural gas and oil produced in the southern regions of the country to population centers in the northern and western parts of the country.
With the world's fourth-largest natural gas reserves, Turkmenistan has been searching for greater access to global markets. Geography and Iran's own domestic reserves limit Tehran's role as a potential consumer market, and other Central Asian states, including Afghanistan and neighboring Pakistan, have serious economic and security limitations in building pipelines in the mountainous terrain that separates them from their energy-rich neighbors. Turkmenistan traditionally has sold the bulk of its natural gas exports to Russia, but in recent years Ashgabat has focused on selling just over half of its exports to China, splitting the rest nearly evenly between Russia and Iran. Turkmenistan sees potential in expanding exports to growing natural gas markets in Asia, especially China, but faced with limited growth markets in Russia and Iran, Ashgabat has its eye on Western markets as well.
Turkmen political leaders have long sought to diversify the country's natural gas exports. The Trans-Caspian pipeline to Azerbaijan, which would link Turkmen supplies to Europe through Azerbaijan and Turkey, has been under discussion since 1996. However, the proposed pipeline has faced intense opposition from Russia. Iran has boundary disputes with neighboring Azerbaijan and Turkmenistan over the Caspian Sea, but this has not prevented Iran from offering to serve as a transit state for Turkmen natural gas in the past. Most recently, National Iranian Gas Co. Managing Director Hamidreza Araqi announced March 11 that Iran was ready to transit Turkmen natural gas to Arab states in the Persian Gulf.
Challenges to Iranian and Turkmen Ambitions
Tehran has agreed to other transit plans as well. Iran and Turkey reached an agreement to transit Turkmen natural gas to Europe in 2012 under Iran's president at the time, Mahmoud Ahmadinejad. Regional tensions over the Syrian conflict, Western sanctions on Iran and domestic political issues have taken a toll on the implementation of this deal, and geography still presents a significant challenge to Iran and Turkey's plans to link Central Asian energy reserves to global markets.
With Russian opposition to the Trans-Caspian pipeline likely to impede its construction for the short to medium term, Ashgabat is looking for a land route to reach European consumers. The pipeline network has about 10 billion cubic meters of spare capacity, but it is completely disconnected from Iran's central natural gas transportation trunklines (known as the Iran Gas Trunkline), which severely limits Turkmenistan's ability to pump natural gas through Iran and into Turkey. Iran's mountainous terrain and the vast desert regions of the Iranian Plateau have prevented Iran from linking its own energy supplies to northeastern Iran, much less bringing Turkmen natural gas supplies to the West.
Iran needs to expand its domestic infrastructure significantly before it will be able to transport its own natural gas supplies, let alone Turkmen supplies. Iran intends to expand its Iran Gas Trunkline network, but currently there are no plans to extend the network toward the northeast. Turkmen natural gas does service the northern coastal region near Rasht, but Iran's Alborz mountain chain makes westward expansion of this line into Iran or toward Azerbaijan costly and difficult. Iran likely would need foreign investment and assistance in building out its transit network. Even if sanctions are lifted, Iran probably will prioritize developing its own reserves and export capabilities before assisting Turkmenistan.
The Turks and the Europeans probably will need to expand their own transit options to accommodate greater Iranian and Turkmen supplies. Turkey is in the early stages of building the Trans-Anatolian pipeline project to bring natural gas supplies from Azerbaijan's Shah Deniz II field to southern Europe. Though some spare capacity (less than 10 billion cubic meters) has been built into the design, final routing for the pipeline, future expansion plans and European infrastructure development are still firmly stuck in the planning and negotiations phase, meaning Turkey's infrastructure limitations compound those of Iran and Turkmenistan.
Russia's role as a supplier remains the biggest impediment to Iran and Turkmenistan's export plans. The European Union's weak response to Russia's actions in Ukraine illustrates Europe's strong reliance on Russian energy supplies, and Moscow's ability to undercut costlier Turkmen and Iranian supplies will give it a strong negotiating position for future contracts. In addition, ongoing support for Russia's competing South Stream pipeline project in some EU states indicates that not all European consumers consider Russian natural gas supplies risky.
The volume of potential Iranian and Turkmen natural gas supplies will continue to attract considerable outside interest, especially from European consumers. However, infrastructure and political limitations will probably keep these supplies from reaching Western markets in the short to medium term. Long-term ambitions could be fulfilled, but Russia will work hard to strengthen its export position to Europe in the meantime, hoping to limit the strategic value of Iranian and Central Asian natural gas supplies to global markets.