The Race for Iran

Following on from our recent post, “Iran, the Competition Over Eurasian Natural Gas, and the Revival of Classical Diplomacy in the 21^st Century”, we want to draw readers’ attention, first of all, to a very thoughtful comment on that post from Ed Chow, our friend and colleague at CSIS.  Ed generously notes his agreement with “most of what you said and with much from those you quoted”, and, in particular, with our argument that “U.S. policy should not seek to isolate Iran in its own region, particularly on oil and gas”.  However, he cautions against exaggerating the impact of the recent inauguration of a new gas pipeline between Turkmenistan and Iran, noting the problematic past performance of both Ashgabat and Tehran in the previous dealings with one another over natural gas.  Likewise, Ed cautions against exaggerating “the ability of TPAO—Turkey’s national oil company—to develop big gas fields in Iran”.  In particular, he dismisses the notion of Iranian gas going into Nabucco as “mainly a useful ploy”.  (Ed is one of the sharpest analysts we know of the serious commercial challenges that would need to be overcome for Nabucco to become anything more than a “pipe dream”.  We have learned much from him on this subject, and largely agree with his analysis of Nabucco’s commercial viability.) 

More broadly, Ed notes that   

Iran has no surplus gas to export at present, given its internal needs for power generation and reinjection to sustain oil production.  The big gas reserves to be developed in Iran are mainly offshore.  If they are developed—and here Iran’s commercial obstinacy is more the obstacle than international sanctions—why wouldn’t Iran build liquefaction facilities to ship liquefied natural gas (LNG) to world markets rather than ship gas via a long-haul pipeline through half a dozen undependable transit countries to an inland European market?  Nabucco does not make any economic sense with or without Iranian gas.  If Iran is to export large volumes of pipeline gas, I find the Pakistan-India pipeline much more compelling. 

Ed is a real expert—that is, someone with two decades of high-level industry experience—in the commercial aspects of the international oil and gas business.  Certainly, his argument that LNG is commercially and strategically (in the business school sense of the term) preferable to Nabucco as an export outlet for Iranian gas makes sense.  So does his argument that, among Iran’s options for exporting gas via pipelines, the proposed Pakistan-India pipeline is more compelling than Nabucco.  And he is not the first person from the industry to cite Iran’s “commercial obstinacy”.  However, with regard to LNG, we believe that international and domestic political factors have come together in recent years to reduce Tehran’s interest in pursuing LNG export projects—which makes pipelines the most likely channel through which the Islamic Republic might emerge as a gas exporter in coming years. 

We have been on record with our assessment that sanctions are a counter-productive policy tool vis-à-vis Iran that will not produce strategically meaningful leverage over Iranian decision-making about the nuclear issue and other matters of concern.  However, on the international front, sanctions—especially unilateral U.S. sanctions—place limits on the Islamic Republic’s possibilities for realizing LNG projects.  At this point, only Western energy companies—U.S. companies and major European players like Royal Dutch Shell and Total—are capable of and have experience doing LNG trains.  Much of the relevant technology remains subject to U.S. export controls.  While some European companies say they are capable of carrying out LNG projects without using U.S.-controlled technology, none of these companies to date has been prepared to do so in Iran—almost certainly for a mix of commercial and political considerations.  Currently, the most important new investments in Iran’s upstream oil and gas sectors as being undertaken by China’s national energy companies (NECs), which are not yet able to develop LNG trains on their own.  As we noted in a monograph on Chinese-Iranian relations that we published with our colleague John Garver in September 2009 ,

[I]t seems highly probable that China will not only continue to import significant amounts of oil from Iran, but that Chinese NECs will become increasingly involved in the Iranian upstream.  On their own, the Yadavaran and Azadegan oil fields have the potential to become major producing assets for Sinopec and CNPC, respectively.  As Chinese NECs become more involved in Iran’s upstream gas sector, some companies—e.g., CNOOC—may continue to hold on to ambitions to become involved downstream in the development of LNG trains.  But it is likely to take many years before a Chinese NEC would be able to realize such ambitions without Western partners.  Thus, it seems more probable that upstream gas projects involving Chinese NECs will ultimately be tied to meeting Iran’s internal demand for gas and/or to pipeline export projects.

On the domestic front, it appears that political opposition to exporting natural gas in the form of LNG has grown significantly in recent years.  If one believes that exporting natural gas amounts to letting foreigners gain control of Iran’s natural resources, it should not matter whether the gas is exported in the form of LNG or through pipelines.  But LNG—which, as noted above, still requires the involvement of Western energy companies—has taken on especially negative connotations in Iranian politics.  Thus, for the foreseeable future, Iranian ambitions to emerge as a gas exporter are more likely to be focused on pipeline projects than LNG.   

