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23.10.2022 Author: Vladimir Odintsov

Iran is joining Russian gas supplies through substitution schemes

In their recent speeches, representatives of Russia and Iran have very positively described the intense contacts between the two countries, assessing visits, meetings and negotiations of the officials of both countries as a steady and unwavering will of these states aimed at shaping a “new era” of mutually beneficial strategic cooperation, including in the economic sphere.

According to the Iranian newspaper Resalat, the Islamic Republic has lived under economic sanctions imposed on it by the so-called “international community” for decades. Russia now also faces unprecedented sanctions from the West, becoming the leading country in economic restrictions ever imposed on any state at the same time. Showing a friendly disposition towards developing and strengthening relations with Russia, Tehran invited Moscow to share its experience in overcoming illegal restrictions imposed by Western countries. Tehran also expressed the need for effective coordination in countering the recent unilateral sanctions imposed by several countries, especially the US, against independent states.

“Sanctions against Russia are a crime against humanity, but they create an opportunity for greater cohesion,” stressed Iranian Deputy Minister of Oil Ahmad Asadzadeh, speaking at the recent Russian Energy Week in Moscow. In order to counter Western restrictions on the Russian energy market, Ahmad Asadzadeh pointed out that Gazprom could use Iran to transit gas to Iran’s neighbors. “Iran’s neighbors are a big market of gas consumers. For Gazprom, this is a major opportunity to export its gas to Iran’s neighbors via Iran. As an example of a country, Pakistan is a big consumer of gas,” he said.

As previously reported, Russia and Iran have concluded energy deals worth some $40bn, but details have not been disclosed. Meanwhile, some observers gave the impression that this was more of a declaration of Russia-Iran rapprochement. However, in early October, Russian Deputy Prime Minister Alexander Novak provided some clarification on the matter, saying that Russia and Iran were working on arranging spot deals for oil and gas supplies, which are expected to be signed by the end of this year. In the first phase, their volume could be as much as 5 million tonnes of oil and 10 billion cubic meters of gas a year.

Iran’s potential as a transit country for Russian gas exports was recently assessed by the Islamic Republic’s Deputy Minister of Oil, Morteza Shah-Mirzaei, who noted that the country has everything it needs to cooperate with Russian energy companies. In particular, raw product from the Russian Federation can be transported to the Persian Gulf states.

These Iranian proposals to supply Russian energy carriers through substitution schemes are becoming particularly urgent today, against the background of the gas terrorism unleashed by the West against the Russian Nord Stream pipeline in the Baltic Sea on September 26, and also the “sudden leak” in the Polish section of the Druzhba pipeline.

In terms of the practicalities of using Iran as a transit state for Russian energy supplies, its Minister of Oil, Javad Owji, officially confirmed the other day: Russia and Iran have concluded a “gas” deal worth $44 billion, which only Russia will invest. This includes the construction of a gas pipeline and liquefied natural gas plants in Iran, with part of the investment ($4bn) to be used to develop an Iranian field. Given that such projects take at least 5-6 years to implement (from feasibility study to implementation), this will be a project for the next decade. Gazprom will finance it with borrowed bank loans. In addition, there may be some financial institutions set up in the Russian Federation for the purpose of the project and lending from financial institutions based in the Asia-Pacific region.

As part of a memorandum on energy cooperation signed in the summer by representatives of Gazprom and the National Iranian Oil Company (NIOC), the possibility of swap operations (i.e. Iranian gas is labelled as Russian and Iranian gas as Russian) is discussed for shipments to markets. In a long-term strategy, given its geographic location, Iran could facilitate Russian gas access to the Pakistani and Indian markets by pipeline, bypassing the LNG production stage. This will not only increase the efficiency of pipeline projects in the region, but also bring together the three major suppliers – Russia, Iran and Turkmenistan. And while it is too early to say that the Pakistani and Indian gas markets are comparable in capacity to the Chinese market to which Gazprom has already reoriented itself, the emerging prospects from gas cooperation between Moscow and Tehran will nevertheless allow Islamabad and New Delhi to accelerate the implementation of the economic plans they previously had.

Furthermore, the intensified gas cooperation between Russia and Iran will allow them to give an additional boost to their own industrial LNG production, demand for which has risen considerably in recent times. In this context, it is worth recalling that Iran has the second largest resource base in the gas industry, with more than 17% of the world’s gas reserves, while its share in production is “only” 5.4%.  A lack of export infrastructure, caused by Western sanctions, is hampering Iran’s ability to increase gas production. That is why Iran has no liquefaction export capacity, while neighboring Qatar, with a global share of 20.7% of gas reserves, is the world’s second-largest gas producer.

Russia also has some capacity problems for large-scale LNG production, using so far only technology for small- to medium-scale projects (not more than 1 million tonnes per year). In particular, such as Magnitogorsk LNG or the fourth line of Yamal LNG. Therefore, if the Russian-Iranian project is implemented, several new LNG plants will also be built in both countries, giving an additional boost to the Russian and Iranian economies.

Vladimir Odintsov, political observer, exclusively for the online magazine “New Eastern Outlook.


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