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The Race for Iran

IRAN, THE COMPETITION OVER EURASIAN NATURAL GAS, AND THE REVIVAL OF CLASSICAL DIPLOMACY IN THE 21ST CENTURY

 

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. 

We couldn’t agree more with that assessment.  In his post, Ben linked to a very astute piece of analysis on the strategic significance of Turkmen-Iranian gas dealings by former Indian diplomat MK Bhadrakumar .  As Bhadrakumar writes

The 182-kilometer Turkmen-Iranian pipeline starts modestly with the pumping of 8 billion cubic meters (bcm) of Turkmen gas.  But its annual capacity is 20bcm, and that would meet the energy requirements of Iran’s Caspian region and enable Tehran to free its own gas production in the southern fields for export.  The mutual interest is perfect: Ashgabat gets an assured market next door; northern Iran can consume without fear of winter shortages; Tehran can generate more surplus for exports; Turkmenistan can seek transportation routes to the world market via Iran; and Iran can aspire to take advantage of its excellent geographical location as a hub for the Turkmen exports…

The Turkmen-Iranian pipeline mocks the US’s Iran policy. The US is threatening Iran with new sanctions and claims Tehran is “increasingly isolated”.  But Mahmud Ahmadinejad’s presidential jet winds its way through a Central Asian tour and lands in Ashgabat for a red-carpet welcome by his Turkmen counterpart, Gurbanguly Berdymukhammedov, and a new economic axis emerges.  Washington’s coercive diplomacy hasn’t worked.  Turkmenistan, with a gross domestic product of US$18.3 billion, defied the sole superpower (GDP of $14.2 trillion)—and, worse still, made it look routine.

There are subplots, too.  Tehran claims to have a deal with Ankara to transport Turkmen gas to Turkey via the existing 2,577km pipeline connecting Tabriz in northwestern Iran with Ankara.  Indeed, Turkish diplomacy has an independent foreign-policy orientation. Turkey also aspires to be a hub for Europe’s energy supplies.  Europe may be losing the battle for establishing direct access to the Caspian.

This is important stuff, very much at the heart of the “race for Iran”.  Three recent reports from the Jamestown Foundation—one by Vladimir Socor and published on January 7, another by Alman Mir-Ismail and published on January 11, and the third by Sergei Blagov and published on January 13—add more dimensions to the story, which we will try to pull together for our readers.

Socor’s piece, among other things, amplifies on what Bhadrakumar describes as the Turkish “subplot” to Iranian-Turkmen gas dealings: 

With Turkmen gas expected to reach Iran in growing volumes, Turkey is interested in receiving more Turkmen gas via Iran, or Iranian gas freed up by Turkmen deliveries.  [Turkish Energy Minister] Yildiz told Berdimuhamedov and Ahmadinejad during this event, that Turkey can use those added volumes partly for its own consumption and also for the Nabucco pipeline project to Europe.  Yagsygeldi Kakayev, the head of Turkmenistan’s State Agency for Management and Use of Natural Resources, told Yildiz that “Turkmen gas will reach Turkey as alternative routes develop”.

Turkish Prime Minister Recep Tayyip Erdogan had discussed these issues during his October 2009 visit to Tehran while also reaching out politically to Ahmadinejad.  Agreements of intent signed on that occasion include exploration, production, and transportation of Iranian natural gas, notwithstanding US sanctions in that sector.  Turkey is also interested in receiving future Turkmen gas production volumes via Iran, irrespective of the situation with trans-Caspian transportation and potentially to that project’s detriment.

As we wrote in an October 2009 Op Ed ,

Turkey may well move ahead and conclude significant upstream and pipeline contracts in Iran despite U.S. opposition. The U.S. position on this issue is detached from economic reality. However much the Obama administration resists admitting it, the Nabucco pipeline will almost certainly not be commercially viable in the long run without Iranian gas volumes. In the end, Turkey’s approach to Iran does more for Western interests than does the U.S. approach. 

Last month, a senior Obama Administration official acknowledged privately that it is increasingly possible over the next year or so that Turkey might sign its own upstream and midstream deals in Iran.  Recent developments strongly suggest that Turkish policy is continuing to move in this direction. 

Mir-Ismail’s piece focuses on the ongoing decline in U.S. relations with Azerbaijan—a country that is critical to plans for supplying gas to proposed pipeline projects (e.g., Nabucco) that would bring non-Russian gas volumes to Europe.  He notes that

a strengthened Azerbaijan, frustrated with the lack of progress on the resolution of the Karabakh conflict and dissatisfied with what is perceived as the short-sighted policies of President Barack Obama in regards to re-opening the Armenian-Turkish border, considers the US less as a strategic partner…the US might soon witness a further decline in its political standing in the region. 

