The Weekly Reader

Link: http://www.atimes.com/atimes/Middle_East/IB10Ak02.html

Gas: Iran turns up the heat
By M K Bhadrakumar
Asia Times OL

It is seldom that the Russian president is publicly contradicted by officials in Moscow. But in the Russian reaction to Tehran's proposal for formal cooperation among the major gas-producing countries, it happened.

Supreme Leader Ali Khamenei conveyed the Iranian suggestion to the visiting secretary general of Russia's National Security Council, Igor Ivanov, in Tehran on January 28. The next day, Russia's Gazprom reacted in Moscow that "establishing a gas OPEC [Organization of Petroleum Exporting Countries] is impossible because of different structuring of the oil and gas business".

ED NOTE: An excellent piece on the real geopolitics of Iran and Russia moving into the Asian market for natural gas. The last third of the article contains quotes from the Russian Foreign Ministry that are a must read, cause the American corporate press will never publish them. A must read if you follow these issues.

Follow up:

A spokesman of the Russian Economic Development and Trade Ministry also reacted sharply: "I do not understand why Russia would need to create a gas cartel - I do not see any sense in it. The more so as Iran is now coming under serious external pressure." The official asked: "Why should we undertake commitments to synchronize our actions, why force ourselves into regulatory frameworks which could boil down to setting quotas?"

Then came a structured Russian position when Ivanov put the Iranian proposal in perspective at a press briefing in Moscow this Tuesday. He said the Iranian side mentioned the idea "not as a question or proposal for discussion, but as a general idea that natural-gas producers should seek such forms of cooperation, which fully supports their interests. As far as I know, no talks on setting up a cartel are under way."

But two days later, at a press conference in Moscow, President Vladimir Putin took a giant leap forward. He said, "A gas OPEC is an interesting idea, and we will think about it. In this initial stage we will agree with the Iranian specialists, with our Iranian partners and with some of the other countries that are large suppliers of fossil fuels, above all gas, to world markets, and we are already trying to coordinate our activities on the markets of third countries. We plan to continue doing so in future."

Putin added, "We have no plans to create some kind of a cartel, but I think it would be a good idea to coordinate our activities, especially in the context of achieving our main aim of ensuring a certain and reliable supply of energy resources for our main consumers."

However, five days later, Russian Energy Minister Viktor Khristenko was still at Square 1. "Fantasies about cartels and 'gas OPECs' are products of a sick imagination," he said.

So what's the problem? First, Moscow wanted to see that alarm bells didn't ring in Western capitals, especially when a top-level European Union delegation was due to visit Moscow. In the West, sweat breaks out at the very mention of "cartel", invoking images of production quotas, price rigging, and so on. Second, Moscow knows that a "gas OPEC" is still a decade away from realization, given the regional structure of the market, absence of a floating gas price (gas is mostly price-indexed to petroleum), double dependency resulting from the transportation through pipelines (gas-carrier ships are nowhere near meeting the needs of transportation) and the prevalence of long-term contracts between the supplier and the consumer, and, of course, the absence of a developed gas-liquefaction infrastructure.

Third, a masterly stroke in ambiguity doesn't do Russian interests any harm. The North Atlantic Treaty Organization has visualized that it is a matter of time before a "gas OPEC" takes shape. On the sidelines of the last NATO summit, in Latvia in November, there were calls for the formation of a "gas NATO" that is geared to safeguarding the energy security of Western consumer countries.

Thanks to Russian ingenuity, between the illusion and the reality of a "gas OPEC" a gray zone has appeared, with no certainty that this zone will not incrementally become the reality itself.

Iran-Pakistan-India pipeline
Putin and Khristenko were not contradicting each other. Putin had just returned from a visit to India (January 25-26), where the focus of discussions was on restructuring the Russian-Indian strategic partnership into a new paradigm with energy cooperation at its core. Putin paid special attention to cooperation "in building facilities for gas production and transportation in India and the adjacent region" (emphasis added). This is a reference to the highly politicized US$7 billion project for a 2,100-kilometer Iran-Pakistan-India gas pipeline.

Putin's visit to Delhi came closely on the heels of the latest round of negotiations over the price of gas for the Iran pipeline project. According to a new formula proposed by Iran, the cost of gas will translate at the Pakistan-India border as $4.93 per million British thermal units (mBtu), plus $1.5 per mBtu that India would have to pay to Pakistan as a transit fee. Indian officials have since expressed optimism that the signing of India's $145 billion gas mega-deal with Iran might take place by June.

Iran has shown extraordinary flexibility by lowering its original price offer by 30%. The geopolitics of energy security has seldom sailed into view with such elan. What needs to be noted is that Tehran's keenness to forge energy cooperation with its South
Asian neighbors (and China) and its proposal to Russia to develop a cooperative grid of gas-producing countries are, in strategic terms, two sides of the same coin.

