Innumerable mutual benefits have ensued from the strategic and diplomatic relationship fostered between Russia and Iran over the last five years. These large, stable Eurasian states show remarkable potential for cooperation. The Islamic Revolution was a milestone in Iran's relationship with its northern neighbor; as the country began to redefine its relationship with the West, stronger economic ties with Russia tended to emerge naturally. The energy industry was an obvious locomotive for such collaboration. The Bushehr Nuclear Power Station, the first of its kind in Iran, owes its uranium-supply staff training and financing to investments made by Russian power corporations, especially in Iran's South Pars area and other energy fields.
Such fortified investments have paved the way for a strategy of greater energy collaboration between the two states. Having suffered considerably as a result of a quarter-century of sanctions, Iran has begun to seek cross-border investments to renovate its derelict energy industry. Faced with its own economic sanctions in the wake of the Ukrainian crisis, Russia has responded to Iran's new, outward-looking approach with moves to preserve a collaborative relationship. Furthermore, having struggled with the economic fall-out of a severe decrease in crude-oil prices and shrinking demand due to the global economic crisis, it would be logical for Russia to try to maintain its position in Iran's energy industry beyond the sanctions era.
REBIRTH OF GEOPOLITICAL THEORY1
A pragmatic geopolitical focus has been the determining factor for the relationship between these two states. Although each is diverse in its character and history, both have enjoyed an imperial status across Eurasia, often involving conflict, sometimes in collaboration. What lies beneath the relationship between Russia and Iran in the post-Cold War period is the struggle for dominance over Eurasia. According to the "Heartland Theory" developed by Mackinder, whoever rules Eurasia, the "World Island," commands the globe.2 The geopolitical struggle among powers wishing to dominate it today recalls the power struggle between Britain and Russia in the late nineteenth century, leading to widespread use of the term the "New Great Game." While its nineteenth-century incarnation saw Tsarist Russia and Victorian Britain turn the region into a giant chess board in which Persian territories and riches were plundered by both, in the Cold-War period, Iran aligned itself to the West as one of the "bulwark" states bordering the USSR. However, after the events of 1979, Iran adopted a "Neither East Nor West"3 strategy, in which its relationship with the USSR was normalized based on shared anti-American sentiment.
With the end of the Cold War, and the sudden emergence of the United States as the world's hegemon, new political discourses aimed at isolating Iran and containing Russia paved the way for a natural working relationship between the two countries with a view to balancing U.S. power in the region.4 What lies beneath their affiliation, accepted as "strategic" by both, is that they consider one another assets to national security, domestic stability and protection of territorial integrity.5
Unlike the original Great Game, a geopolitical struggle for dominance, the "New Great Game" does not concentrate on territory but on the control and transfer of energy resources. Global and regional powers that wish to be in the driver's seat for the changing balance of power in the region vie with each other for control of energy investments and pipelines.6 The increased significance of energy security is accepted as the "new energy geopolitics" by Michael Klare, who argues that classical geopolitical theory that relies on the division of land and naval territory fails to account for this shift in realities.7
As two of the largest suppliers of oil and natural gas in the world, Russia and Iran have tremendous influence on the global market. Russia ranks high among the world's energy producers and exporters, and gives precedence to its geopolitical position in its energy policies.8 For its neighborhood, the country uses energy as both "stick and carrot" to preserve its clout.9 Iran has been recognized as one of the most important oil-producing states since 1908, when oil was discovered in its territories for the first time.10 Yet unlike Russia, despite having the most abundant natural-gas reserves in the world, Iran is not a significant player in the global market, ranking third in production.11 Nevertheless, Russia and Iran have not viewed each other as rivals in crude-oil and natural-gas exportation, nor have they ever competed for alternative transfer routes that would enable regional resources to flow elsewhere.12
THE IRAN PETROLEUM CONTRACT
The development of joint oil and natural-gas fields are Iran's first priority, and Tehran is preparing for the post-sanctions era. Completion of the South Pars development plan and West Karoun (the Azadeghan Field, shared with Iraq) is a top priority, and the National Iranian Oil Company (NIOC) has its sights on successfully increasing oil and gas production there.13 Iran believes that any increase in oil and gas export capacity will help it play a more dominant role in world energy markets and a more strategic role in the region. Iran has drawn up new oil and gas contracts with the aim of injecting investment into its energy sector.14 With its huge reserves, the country has more than the capacity needed to attract investors, yet to guarantee this in the short term, an increase in transparency and the possibility of forecasting new oil contracts would be key institutional changes that could facilitate it.15
By November 2015, Iran had devised a new oil and gas contract model designed to benefit both home-grown and international oil companies. These changes are expected to generate billions of dollars in investment. The change is significant; in past decades, Iran has been using a unique model of buy-back contracts in oil and gas designed to attract international companies to invest in its energy sector, but the model's limitations have impeded its success. Thus Iran unveiled a new model of the Iranian Petroleum Contract (IPC) in order to forge a new path.16 The major improvement is in the IPC's legal section, in which the interests and commitments of the parties — NIOC and international oil companies — are laid out with the intention of protecting and increasing the interests of Iran, while aligning them with those of its counterparts.