Just after we published our “Iran, the Competition Over Eurasian Natural Gas, and the Revival of Classical Diplomacy in the 21^st Century” post—in which we lamented the relative lack of attention to these issues in the Western media—we came across this UPI piece, “Iran Redraws Energy Map to Defy U.S.”, filed from Tehran on January 14 .  For the most part, the article reinforces arguments we made in our post.  However, the article also notes a potential “fly in the ointment” that could work against Iran’s ambitions to help supply Turkmen—and, perhaps, its own—gas to Europe via Turkey: 

Iraqi Prime Minister Nouri al-Maliki offered last summer to supply Nabucco with 15 bcm of gas a year from 2015.  If that comes off, the Americans, determined to leave a viable Iraqi state behind them would undoubtedly throw their weight behind such a project, if only to tighten the squeeze on Iran.               

The prospects of Iranian-Iraqi competition to supply hydrocarbons to international markets looms increasingly large on the strategic horizon, both with regard to crude oil and internal dynamics within OPEC and with regard to natural gas markets.  We anticipate taking up this topic on this blog on a regular basis.  For now, we would point out that any Iraqi gas that might go into Nabucco would almost certainly come from the Kurdistan Region.  The commercial viability of natural gas production and export in Iraqi Kurdistan is still to be demonstrated.  Moreover, exporting gas from Iraqi Kurdistan to Turkey would require a resolution of fundamental differences between the Kurdistan Regional Government and the central government in Baghdad—differences that have precluded the conclusion of a national oil law in Iraq for five years.  It is not clear to us that those differences are any closer to being resolved than they were a year ago or two years ago.  If the differences between the KRG and Baghdad were resolved, Turkey would surely look seriously at Iraqi gas as an option; in the absence of such a resolution, though, Ankara has for some time shown itself to be reluctant to strike “separate” energy deals—meaning actual contracts, not just preliminary agreements—with the KRG.   

Finally, one reader wrote privately to suggest that we may have overstated our case about Europe’s future need for non-Russian, Eurasian gas, citing the recently released 2009 edition of the International Energy Agency’s World Energy Outlook to argue that the world will actually experience a gas “glut” with declining prices in coming years.  In such an environment, the strategic value of Iran’s natural gas reserves would seem to be significantly diminished.  Flynt Leverett was a peer reviewer for the 2009 World Energy Outlook and, while he does not speak for the IEA, we are very familiar with the IEA’s analysis of international gas markets.  The IEA anticipates an oversupply of gas, including LNG, in the near-to-medium term, to be sure (this almost certainly contributes to Iran’s diminished enthusiasm for moving ahead with LNG projects in the near-to-medium term).  But the IEA also sees serious risks of a supply “crunch” in the medium-to-long term.  Furthermore, while the unconventional gas “revolution” will make North America self-sufficient in natural gas, there is not likely to be a comparable unconventional gas “revolution” in Europe.  Moreover, IEA officials say that gas self-sufficiency in North America will reinforce the longstanding regionalization of international gas markets—which means that Iranian and Central Asian gas will still be strategically significant for Europe (and China) in coming years.    

–Flynt Leverett and Hillary Mann Leverett

Tomorrow, January 16, is the 31st anniversary of Shah Reza Pahlavi’s abdication and departure from Iran.   To mark the occasion, we bring to our readers’ attention a compellingly sober Op Ed, “Regime Change in Tehran? Don’t Bet on It”, published in Asia Times on January 14 by the veteran journalist and author Dilip Hiro.  The bottom-line conclusion—that the Islamic Republic of Iran is not imploding—is close to the fundamental take-away from our own Op Ed, “Another Iranian Revolution? Not Likely”, published in The New York Times on January 6.  But Dilip Hiro devotes more of his analysis than we did to comparing the dynamics that propelled the Iranian revolution of 1978-1979 to current conditions “on the ground” in the Islamic Republic.  In this regard, he pointedly draws the parallels (or lack thereof) between the revolution that overthrow Shah Reza Pahlavi 31 years ago and political events and prospects today.

In February 1979, the autocratic monarchy of the shah collapsed when the country’s economy ground to a halt due to strikes not only by the religiously observant merchants of the bazaar, but also by civil servants, factory employees, and (crucially) leftist oil workers.  At the same time, the foundations of the modern state—the armed forces, special forces, armed police, intelligence agencies, and the state-controlled media—all cracked.

The street demonstrations, launched in October 1977 by Iranian intellectuals and professionals to protest human-rights violations by SAVAK, the shah’s brutal secret police, lacked both focus and an overarching set of coherent demands articulated by a towering personality.  That changed when Khomeini, a virulently anti-shah ayatollah exiled to neighboring Iraq for 14 years, was drawn into the process in January 1978.  From then on, the ranks of the protestors swelled exponentially…

Now, the foremost question for Iran specialists ought to be:  over the past six months have significant numbers of residents from downscale south Tehran, with its six million people, joined the protest?  Going by the images on the Internet and Western TV channels, the answer is “no”.  South Tehranis do not wear fashionable jeans, and any protesting women would appear veiled from head to toe and without noticeable make-up.

