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Iran has more than 15% of world gas reserves, and its geographical location allows it to export its gas to most potential customers via pipeline, which is easier and less expensive than exporting it as LNG. Iran could export gas to India and China via Pakistan, to Europe via Turkey, to Former Soviet Union (FSU) countries via its neighbors to the north and to Syria and Lebanon via Iraq.
Nonetheless, Iran’s current share of the global gas market is less than one percent, with Turkey accounting for 90% of its exports. In 1996, the two countries signed a contract for the sale of 10 billion cubic meters a year (bcm/y) of natural gas from Iran to Turkey for 25 years. Iran also exports less than 1 bcm/y of natural gas to FSU countries and barters gas with Armenia in return for electricity. It also imports gas from Azerbaijan to supply its northern provinces in return for sending the same amount of gas to Azeri exclave Nakhjavan.
The main reason Iran’s share of the global gas market has failed to grow is, simply, a lack of export capacity due to the absence of foreign investment and technology as a result of sanctions. Iran consumes almost all of its gas production domestically, where it provides 65% of the Iranian energy basket. Iranian households account for 48% of annual gas consumption, power plants for 27% and major industries for about 16%. Iran also depends on gas injection to maintain pressure in its oil wells. It injected about 100mn cmd of gas into its oil fields last year and is planning to raise volume to 270mn cmd by 2015.
According to the BP Statistical Review of the World Energy (June 2012), Iran consumed 153.3 bcm of natural gas in 2011, while its production was 151.8 bcm, meaning that at the moment it has no extra capacity for export. Nonetheless, it has continued to try to implement its agreement with Turkey to supply 10 bcm/y of gas, but its huge domestic gas demand has consistently prevented it from meeting its contractual obligations.
ISSUES OF PRICE AND QUANTITY
In 2009 Iran exported only 5.25 bcm of gas to Turkey, rising to 7.77 bcm in 2010 and 8.4 bcm in 2011. Turkish officials have also complained that the price of Iranian gas is higher than the Russian and Azeri supplies being offered to Turkey. The issues of the price and quantity of the exported gas have been the subject of continuous negotiations between the two countries, and the Turks said that they had filed a complaint against Iran with the International Court of Arbitration on 16 January, according to Turkey’s Hurriyet daily newspaper.
The major reason behind the higher Iranian gas prices is that Iran is buying gas, mainly from Turkmenistan, and exporting most of this to Turkey in order to maintain the volumes stipulated in its contract. For instance in 2011, Iran imported 10.2 bcm of natural gas from Turkmenistan and, as mentioned earlier, in the same year they exported 8.4 bcm of natural gas to Turkey as noted in the BP Statistical Review.
According to the Iranian officials, it earned $3bn from its natural gas exports to Turkey in 2011. But the figure would be much less if the money Iran spent to import the gas from its neighboring countries before re-export to Turkey was deducted. Turkmenistan has a long term supply contract with Iran – it of course shares no border with Turkey – and this further complicates substituting Iran gas supply to Turkey.
It seems at this point that since natural gas exports do not constitute a major source of income for Iran, its main goal is to maintain a minimum market share with its limited number of customers. Sanctions preventing investment and foreign technology have already stopped Iran from developing its gas reserves to their full potential. At this stage, therefore, the pressure being applied by the EU sanctions specifically targeting gas is only psychological – the restrictions already in place targeting inflows of funding and equipment have already done the bulk of the work in isolating Iran.
*Sara Vakhshouri is currently President of SVB Energy International. She is also former advisor to the Director of National Iranian Oil Company International, a NIOC department responsible for negotiating and selling Iranian crude oil.