The decline in U.S. relations with Azerbaijan is important in this context because Azeri gas has long been seen as an essential ingredient to make the expansion of non-Russian pipeline infrastructure transporting non-Russian gas volumes to European markets economically viable.  But it is becoming much less likely over time that anticipated volumes of Azeri gas will be available for expanding a “Fourth” or “Southern” Corridor for shipping Eurasian natural gas to Europe.  And that makes Iran an even more indispensable player for long-term energy security, in Europe and globally. 

Blagov’s piece reinforces the foregoing points about shifting calculations in both Turkmenistan and Azerbaijan regarding the marketing of these countries’ future natural gas production.  Specifically, he notes that “Moscow has moved to revive its gas partnership with Turkmenistan and started unprecedented gas imports from Azerbaijan.”  However, Blagov argues that “Russia now faces Iranian competition in its gas dealings with both Caspian nations”.  Iran’s engagement with Turkmenistan may well mean that Gazprom ends up paying more for Turkmen gas than it might have otherwise.  (We suspect, though, that Chinese imports of Turkmen gas probably have a much greater impact on the prices that Gazprom must pay to Ashgabat.)  And, of course, Russia wants to avoid gas-on-gas competition with prospective Iranian gas exports to Europe.  But, in strategic terms, we think that there is actually considerable complementarity between Russian and Iranian objectives in the development of the natural gas trade in Central Asia and the Caucasus.  On this point, Bhadrakumar offers the following observations:

We are witnessing a new pattern of energy cooperation at the regional level that dispenses with Big Oil.  Russia traditionally takes the lead.  China and Iran follow the example.  Russia, Iran and Turkmenistan hold respectively the world’s largest, second-largest and fourth-largest gas reserves.  And China will be consumer par excellence in this century.  The matter is of profound consequence to the US global strategy…

Russia does not seem perturbed by China tapping into Central Asian energy.  Europe’s need for Russian energy imports has dropped and Central Asian energy-producing countries are tapping China’s market. From the Russian point of view, China’s imports should not deprive it of energy (for its domestic consumption or exports).  Russia has established deep enough presence in the Central Asian and Caspian energy sector to ensure it faces no energy shortage.  What matters most to Russia is that its dominant role as Europe’s No 1 energy provider is not eroded.  So long as the Central Asian countries have no pressing need for new US-backed trans-Caspian pipelines, Russia is satisfied.

Iran, of course, is also happy to see U.S.-backed trans-Caspian pipelines—from which it is deliberately excluded by Washington—fall by the wayside.  (And, if Iran could eventually begin exporting gas to Europe via Turkey, this would represent another victory for Tehran over U.S. efforts to keep the Islamic Republic in a box.)  As Bhadrakumar notes,

The United States’ pipeline diplomacy in the Caspian, which strove to bypass Russia, elbow out China and isolate Iran, has foundered.  Russia is now planning to double its intake of Azerbaijani gas, which further cuts into the Western efforts to engage Baku as a supplier for Nabucco.  In tandem with Russia, Iran is also emerging as a consumer of Azerbaijani gas.  In December, Azerbaijan inked an agreement to deliver gas to Iran through the 1,400km Kazi-Magomed-Astara pipeline.

More broadly, what all this reflects is the strategic impact of the relative decline in U.S. power and influence across the Middle East, the Persian Gulf, and Central Asia.  This trend is creating new “optionality” for major energy producers in these critical regions—Russia, Turkmenistan, Azerbaijan, and, of course, the Islamic Republic of Iran.  It also reinforces Turkey’s identification and consolidation of new foreign policy options beyond its established ties to the United States and Europe. 

In such an environment, what the United States needs to do is to start practicing what used to be described as classical diplomacy, rooted in the notion of the “balance of power”.  (We are grateful to Chas Freeman for sharing this insight with us.)  Certainly, other important players–Russia, Turkey, Iran, etc.,–are doing so.  But the Obama Administration—like the George W. Bush Administration before it—seems stuck in a mindset that sees U.S. foreign policy as, in effect, a tool of imperial administration.  If President Obama persists in this course, U.S. interests on multiple fronts are at risk of serious damage over the course of his presidency. 

–Flynt Leverett and Hillary Mann Leverett  

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18 Responses to “IRAN, THE COMPETITION OVER EURASIAN NATURAL GAS, AND THE REVIVAL OF CLASSICAL DIPLOMACY IN THE 21ST CENTURY”

  1. picard says:

    Important essay and I followed you until the last paragraph.

    Where do you get the idea that “classical diplomacy” reduces to “balance of power.” (You say Charles Freeman)

    While the current US approach to Iran is quite flawed, it’s hardly the fount of wisdom to counsel we go back to what was indeed the cardinal flaw in US approaches to Iran since the Nixon/Kissinger years — e.g., “balance of power” thinking. (e.g., either having the Shah as our “balancer” ally against Saddam, or then having Saddam balance out Iran, or the Clinton approach of somehow having the GCC balance out Iran and Iraq….