Clearly, Tehran has sized up the growing assertiveness in Russian regional policies and is keen to harness it geopolitically. But more important, Tehran has signaled to European capitals that they may have to pay a heavy price for any further identification with the US policy toward Iran. The fact that the

Iranian proposal on the "gas OPEC" was made by spiritual leader Khamenei should leave Western capitals in no doubt that Tehran is not scoring a propaganda point. They must now rethink before imposing unilateral sanctions on Iran.

Iran is the "last frontier" for European countries seeking to access natural gas from the Middle East. By 2015-20, Europe will face serious gas shortages, even if Russia augments its supplies via the Northern European pipeline. Tehran knows it is a "special case" for European countries. Tehran was hoping all along that it could normalize relations with the European Union, and that it would receive serious economic and political carte blanche.

Khamenei's warning has registered. In an interview with The Financial Times, French Prime Minister Dominique de Villepin said on Tuesday that the international community (read the United States) is "lacking imagination" on Iran. "We must show Iran that firstly it has more to lose than gain from an enrichment program that worries the international community, but also that if Iran accepts to respect its international obligations, it has much more to gain than lose," he argued.

German Chancellor Angela Merkel said, "Talks on the matter are still possible." A meeting between Merkel and Iran's chief nuclear negotiator, Ali Larijani, on the sidelines of a Munich security conference this weekend is probable in an attempt to break the impasse over the nuclear issue. Germany holds the EU presidency and heads the Group of Eight.

Russian motivations
Meanwhile, for Moscow, Khamenei's suggestion on a "gas OPEC" is a geopolitical windfall. Between them, Russia and Iran control more than 40% of the world's natural-gas reserves. And about three-fourths of the world's gas reserves are concentrated in the Middle East and the former Soviet Union. Therefore, Russian-Iranian cooperation has great potential to impact on the global distribution and price of gas.

First and foremost, Moscow stands to gain by forging an understanding with Tehran on gas-export strategies to avoid competing in the European market. Russia has to prepare for the day when Iran's huge gas reserves (26.9 trillion cubic meters) will begin to flow toward the European market.

Russia has already worked out a level of understanding with Algeria. Algeria meets 10% of Europe's current needs as compared with Russia's 30%, but its market lies in southern Europe. Next week, Putin visits Qatar, another major gas-producing country in the Middle East. Qatar controls the world's third-largest gas reserves after Russia and Iran, estimated to be in the region of 11.2 trillion cubic meters.

Second, Iran is an important partner for Russia in terms of the politics of the transit of gas exports. Iran is averse to any country reselling its gas. Therefore, Iran's choice of transit routes to Europe will have a profound bearing on the geopolitics of South Caucasus, the Black Sea and even South and Central Asia. An extension of the Iran-Armenia gas pipeline (expected to be commissioned shortly) through Georgia via the bottom of the Black Sea could further exclude Russian gas from the South Caucasus and southeastern European markets.

Putin recently criticized Bulgaria and Greece for procrastinating over the Burgas-Alexandropoulis pipeline project. He said: "Since we and our partners in the Caspian Sea region are partners, while our main consumers are in Western Europe, and Bulgaria and Greece are members of the European Union, they should be very much interested in the execution of this project. But, instead, we are seeing endless bother."

Russian Deputy Prime Minister Dmitry Medvedev was more forthright last week in Davos, Switzerland, when he alleged that US Secretary of State Condoleezza Rice had shot down Burgas-Alexandropoulis. Rice has made clear Washington's preference for the rival EU-backed Nabucco pipeline for evacuating Caspian gas via Turkey to southern Europe. Switzerland and Austria recently reached an understanding with Iran about the supply of Iranian gas for the Nabucco pipeline via the existing Iran-Turkey gas pipeline.

Again, the EU has stepped up the search for alternative projects, such as the Trans-Caspian pipeline, and has identified Central Asian countries as a source of supply for the European market. Iran is well placed to offer direct pipeline routes to Turkmenistan and Uzbekistan. That is to say, Iran is a key partner in any EU strategy to develop direct transportation links with Central Asian energy producers that bypass Russian pipelines.

Washington has sought for the EU to press Russia to deregulate its monopoly of gas-transportation networks and to allow Central Asian gas to have access to it on conditions of simple transit. Washington is pressuring European countries not to enter long-term gas contracts with Russia. Cooperation with Iran helps Russia immensely in countering these Western pressures.

The SCO 'energy club'
Besides, Russia always wanted to take part in gas projects in Iran and Qatar, especially in the Southern Pars fields. (Two-thirds of the South Pars reservoir belong to Qatar.) The latest developments in Russian-Iranian relations and Putin's forthcoming visit to Qatar may lead to joint gas projects between Iran and Gazprom.