The IPC, like other oil contracts, includes four phases: exploration, development, production and enhanced/improved recovery. The most positive update to the IPC is the longer time frame it allows international companies. The revised IPCs are to last 15-20 years, providing foreign companies with better continuity for the exploration and development phases. In contrast, the current buy-back contract provides a typical lifecycle of only five to seven years. The current contracts require the investor company to finance the joint project and supply the required technology.17
Since the P5+1 Agreement with Iran over the nuclear program, Iran has outlined many times that it plans to rebuild its major industries and business relations with global powers. The government has stated that it will be targeting oil and gas projects worth $185 billion by 2020, having already designated nearly 50 such projects worth that amount. The majority of these will be in joint fields awaiting exploration.18 The state energy producer plans to tender contracts over a period of six months to a year to develop several joint fields. NIOC has identified 34 foreign oil firms as suitable bidders. Thus the foundations have been laid for Iran to take advantage of new international business opportunities in its energy sector, in order to invest in technology and rebuild the industry. The government hopes foreign companies will invest as much as $50 billion annually. Major European oil companies such as France's Total and Italy's Eni have already expressed interest.19
During the sanctions era, when foreign oil companies drifted away from Iran's oil and gas fields in droves, its oil and gas companies started to show interest in developing joint fields, especially in the South Pars region. Iran's Association of Petroleum Industry Engineering and Construction Companies was present at a consortium aiming to realize cash and engineering, procurement, construction and finance (EPCF) projects, drawing funds from domestic banks and the country's National Development Fund. However, due to technical and financial problems, Iranian companies have not been very successful.20 As Iran pledged to increase its gas output by 140 million cubic meters per day (mcm/d) by March 2017, phases 14-17 of the South Pars were successfully completed last year, allowing output to increase as planned. With South Pars now providing 50 percent of the country's gas requirements, the stage will be set for exports to foreign markets.21
On the other hand, agreements made using the new IPC model ascribe foreign investors a certain percentage of ownership of the petroleum extracted. This is a matter of contention domestically, with the opposition widely accusing policy makers of having committed a "violation of national property."22 The IPC agreements are very similar to Iraq's oil deals, in which, as long as field production continues, foreign investors are given a share of that cash. Furthermore, management of the projects is contracted to foreigners. Iraq has given oil fields to foreign investors within the framework of similar agreements since 2007, with the result that production capacity has increased 2.5 times, reaching 4.4 million barrels per day, and is expected to reach 5 million by the end of 2017. In terms of speedy capacity building, at least, the benefits are clear.23
EUROPEAN ENERGY STRATEGY
In 2014, in the wake of the Ukrainian crisis, the EU faced the reality of its overwhelming dependency on Russia for energy supplies. This prompted the formation of an Energy Union to create an internal, sustainable, common and single market, as well as monitor bilateral energy cooperation among countries to ensure a diversity of supply. According to Miguel Arias Caete, EU commissioner for climate action and energy, the Energy Union's aim is not to override the policies of individual states but to secure energy for all members.24 What is important for Iran is both finding investment and increasing the recovery rate (the amount of oil extracted from a basin). Today, only four of Iran's oil fields have the potential to produce. Iran needs advanced technology to increase its place on the productivity index and its production capacity. In addition, if oil prices continue to decline, foreign oil companies will no longer be willing to invest in Iranian oil fields with the old buy-back deal. According to the International Energy Agency, the search for new oil reserves in 2016 fell to its lowest level in 70 years. In 2015, global oil and natural-gas investments declined by 25 percent to $585 billion.25
