The Shah Deniz gas discovery had the effect of decreasing the volume of the Trans-Caspian Gas Pipeline (TCGP) allocated to Turkmenistan, whose President Saparmurad Niyazov consequently sought other new routes. However, he has so far failed to conclude any agreement other than his fallback plan, which is to sell more gas to Russia, which, because of the absence of signficant pipelines for export to other countries, remains his only big customer. In this context, Iran has again come forward as a potential consumer of Turkmenistan's gas.
1. Turkmenistan's Exports to Iran
Turkmenistan's official statistics and political declarations assert that the Korpedzhe-Kurtkui pipeline (the only one to be constructed from Turkmenistan since it became independent) has achieved deliveries of 5.5 billion cubic meters (bcm) this year, but Western experts universally accept a figure of 1.8 bcm as more accurate. If one reads the Turkmenistani figures more closely, the 5.5 bcm figure appears to refer to total gas exports to Iran through the pipeline since it opened in 1997.
Earlier this year the pipeline's 5 bcm per year volume was announced to have been upgraded to 8 bcm per year. Then earlier this month, a second phase of the project was announced which, according to official Turkmenistani declarations, will mean export of 15 bcm of gas to Iran in 2001, with that figure to rise to 28 bcm under unspecified future phases of construction. However, this appears to be the same project that was put in doubt earlier this year, when Iran questioned Turkmenistan's ability or desire to fulfill even its more modest commitments. In May, President Niyazov was giving public assurances that deliveries during the year 2000 would indeed reach 13 bcm.
Indeed, according to Turkmenistan's official development plan for the first decade of the twenty-first century, revenues from Iran are anticipated for a volume 13 bcm per year over the decade. However, it is doubtful that Korpedzhe has enough gas to satisfy that volume. Pricing is also an issue, since Iran has apparently still not been paid back the $195 million that it invested in the line. Given President' Niyazov's commitment to export 30 bcm to Russia in 2001, it seems unlikely that great volumes will be available for Iran from the Soviet-era Dauletabad field, even though it is on the Iranian border. (This is the same field for which he is trying to secure a pipeline through Afghanistan to Pakistan.)
Nevertheless, the possibility has been raised this week by an official of the European Union (EU), that Turkmenistan's gas might ultimately find European consumers not via the TCGP but by transiting Iran. The idea of Turkmenistan's gas reaching Europe via Iran had been first elaborated in 1993 at a summit of the Economic Cooperation Organization (ECO), a Turkey-Iran-Pakistan cooperation forum that expanded, after the Soviet Union disappared, to include the Central Asian countries and others. Iran sought to transform ECO into a more dynamic organization under the name Council for Economic Cooperation, but the means to attain the economic goals desired were not available. The other countries soon found other forums through which to pursue their mutual cooperation.
= 2. Will Europe Have a Role? =
Iran has become a member of the EU's Interstate Oil and Gas Transport to Europe (INOGATE) program, according to a statement attributed in Teheran to Faouzi Bensarsa, who is the INOGATE coordinator in the EU's Directorate-General for External Affairs. "All preliminary measures have been adopted by both sides and a formal announcement will be made soon," he is reported to have said. A Working Group on Energy between the European Commission and Iran was formed in May 1999. Iran was subsequently invited to become an observer to the INOGATE program, which was originally established to promote cooperation between the EU and the former Soviet republics. Another working group, this one on trade and investment, is also being established between Iran and the European Commission.
In 1999 INOGATE established an "Umbrella Agreement" on an institutional framework to optimize the use of energy resources in a manner that seeks to reduce investment risks, increase investment return and promote the evolution of management practices in accord with European standards and the international regulations of safety, environment, and trade. It does not have its own financing structure, but if it evaluates a project as vital and justified, then this constitutes an important endorsement in the eyes of international financial institutions in general, and in particular the European Investment Bank, which is an organ of the EU.
It should be recalled that the Energy Charter itself, a product of an EU summit from the early 1990s, advocated trading Western capital and technology for energy from the post-communist countries in both Eastern Europe and the former Soviet area, diminishing Europe's dependence on OPEC, encouraging post-Soviet reform by promoting free trade and ensuring access to resources. The Charter's principles were subsequently codified into the ECT, which is administered through the Energy Charter Conference and its Secretariat, headquartered in Brussels but a self-standing international institution independent of the EU.
The ECT has been signed by essentially the entire membership of "OSCE Europe" and ratified by all but a handful of them. Its main legal objective is to guarantee nondiscrimination and transparency in the application of international norms to industrial and commercial property. Its chief economic aim is to establish conditions for a functioning energy market by mobilizing the private sector through intergovernmentally established incentives. The international energy companies support it in particular because it promises them the stable business environment they need to proceed with productive economic activity.
= 3. Can Iran Have a "European Vocation"? =
However, a potential complication in the actual realization of such cooperation, or at least in its significant deepening, is the fact that Iran is the only participating country or observer country at in INOGATE that has not signed the ECT. To recall, the problem is that Iran has not even signed the ECT. It is unlikely that the political directors of the relevant ministries will view the ECT as favorable to their particular interests, even if this may favor the country's economic development more broadly. For across all of Europe and beyond the Urals, the ECT forms the basis, through its Conference and Secretariat, for harmonizing in a non-discriminatory manner the national systems of the participating countries regarding a whole range of issues.
These issues include the legal regulation of their energy sectors, including such issues of fundamental importance as transparency, non-discriminatory treatment of foreign direct investment (including matters of taxation and repatriation of profits), and acceptance of international arbitration. Such principles would seem conflict at a very basic level with not only Teheran's treatment of foreign capital, but indeed with the very legal philosophy that has guided its treatment of foreign investors over the last twenty years.