Furthermore, gaining leverage over gas distribution in Eurasia has always remained a strategic goal for Gazprom. Any merging of Russian and Iranian gas distribution networks virtually paves the
way for Gazprom to have a role in the management of the entire Asian gas pipeline network. The prospects of Turkmenistan joining such a system are brighter than ever before.

In other words, we're talking seriously for the first time about the prospect of a gas market uniting Turkmenistan, Iran, Pakistan, India and China. This is where a breakthrough in the protracted negotiations over the Iran-Pakistan-India pipeline project could

become a defining moment for energy politics in Eurasia.

Russia is not in competition with Iran in tapping the South Asian market for gas. It is expedient for Russia if Iran gets deeply engaged in the Asian market (which includes two energy guzzlers - China and India) and, that, too, with Russian equity participation in the actual construction of Iran's pipeline to South Asia. That could lead to Gazprom's participation in the highly lucrative distribution and retailing of Iranian gas in Pakistan, India and China.

In geopolitical terms, what merits attention will be the prospects of an "energy club" taking shape within the Shanghai Cooperation Organization (SCO) framework. Significantly, the foreign ministers of India, Russia and China are to meet in New Delhi in a trilateral format this month. Meanwhile, the Indian foreign minister has just concluded a visit to Iran, setting the requisite political climate for accelerated energy cooperation.

Russia sees advantages in developing an "energy club" within the SCO. Putin proposed such an idea at the SCO summit last June. The Russian objective is to bring together major energy producers and key consumers within the ambit of SCO, which would not only lead to coordination of efforts in joint energy production and transportation projects but also strengthen regional security on the whole, apart from reinforcing the multipolarity of the world order. The SCO consists of China, Russia, Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. Iran has observer status.

Alarm bells must be ringing in Washington. Has the clock begun ticking for a SCO "energy club"? Is the world order becoming irreversibly multipolar? To be sure, the tensions around the Iran nuclear issue that Washington has ratcheted up are proving counterproductive. They have prompted Tehran to draw close to Moscow and, arguably, to expedite the Iran-Pakistan-India gas pipeline project.

US-Russia standoff
Ironically, expanding Russian-Iranian energy cooperation coincides with the first US deployments of its missile defense system in Central Europe, on the pretext of countering an Iranian threat.

At a press conference in Moscow on February 1, Putin brusquely dismissed the US reasoning on the tests. He said, "Our military experts do not think that the missile defense systems the United States wants to deploy in Eastern Europe are aimed at countering threats from, say, Iran ... The trajectories of missiles fired from Iranian territory are already well known. And they do not have ballistic missiles either. They have medium-range missiles ... We think therefore that these [US] arguments do not carry much weight. This does directly concern us, of course, and it will lead to an appropriate response. As I already said, our response will be asymmetrical, but it will be highly effective."

The specter of a nuclear arms race being forced on Russia haunts the Kremlin. Nothing brings this home more than the Russian proposal to Washington to conclude a non-aggression pact ("legally binding agreements guaranteeing that their military potentials will not be targeted against each other"). Russia-Iran cooperation seems to gather pace almost in direct proportion to the deterioration of Russian-US relations. Moscow's post-haste delivery of Tor-M1 air-defense systems to Iran in December was extraordinary.

Former Russian prime minister Yevgeni Primakov last week summed up the calculus: "Russia is on the way to becoming one of the pillars, if you like, one of the centers, of the multipolar world and one should reckon with Russia ... The Americans will have to retreat, they are at a dead end, and they don't know how to back out of it. They understand it and they are now turning to the United Nations ... Our task is, together with Europe, together with China, together with India, to make sure that a world order that emerges is based on stability."

Primakov added, "You see, we want the American hegemonistic aggressiveness to be blunted. Objectively, things will be moving in this direction because giants such as China and India are rising. By the way, the combined GDP [gross domestic product] of China and India is exceeding that of the United States and they are growing 2.5 times faster than the United States."

Significantly, the adviser to Iran's Supreme Leader on international affairs and former foreign minister Ali Akbar Velayati arrived in Moscow on Thursday for follow-up consultations over Ivanov's talks in Tehran. Velayati played a key role, along with then-Russian foreign minister Yevgeny Primakov, in laying the foundation for Iran-Russia strategic cooperation in the mid-1990s.

In sum, as weeks and months pass, we may get used to the idea of a gas analogue of OPEC - an idea, incidentally, that Putin first mooted in 2003. It is immaterial whether someone calls it "gas OPEC". It isn't the cartel ideology that matters. After all, it isn't all about natural gas, either.

M K Bhadrakumar served as a career diplomat in the Indian Foreign Service for more than 29 years, with postings including ambassador to Uzbekistan (1995-98) and to Turkey (1998-2001).

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