It is South Tehran that contains the Grand Bazaar, covering eight kilometers of warren-like alleyways and more than a dozen mosques.  That bazaar is the commercial backbone of the nation, with its intricately woven strands of trade, Islamic culture, and politics.  Its lead is followed by all the other bazaars of Iran.  Because Prophet Mohammad was a merchant, there has been a symbiotic relationship between the commercial class and the mosque from the early days of Islam.  Iran is no exception, and the importance of the bazaar’s influence still cannot be overestimated.  After all, it was barely a century ago that oil was first found in the country, while industrialization gained a foothold only after World War II.  So, have bazaar merchants begun to shut their shops in solidarity with the protestors—as they did during the anti-shah movement?  No again…

The attempts of today’s opposition leaders to emulate Khomeini’s example have not succeeded, chiefly because their camp lacks a religious leader of his stature.  The near-fatal blow that Khomeini struck at the shah’s regime lay in the fatwa (edict) he issued decreeing that firing on unarmed protestors was equivalent to firing at a copy of the holy Koran.  Most of the shah’s soldiers, being Shi’ite and often young conscripts, accepted Khomeini’s interpretation.  Many of them had already lost faith in their commanders after bank employees revealed, in September 1978, that top army officers had been transferring vast sums abroad.  Little wonder that, by the time the shah left Iran in January 1979, the army’s strength had plummeted from 300,000 to just over 100,000, mainly due to desertions.

By contrast, there is little evidence so far that the present regime’s security forces—the heavily indoctrinated Revolutionary Guards Corps, the Basij militia, or the armed police—are vacillating when ordered to break up demonstration with force.  On its part, the regime, aware of the danger of creating martyrs and of the historical precedent, has taken care to make minimal use of live fire in dispersing protesting crowds.  During the 12 months of the revolutionary movement that stretched from 1978 into 1979, the indiscriminate use of live fire by the shah’s regime led to between 10,000—the government figure—and 40,000—the opposition’s statistic—deaths.  In the six months of the street protest this time around, the total, according to the opposition, is 106.

The whole article is worth a read.  And thanks for continuing to read us.

–Flynt Leverett and Hillary Mann Leverett

In an earlier post on this site, “Isolating Iran From the Energy Equation Is Not Possible”, our colleague Ben Katcher noted the extraordinary significance (largely unnoticed in the Western media amidst all the frenzied speculation that the Islamic Republic is imploding) of the inauguration of a new pipeline during Iranian President Mahmoud Ahmadinejad’s recent trip to Turkmenistan. This pipeline will bring gas from a large Turkmen field into northern Iran. Ben rightly noted that, in the West’s quest for energy security,

one of the key obstacles to success is the self-inflicted decision to try to ‘isolate’ Iran in this game—as if that were possible. Iran not only possesses the second largest natural gas reserves in the world, it is also a key geographical bridge from Turkmenistan to Turkey (and on to Europe). Isolating Iran is not an option when the strategic logic of cooperation is so compelling for countries like Turkmenistan, Russia, and China.

Read the full post »

In yet another demonstration of the (in)effectiveness of the Obama Administration’s quixotic quest to get China on board for what Secretary of State Hillary Clinton used to call “crippling sanctions”, the Chinese foreign ministry announced that Vice Foreign Minister He Yafei, who has been representing Beijing at meetings of the P5+1 political directors regarding Iran, will not attending the next meeting, which will be held on Saturday in New York.  The Chinese Foreign Minsitry says that the Vice Minister ”will not be able to attend because of scheduling issues.”  This was the same reason provided for his unavailability for last month’s P5+1 political directors meeting. 

The Obama Administration’s continued pursuit of what it must know will be a failed effort to win UN Security Council authorization for effective sanctions against Iran will only provide ammunition for those who want to push the United States into a military confrontation with the Islamic Republic.  Having “failed” at (half-hearted) engagement, the Obama Administration’s looming failure on sanctions will leave many foreign policy elites arguing (and much of the American public thinking) that the United States has no option left to stop Iran’s pursuit of a nuclear weapon except military force.  As we have written and said many times before, such an outcome would be tragic for all involved and profoundly counter-productive for American interests.

Adrian Hamilton, writing in The Independent, argues that most recent Western analysis about developments inside Iran are based on what people on the outside want to happen, rather than on an objective analysis of the relevant facts and history.

Here is Hamilton’s conclusion:

The trouble with most comment is that it is suffused by what people on the outside, and the exiles, want to happen rather than what they think will. Opponents of Tehran’s policy on nuclear, Palestine and the region wish for a velvet revolution that would produce a pro-Western government which would reverse all those plans. But even if the reformers eventually prevail, it is still far from certain that they would overthrow the whole theocratic system or act within the tenets of an Islamic revolution which most people still subscribe to. Nor is it sure, however devoutly it may be wished for, that the reformists have the numbers to prevail – although it is my feeling that they will.

The one near-certainty is that, if changes comes, it will be from within the country not without and that when, and if, it comes it cannot be seen to be at the behest of the West and to the detriment of Iran’s independent standing. Our policy should be what it should have been these past 10 years – to forget all the nonsense of sanctions and forcing Tehran to the table, to keep negotiating in good faith and with due understanding of its imperatives, and to support reform by keeping communication open, constantly reiterating our concern and providing a refuge for any who need it.

You can read the entire article here.

– Ben Katcher