    Diplomacy YES — for a change. But “balance of power?” Soooooo 19th century. :-}

  2. Kamran says:

    The commissioning of Turkmen-Iran pipeline supplying gas from southern Turkmenistan (40 inch dia pipeline from Daulatabad to Khangiran) to norther Iran is a real blow not only to policies of America but also opens new avenues for Turkmenistan to find Southern outlets for its new gas discoveries. Russia can no more influence Turkmenistan gas exports if the Gas-Swap deals become a basis of Iran-Turkmenistan relationships relating to gas exports worldwide through pipelines of LNG terminals in the Persian Gulf.

  3. Name (required) says:

    @Jon Harrison

    I apologise. It wasn’t my intention to make you feel that I was connecting your name to statements you haven’t made or agree with. The “@” basically means that the comment is directed “at” someone, but I understand your concern.

  4. JohnH says:

    I agree that Israel does not have any real role to play strategically in US interests in Iran. Their role is more of a junior partner in the enterprise. Mossad provides certain useful services. And the “existential threat” meme helps build the case against Iran and, curiously enough, create fear and hatred among broad swaths of the US population that otherwise has no more in common with Israel than, say, with Romania.

  5. Jon Harrison says:

    Whoever “@Jon Harrison” is, it’d be better if you used a different online name. I don’t want to be accused of writing what you wrote. I disagree with most of what you said. I would be happy to engage with you if you’ll pick a different name.

  6. @Jon Harrison says:

    While I agree with you that it seems Israel has influence in US politics I do not believe that they control US policy. At least not with the objection of the US elites. That is at best it could be a convergence of interests. And the US listens to Israel as a client state in an important region. Don’t get me wrong, Israel has done terrible things in the region, but the US has supported (and committed) far worse atrocities before and in other places.

    “U.S. is foregoing so many advantages that would otherwise accrue to itself.”

    (I assume you mean eg working with Iran)

    “Advantages” for the US is when it can advance itself on behalf of others. Such “advantages” are not compatible with the interests of others (ie sane, intelligent people). The reason the US is “foregoing” all “opportunities” is simply because nobody wants to work with the US on such terms. Remember that the US had and has good relationship with regimes that are corrupt and commit despicable crimes, Saddam and Saudi Arabia are two examples that comes to mind. If you want you could put Israel here and have an explanation to why the US easily can work with them. The policy that Israel is enforcing is hurting what for normal people would be be their long term interests ie living peacefully with their neighbours, while it is advancing US interests in the region.

    I’m keeping it short, there is of course a lot to be said on the matter.

  7. JohnH says:

    “Wwouldn’t a higher oil price hurt the developing economies more than the US & thugs?” Agreed, but you have to look at who benefits, not who gets hurt. Sure, poor nations get royally screwed (when don’t they?) But the beneficiaries are all those companies that made bets that most of the really cheap oil was gone. They invested in oil production costing $30 per barrel (Canadian tar sands) and up. If oil prices were responsive to today’s oil glut, many of these investors would be wiped out and future supply would be in jeopardy.

    It would not surprise me in the least if there were intervention in the markets, not just by the Saudis, but by Western governments, kind of a TARP for oil markets.

  8. Jon Harrison says:

    Very insightful indeed. The entire business is just so depressing, in that the U.S. is foregoing so many advantages that would otherwise accrue to itself. And why is that? Because of Israeli influence over the U.S. government. It’s a sin, a crime.

  9. @JohnH says:

    Very insightful.

    Two things.

    There Iranian oil bourse should perhaps be taken into consideration?

    “Saudi Arabia may have found a way to defeat the liberalized trading system for oil and to maintain high prices in periods of excess supply,”

    You assume that this is a decision that Saudi Arabia can take. Sorry but they (Arabs) and especially Saudis are politically pathetic. They have no real say in important matters (perhaps only how they may kill each other). I hardly believe that if the US didn’t want higher price than SA wouldn’t have found any “loopholes”. This brings us to my second point. The high prices if I am not mistaken is hitting poor nations (and people, eg in US) foremost. Considering all, wouldn’t a higher oil price hurt the developing economies more than the US & thugs?

  10. JohnH says:

    “None of them has proved that they can achieve success on their own.” And that may be the West’s remaining ace in the hole–the need for expertise to develop South Pars and others.

    Typically both producers and consumers like long term contracts, because prices and supply/demand are predictable. National and corporate budgets can bet set with reasonable confidence. Long term contracts dovetail neatly with product supplied by pipeline. My guess is that Iran would dearly like to do a long term pipeline deal with India but will ship by sea if necessary. That’s probably a big reason the US is so assiduously courting India and advising her to disregard its national interests, not do a deal with Iran, and adhere to the US system.