Iran's natural-gas reserves may also face serious problems in the coming years. In the South Pars field, Iran produces 500 mcm/d — 6 percent of nationwide production. If all the remaining stages of the South Pars Field were completed, Iran's natural-gas production would increase by a further 500-720 mcm/d. However, a further $20 billion will need to be procured in addition to the investment of $70 billion already attained. However, after five years — from 2022 — there will be a decline. Due to a fall in pressure, production capacity of South Pars will decrease by 25-30 percent. Iran should replace the existing 1,500-ton platforms with 15-20,000-ton platforms, each of which can carry two to three compressors, compensating for the reduced production capacity.26
Iran's second-largest natural-gas project, in the Kish Basin, has not yet achieved the progress expected after an expansion was launched 10 years ago. While Iran ought to have invested $2.5 billion to provide a 28 million mcm/d capacity by 2017, it invested a mere $250 million. The project is now expected to become operational in 2022. Iran's natural-gas production is expected to increase by 90-100 billion cubic meters per year (bcm/y) by 2020; however, after 2022, a decrease in both production and demand is expected. The country will then have no choice but to bolster the number of IPC-based projects and produce 49 fully functioning fields.27
A senior analyst at the Wood Mackenzie research center, Homayoun Falakshahi, believes that the amount of marketable gas will reach 231 billion cubic meters in 2017. He notes that, with the introduction of Iran's South Pars and Kish fields, the country's gas-production potential will reach 320 bcm/y by 2022. Iran has 30 billion cubic meters of natural-gas export contracts annually with Oman and Iraq. At the same time, Iran's targets include raising its penetration rate from 90 percent to 97 percent over the next five years, doubling its petrochemical production capacity, and adding 25 gigawatts to its energy-production capacity.28
A VIABLE ALTERNATIVE TO RUSSIA?
Dependent on outside sources for 53 percent of its energy needs, the EU is indisputably the largest energy buyer in the world. Although the organization has a number of rules regarding the energy policies of individual member states, all 28, in reality, follow their own energy policies, challenging the idea that the EU is the largest energy market in the world.
However, the EU is the largest natural-gas market in the world and is anticipated to hold this position for the foreseeable future.29 Although gas demand began to recede in light of the 2008 global economic crisis, the EU's total natural-gas demand will continue to be significant. Important changes in the industry are likely to arise out of shale-gas production, and it is still important for the EU to safeguard supplies under current conditions. In 2013, 43 percent of total EU energy needs were satisfied by Russia, 27 percent of it consisting of natural gas. In 2013, Russia exported 80 percent of the natural gas it produced to the EU, and today Estonia, Latvia and Lithuania depend on Russia for 100 percent of their energy requirements.30
The EU gets one-third of its gas from Russia.31 That said, in terms of gas specifically, the EU and Russia are mutually dependent. Thus, the relationship of the EU and Russia should be handled with care from both sides. In response to the EU's seeking resource diversification, Russia executed a natural-gas sales agreement with China for 30 bcm/y over 30 years.32 Revising its Energy Strategy Document for 2035 after the Ukrainian crisis, Russia had clearly adopted a strategy of opening up to the Asia-Pacific energy market in preparation for a decrease in bids from the West.33
The EU began to follow a relatively more active policy of resource diversification in 2006, when Russia first cut off gas to Ukraine. That the crisis in Ukraine subsequently intensified made Russia's interest in the EU's energy security more comprehensible. Seeking resource diversification, the EU began to take an interest in the Caspian and Central Asia. It did not prioritize Iran, with the richest reserves in the world, due to the sanctions imposed upon it. Collaboration with Iran has now been put on the agenda again with the lifting of sanctions. Iran is, of course, eager to gain the geopolitical benefits of and lucrative deals with Europe.34
An obstacle hindering Iranian gas from becoming a solution for the EU's diversification drive is the cost. Russian gas is abundant and cheap, a factor that somewhat explains Europe's dependency.35 It does not seem possible in the short term for Iran to compete with Russian rates. Russia has certain advantages in the European market, with an extensive pipeline network in place, as well as long-term contracts. For Europe to reduce its dependency on Russia, complex solutions such as designing new pipeline projects, enhancing the LNG usage rate, developing nonconventional resources and favoring alternative energy resources will also be needed. Simply put, Iranian gas will not be a magic wand for the EU's diversification project.