That being so, the European Commission will need to consider more broadly, at least further down road, how well such cooperation with Iran fits into the normative framework established by the EU. Iran seeks a Cooperation Agreement with the EU, but the latter has conditioned this upon the reform process in Iran. The well-known difficulties against which the reformers in Teheran battle have made serious consideration of such a Cooperation Agreement from the European side unlikely in the near, and even medium-term, future.
= 4. Iran's Armenian Road to Europe? =
A pipeline from Turkey to Greece has also been projected in the INOGATE framework, to channel natural gas production from such countries as Iran, Azerbaijan, and Turkmenistan to southern Europe. The cost of the project has not been assessed yet, but its estimated as moderate, taking into account that Turkey's pipeline networks already reach Istanbul, and the Greek Prime Minster has already endorsed the extension of the Greek pipeline to the border, so the biggest important section remaining to be completed is the one from Istanbul to the Greek-Turkish border. If Turkey agreed to receive Turkmenistan's gas via Iran, then it could transit through Greece to southern Europe; however, Turkey still believes in the TCGP, although not before 2006.
Consequently for several years now, Iran has been trying to get into the Armenian market. Indeed, an intergovernmental agreement concerning such a pipeline, with a volume of 1 bcm per year, was signed in 1992 and then amended in 1995. However, financing for such a pipeline between the two countries has been difficult to find, even though its length would be a mere 140 kilometers (100 in Iran and 40 in Armenia). In mid-1999, Gazprom expressed an interest but then withdrew; likewise Gaz de France. In late February 2000, discussions took place with the Iranian National Gas Company (INGC) and the Armrosgazprom joint venture, but the price was set at $90 per thousand cubic meters, whereas Russia supplies the same quantity at $70.
After the World Bank expressed interest, construction nevertheless began, only to be halted in mid-March for lack of funding. In April, China offered a $80 million loan to Armenia for the project, but the World Bank declined to subsidize it because of the excessively high interest rate. The consortium implementing the project was then restructured to include Armrosgazprom, INGC, and the National Gas Corporation of Greece as well as Gazprom from Russia.
= 5. Ukraine Joins the Fun =
In mid-July, a significant trilateral meeting among the European Commission, Iran and Armenia took place in Erevan, at which the European Commission decided to consider supporting the pipeline project under INOGATE's aegis. The European interest stems from the desire to enable Armenia to shut down the Medzamor nuclear power plant, long been an EU goal within the framework of its nuclear safety program for the new post-Soviet states. However, to accomplish this, an alternative source of energy for Armenia must be identified and made available. Iranian natural gas would satisfy that need. Bensarsa's recent visit to Teheran was in the framework of organizing a conference to bring the Medzamor Working Group under INOGATE's "Umbrella Agreement."
In August, Ukraine's ambassador to Armenia stated his country's readiness to partner with Armenia in laying the pipeline from Iran. However, it appears that projections for the pipelaying to begin before the end of the present calendar year will go unmet. When the Iranian Foreign Minister Kamal Kharrazi took the opportunity of the Ukrainian ambassador's announcement to recall his late-1999 initiative to construct a gas pipeline to Ukraine via Armenia, the Ukrainian ambassador reciprocated by proposing to connect the Iran-Armenia pipeline with the Turkmenistan-Ukraine pipeline. (As discussed in part 6 of this series, that pipeline has long been a favorite project of Ukraine's Deputy Prime Minister Yulia Tymoshenko.) In return, the Ukrainian envoy in Armenia, Oleksandr Bozhko, proposed to link the Iranian-Armenian pipeline with the Turkmen-Ukrainian gas pipeline. This gave Tymoshenko's idea, which originally concerning extending the TCGP across Georgia and under the Black Sea, a new twist: gas could go from Turkmenistan through Iran into Armenia, then across Georgia and under the Black Sea to Ukraine.
= 6. Shah Deniz, Iran, and European Energy Demand =
None of this would have occurred without the Shah Deniz discovery, which put Turkmenistsan's gas back into play after the TCGP negotations fell through earlier this year. That being the case, what is to be made of Bensarsa's assertion that Europe would welcome Turkmenistan's gas via the Iranian route, whether it went through Turkey to southern Europe or through Ukraine to northern Europe?
Turkmenistan has not yet expressed serious interest in the latter idea, although it has agreed to discuss it with Armenia and Iran. Probably Turkmenistan's hesitation to go the long way around to Europe, through Iran and the South Caucasus then under the Black Sea and through Ukraine, is due to his awareness that, at least in Russia's experience, natural gas transiting Ukraine to third countries has a tendency sometimes to go missing. Thus, in early November, Turkmenistan's Acting Oil and Gas Industry Minister Khoshgeldi Babaev stated that even if his country started to supply Armenia again, it still gave priority to the TCGP project over the Iranian route to Europe.
It would appear that, although Bensarsa's interest in bringing Iran into the European energy network is undoubtedly genuine, all the talk about Turkmenistan's gas reaching Europe through Iran and Ukraine is at least for the moment, from the EU's standpoint, nothing but a gambit in another game. For now there are occurring preliminary price negotiations between the EU and Russia over the long-term comprehensive Russia-Europe deal currently being fleshed out on the basis of contacts among the European Commission's President Romano Prodi, German Chancellor Gerhard Schroeder and Russian President Vladimir Putin at the end of September (and discussed here in early October). That having been said, Iran's resources will not be developed overnight, yet neither will Europe go away nor its demand decrease.
Copyright © Robert M. Cutler unless otherwise noted.
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First published in FSU Oil & Gas Monitor, No. 112 (13 December 2000): 6–8.