    The US prefers its liberalized oil trading system and would prefer to have it be the norm for natural gas as well. Instead of having supply locked under contract, that system creates a competitive short term market for oil trading –pricing by bourse and and delivery by tankers–which helps minimize prices to consumers, particularly during periods of ample supply. Saudi Arabia’s “excess production capacity” helped keep a lid on prices until their spare capacity ran out around 2003. And the ability to redirect a tanker to a market on a moment’s notice helps keep prices uniformly low. The US would want someone to take Saudi Arabia’s role for natural gas, perhaps Qatar.

    The US would realizes several additional advantage if natural gas (LNG) flows by tanker instead of pipeline. As mentioned, it flows under US “protection” to market, past choke points under US control. The threat of closing choke points can be invoked whenever the US decides to confront a consumer, such as China, or keep a friend in line..

    Besides that, the product is traded on commodities markets, reinforcing the primacy of the US and its financial markets. Moreover, they are traded in dollars, reinforcing the primacy of the US currency, whereas long term contracts can be priced (or bartered) bilaterally.

    In an interesting side note, Saudi Arabia may have found a way to defeat the liberalized trading system for oil and to maintain high prices in periods of excess supply, such as we are experiencing today. The only question is which will end first, the oil glut or Saudi Arabia’s ability to defeat the market. The latter case would lead to a collapse of oil prices, bankrupt much recently developed production capacity, and freeze future investment in production, not to mention creating havoc on financial markets. http://www.atimes.com/atimes/Middle_East/LA16Ak02.html

  11. @Ed Chow says:

    “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?”

    In order to bypass US “protection” of the sea lanes?

    And I am not sure what you mean with world markets? This should be a different issue; purchase/sale (oil/gas bourses) and transportation (sea lanes, Super Mario Pipes).

  12. Ed Chow says:

    While I agree with most of what you said and with much from those you quoted, I would not exaggerate the impact of the recent “opening” of the new pipeline between Turkmenistan and Iran. Iran has consistently under-performed on its previous offtake obligations from the old gas pipeline between Turkmenistan and Iran. More generally, Ashgabat and Tehran have proved themselves to be remarkably unreliable commercial partners on gas. The weather gets cold and Turkmenistan cuts off Iran, Iran cuts off Turkey, and Turkey cuts off Greece. This is not the kind of commercial foundation under which projects that will cost tens of billion dollars are built.

    I would also not exaggerate the ability of TPAO—Turkey’s national oil company—to develop big gasfields in Iran. The notion of Iranian gas going into Nabucco is mainly a useful ploy. 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.

    I certainly agree that U.S. policy should not seek to isolate Iran in
    its own region, particularly on oil and gas—an arena in which isolating Iran is impossible. But, while the regional players may wish for the era of “big oil” to be over, none of them—including Iran—has proved that they can achieve success on their own.

    Best, Ed

  13. Alan says:

    Paneer – That’s not fair. All I want is a little discussion and you keep on picking up your toys and going home!

    I’ll give it a go anyway. You think the Russians might fancy another Afghanistan experiment in Iran, and you want the US in there instead?

    What do you envisage this US presence to be like, how would they achieve it, and what would the Iranians think about it?

    It certainly makes the argument for an Iranian nuke stronger anyway.

  14. paneer says:

    Alan: For me to know and for you to find out.

    hint:the Soviet occupation of Iran and Torkamanchai Treaty!

  15. Alan says:

    Paneer – why would it be devastating for Iran if the US left the Middle East?

  16. paneer says:

    JohnH: Spot on. That is the crux of the problem. The geopolitical implications for the US and Iran will be devestating that is if the US leaves the ME to Russia and China.

  17. JohnH says:

    Bottom line: there are geo-politically significant reasons behind the US desire to defeat the Iranian regime and bring Iran under US control. And these reasons have nothing to do with the putative nuke program, hostility to Israel, or aid to Hezbollah, Hamas, or Iraqi Shi’a.

    It’s curious and tragic that most commentators on Iran refuse to mention the most obvious, yet logical explanation for US-Iranian tensions. Instead, they insist on trotting out a series of red herrings, all too reminiscent of what happened before the Occupation of Iraq.

    By refusing to acknowledge any role for oil and natural gas in the US calculus, most commentators all too conveniently fail to mention one of the biggest negative side effects of the Iraq Occupation–perhaps the greatest multi-year disruption of oil flow since WWII, contributing mightily to the exponential rises in oil prices during the last decade. Such collateral damage could be even more significant in the case of an invasion of Iran. Yet it goes largely unmentioned.