The EU's interest in Iranian natural gas has the potential of yielding concrete results in the medium term, however, if it taps into the country's increasing LNG [liquefied natural gas] capacity as an alterative to pipeline projects.36 Considering the insecure political structures prevailing in the region, LNG stands out as a more reliable alternative, in any case. Furthermore, with a developed LNG infrastructure, Iran can just as easily expand into the Asian market, where the rates are higher and it is on better terms with a number of partners than with players in the European market.
The global energy market has undergone a period of serious change since the economic crisis of 2008. Rates in the fossil-fuel market have turned out to be truly fragile after a stark reversal of the uptrend in demand and rates following the bust. The decline in demand caused an upsurge in competition in a weakened industry.37 In addition, Iran looks likely to begin supplying natural gas and oil to the global market without restrictions in the near future, reclaiming the market share lost primarily to Russia and other countries in the region.
In its decades of energy collaboration with Iran, Russia has always considered its own national interests and benefits above all else. The nuclear-power-station agreement, as well as other energy collaborations it has executed with Iran, constitute a serious source of income for Russia and have provided it with the advantage of using Iran as a trump card in its relations with the West.
The most fecund source of collaboration between Russia and Iran looks likely to be replaced with competition, as Iran develops plans for supplying Europe with natural gas. With the Caspian's status unresolved for over a quarter century, Iran and Russia have so far prevented Turkmen natural gas from reaching the European market via a corridor beyond their control. Yet, upon the lifting of sanctions, Iran had already started negotiations to penetrate the European natural-gas market, both as a supplier country and as a transit country. Having been excluded from the European market for a long time, Iran took decisive action to become part of the Southern Gas Corridor as soon as the negotiation process started. This was taken as a threat by Russia. Despite its serious investments in Iran's gas industry, Russia has a vested interest in the European market, its biggest client, already clear in its intentions to seek more beneficial deals elsewhere.
With demand slowly increasing as production rates decrease in Europe — not to mention the end of the life span of many nuclear-power plants — the EU will have to seek new energy sources. Although Iran has the potential to be a reliable alternative for ensuring the EU's energy safety, access to the European market will not move as rapidly as expected. Obstacles to a probable collaboration between Iran and the EU include the need to increase Iran's production rate (even if to keep up with its own increasing demand) and the construction of connecting-pipeline infrastructure. Considering its current production potential, Iran seems barely capable of replacing Russia in the medium term, at least not while the latter supplies a third of the continent's natural-gas consumption. What Iran needs in order to fulfill its role, beyond a new pipeline infrastructure, is significant financial support and long-term, interstate contracts that would ensure collaboration for a minimum of 10 years. Similar challenges also apply to LNG; installing the infrastructure is time consuming and necessitates extensive financial support.38 A serious increase is anticipated, if and when Iran completes its field improvements, mainly in the South Pars Field. It aims to reach an annual production of 350 bcm/y until 2030.39 This means that it not possible for Iran, whose current total product is nearly equivalent to Russia's yearly gas-sales rate to the EU, to take part in Russia's European market in the short term. Even if all political, economic, physical and technical obstacles were overcome, and Iranian gas were made accessible to and available in the European market in the short term, it would not considerably affect the proportion held by Russia. For Iran to become a natural-gas supplier to the EU in the short term, it would need to complete an LNG project with a capacity of 14 bcm (10.4 million tons). This would require an investment of $6-9 billion. Alternatively, it could export gas to Europe with an investment of at least $6-8 billion through the Southern Gas Corridor, combining South Pars and its northwest fields, or a new 1,800 km pipeline with 17 compressors. As of now, however, such a project seems a long way from being launched, let alone completed.40
1 Michael T. Klare, "Geopolitics Reborn: The Global Struggle over Oil and Gas Pipelines," Current History (2004): 428-433, http://faculty.wiu.edu/JP-Stierman/History/cameroon_1.pdf/.
2 Halford Mackinder, "The Round World and the Winning of the Peace," Foreign Affairs 21, (July 1943): 601.
3 Brenda Shaffer, "Partners in Need: The Strategic Relationship of Russia and Iran," The Washington Institute for Near East Policy, Policy Paper no: 57 (2001), 10.
4 Kamer Kasım, "Büyük Güçlerin Kafkasya Politikaları," in Toprak Bütünlüğü, Jeopolitik Mücadeleler ve Enerji , eds. Cavid Veliyev, Araz Aslanlı and Güney Kafkasya (Berikan Yayınevi, 2011), 339.
