How the US sanctions are driving Iran-Russia gas Cooperation in South Asia

Iran’s energy diplomacy was on full display when Foreign Minister Javad Zarif was speaking at the recently organised India-Iran business forum in New Delhi. Zarif said that ‘Iran is the most reliable energy provider for India’ and exhorting New Delhi to keep doing business with Iran and buying Iranian oil notwithstanding the ‘illegal’ US sanctions, the minister told his audience that Iran never forgets people on its side when better times come. FM Zarif’s visit to India in early January was part of Tehran’s diplomatic surge in Asia, especially in Iran’s extended neighbourhood. Iran’s options for gaining necessary technology and investment to upgrade and expand its energy sector have rapidly narrowed as not only European, but also some of the major Russian and Chinese state-owned energy companies have quit Iran since the US sanctions on Iran’s petroleum sector snapped back in November last year. Tehran’s efforts to maintain its export income in face of US sanctions are now focussed on doubling down on its energy partnership with countries in its neighbourhood including India and Pakistan.

Iran has been increasingly critical of European Union since the beginning of year when EU announced targeted sanctions freezing funds and other financial assets of Iranian intelligence ministry and individuals in response to alleged Iranian plots to assassinate regime opponents on European soil. The tensions between Iran and EU are unlikely to abate as closely on the heels of the announcement of INSTEX — ‘Instrument in Support of Trade Exchanges,’ EU stepped up its criticism of Iran’s ballistic missile activity, ‘hostile activities’ on European territory and Iran’s continued military presence in Syria. While many see it as EU following a dual-track approach to show the United States that it is possible to pressurise Iran while remaining within the nuclear pact, Tehran has strongly reacted calling EU’s approach as non-constructive for Iran-Europe relations.

In addition to Europe’s carrot and stick approach, China also seems to be using its prominent presence in Iran’s energy sector as a bargaining chip in trade talks with the US.After the US secondary sanctions led French Total to pull out its stakes (50.1%) from the multi-billion dollar South Pars gas project, it was taken over by China’s state-owned energy major CNPC. Now there are reports that amid the high level US-China trade talks, CNPC will not be making fresh investments in Iran, including South Pars, but it will continue to invest in North Azadegan and Masjid-e-Suleiman oilfields to recoup the billions of dollars spent under buyback contract signed years ago. The fleeing of major International Oil Companies from Iran opens opportunities for India’s ONGC Videsh Ltd., which had submitted field development plan for Farzad-B gas field after sanctions were lifted in 2016. But negotiations did not progress as OVL had to face competition from Western IOCs. In need of investment to monetise its gas fields, especially when oil sector is weighed down by US sanctions, Tehran has indicated that it will offer better terms for India once negotiations progress.

Under pressure from US sanctions, Rosneft- Russia’s largest oil producer, which had signed a road map for strategic cooperation in oil and gas in Iran involving a total of US$30 billion of investments in 2017 and Zharubzhneft- which was part of a consortium investing around US$740 million to develop Aban and West Paydar oilfields, also abandoned their projects in Iran in December last year. However, Iran and Russia, as two major gas powers are closely cooperating to undertake pipeline projects aimed at securing long term supplies to emerging markets in Iran’s neighbourhood.

In November, 2017 Russia and Iran signed a memorandum envisaging Russian support for gas supplies from Iran to India, signalling an emerging Iran-Russia energy partnership at the regional level. Russian support for delivering Iranian gas to South Asia is aimed at ensuring Russian dominance of European markets against potential competition, but also use Iran’s geographical location to expand its operational reach to new markets in South Asia, where India is taking steps towards becoming a gas-based economy, while Pakistan already uses natural gas for nearly fifty percent of its energy needs. In June last year, Russia’s Gazprom began supplying cheapest LNG to India under a $25 billion worth 20 year import deal. Currently, Gazprom is supplying LNG from Nigeria to India’s LNG import terminal in Gujarat. A Russian built subsea gas pipeline from Iran’s South Pars field would not only be more economical as no transit fees would have to be paid, unlike TAPI, where India would be paying transit fees to three countries. More importantly, it would bypass Pakistan completely and therefore protectthe country’s long term energy needs from any possible geopolitical friction. South Asia Gas Enterprise (SAGE), a New Delhi based company is working with a global consortium to create an energy corridor, also called the ‘Middle East to India Deep Water Pipeline’ (MEIDP), straddling gas rich Gulf and India. Taking the plans forwards, in September last year, Russia signed a memorandum of understanding with Pakistan for implementing a project to build underwater sea pipeline to Pakistan and India. A month later, the two countries augmented the validity period of an agreement signed in 2015, under which Russia’s state-owned RT Global Resources will execute the $2billion North-South gas pipeline, which would transmit liquefied natural gas (LNG) from Karachi to Lahore.

Russian led plan to bring Iranian gas to South Asian consumers is not only about getting ahead of the US backed TAPI project, but also use the more economical traditional supplies through pipelines to pre-empt competition from the US which began supplying LNG to India last year and is keen to start supplying to Pakistan as well.

Deepika Saraswat

Adjunct Researcher, AGA

10.02.2019