Iran’s Caspian Discovery Could Change the Regional Gas Game

Iran’s recent announcement that it has found a huge new gas field in the Caspian has been touted as a major event, which will “will change the energy and political balance around the Caspian Sea”, according to President Mahmoud Ahmadinejad. With estimated reserves of 1.4 trillion cubic metres of natural gas and 8 billion barrels of oil, the find is undoubtedly significant, but perhaps not for the reasons which Iran means.

First is the legal issue. Iran has not yet revealed the exact location of the field, which is unusual. Oil Minister Rostam Qasemi has said that the field lies 188km from Roudsar and 250km from Neka. A rough triangulation of these figures indicates an area which would be extremely contentious for Turkmenistan, as it would seem to lie within Turkmen waters. This is despite Qasemi’s statement that the field is within Iran’s waters and is “an internal affairs issue”.

This statement is somewhat misleading, as the legal division of the Caspian Sea has not yet been agreed by all five littoral states – largely due to Iranian obstinacy. Tehran has held off from agreeing on a division of the Caspian based on shoreline length, angling to get a larger share by insisting on an equal division by which each state would get the rights to 20% of the Caspian (based on shoreline length, it would get around 14%).

This has not stopped offshore exploration, as the other littoral states have carved up their respective sectors de facto if not de jure, but it does raise questions about Iran’s conception of how far its maritime rights extend. If the quote from Qasemi is accurate, the scene could be set for a political confrontation with Ashgabat and the other littoral states.

This concern could explain the Iranian government’s reticence – nearly a week after announcing the discovery – on the exact location, and also its apparent haste to begin more detailed exploration work. President Ahmadinejad has sounded an urgent note, calling on “all authorities” to start exploring the field as soon as possible. In particular he told the Oil Ministry to get personnel and equipment to the Amir Kabir rig as soon as possible.

A second issue is extraction. Although the Amir Kabir (formerly the Iran Alborz) is the pride of Iran’s Caspian rig fleet, weighing 14,000 tons and capable of operating in waters of 3,380 feet, some experts are already sceptical about Iran’s ability to extract the gas and crude (domestic reports put the cost of extraction at $10 billion, which will almost certainly rise). With international sanctions tightening, particularly on the energy industry, Tehran will be hard-pressed to find the technical expertise and foreign investment required for such a large, complex project.

A Wikileaks cable from the US Embassy in Baku in 2009 suggested the presence of Norwegian and Brazilian contractors on the Iran Alborz rig. The intensification of sanctions may dissuade them from providing technical expertise, slowing down the process. Iran’s bullishness on the field’s size and the ease of extraction may, in part, be an attempt to detract from the impact of the new sanctions.

The third issue is usage: early reports suggest that the gas will not be used purely for domestic use but will also be exported. However given northern Iran’s vulnerability to gas shortages, and anticipated population and industrial growth, exports may be some way down the line whilst domestic needs are taken care of.

In any case, the two principal export markets are hard to reach. Europe is off limits, whilst shipping to East Asia would involve enormous new transnational pipelines, or better pipeline infrastructure running south to the Persian Gulf and additional liquefied natural gas plants there. Building the latter will be tough without significant outside investment, which is unlikely.

The significance of exports from the field – if it is as large as claimed – will be on regional states. It will, contract terms depending, allow Iran to reduce imports from Turkmenistan which are currently used to fuel northern provinces, potentially closing off a vector of Ashgabat’s multi-dimensional energy policy (China is likely to benefit). It will also allow Iran to boost gas exports to Turkey, allowing Ankara to diversify away from its current dependency on Russian imports.

Much greater Iranian gas imports to Turkey could have significant long term implications. It would bind the two together more closely and help to shore up their fractious relationship. From Europe’s perspective, it would also reduce Turkey’s incentive to play hardball on take-off rights for Caspian gas. Ankara’s determination to take off Azerbaijani gas for domestic purposes has been a major factor in holding back the Southern Corridor. With Iran providing a cushion for imports, Turkey may be more flexible, allowing Europe to benefit (albeit indirectly) from Iran’s gas industry.

Much of this is conditional, and much will take time to become clear. But Iran’s new Caspian find could have major implications for regional gas politics – if and when the gas is ever extracted, that is.

Alex Jackson is a political risk analyst at Menas Associates in London, focusing on the Caspian region. He also writes independently on politics, security and energy in the wider Caspian region.