5 Shaffer, "Partners in Need," xi.
6 Ariel Cohen, "The New 'Great Game': Oil Politics in the Caucasus and Central Asia," The Heritage Foundation, January 25, 1996; Zbigniew Brzezinski, The Grand Chessboard: American Primacy and Its Geostrategic Imperatives (Basic Books, 1997), 24; and Parag Khanna, The Second World: How Emerging Powers Are Redefining Global Competition in the 21st Century (Random House, 2009), 73.
7 Michael Klare, Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Metropolitan Books, 2008), 69.
8 According to estimations done by BP, Russia will preserve its position as the largest energy exporter until 2035. According to BP, energy production and energy consumption in Russia will increase by 21 percent by 2035."Energy Outlook 2013 Russia," BP, http://www.bp.com/content/dam/bp/pdf/Energy-economics/Energy-Outlook/Co….
9 Randaa Newnham, "Oil, Carrot, and Sticks: Russia's Energy Resources as a Foreign Policy Tool," Journal of Eurosian Studies 2 (2011): 134-5.
10 Ariel Cohen, James Philips and Owen Graham, "Iran's Energy Sector: A Target Vulnerable to Sanctions," Backgrounder no. 2508 (February 14, 2011): 2.
11 "Iran," U.S. Energy Information Administration (EIA), June 19, 2016, http://www.eia.gov/beta/international/analysis_includes/countries_long/….
12 Ibid., xii; and Shaffer, "Partners in Need."
13 "Development of Joint Oil Fields Top Priority: NIOC," Shana News Agency (Iran), June 13, 2016, http://www.shana.ir/en/newsagency/262884/Development-of-Joint-Oil-Field….
14 "Lozome Tahavol Dar Ghardadhaye Naft o Gaz," Islamic Republic News Agency (IRNA), July 28, 2017,http://www8.irna.ir/fa/News/81725225/.
15 "Olgoye Ghardade Jadide Naft dar Iran Noghteye Aghaze Khobi Ast.," Shana News Agency (Iran), July 28, 2016, http://www.shana.ir/fa/newsagency/267393/.
16 Farshad Kashani, "Iran Has High Hopes for Slick New Oil Contract Model," Al Monitor, November 25, 2015, http://www.al-monitor.com/pulse/originals/2015/11/iran-new-petroleum-co….
18 Shadia Nasralla and Maria Sheahan, "Iran Eyes $185 Billion Oil and Gas Projects after Sanctions," Reuters, July 23, 2015, http://www.reuters.com/article/us-iran-nuclear-industry-idUSKCN0PX0XQ20….
19 Sam Wilkin, "Iran Expects $25 Billion Oil Contracts Signed within Two Years," Bloomberg, August 10, 2016, http://www.bloomberg.com/news/articles/2016-08-10/iran-expects-25-billi….
20 "Iran Firms to Develop Joint Oil, Gas Fields," Press TV, June 27, 2017, http://edition.presstv.ir/detail.fa/203805.html.
21 "President: Iran to Boost Gas Output by 140 mcm/d by Next March," Iran Daily , August 1, 2016,http://www.iran-daily.com/News/156051.html.
22 "Iran: Para Yoksa Petrol de Yok," Para Analiz, May 30, 2017, http://www.paraanaliz.com/2017/genel/iran-para-yoksa-petrol-de-yok-1167….
24Turkey as an Energy Hub? Contributions on Turkey's Role in EU Energy Supply, eds. Mirja Schröder, Marc Oliver Bettzüge and Wolfgang Wessels (Nomos, 2017), 81.95.
25 "Iran Split Over IPC," Natural Gas World 2, no.10 (2017): 29.
26 "Iran: Para Yoksa Petrol de Yok."
27 "Iran Split Over IPC," 29.
28 "Iran: Para Yoksa Petrol de Yok."
29 "World Energy Investment Outlook Special Report," International Energy Agency (IEA), 2014, www.iea.org/publications/freepublications/publication/weio2014.pdf.
30 Ibid, 3.
31 Pasquale De Micco, "A Cold Winter to Come? The EU Seeks Alternatives to Russian Gas," Policy Department, Directorate-General for External Policies, PE 536.413, October 2014, http://www.europarl.europa.eu/RegData/etudes/STUD/2014/536413/EXPO_STU(…, 5.
32 "Russia Signs 30-Year Gas Deal with China," BBC, May 21, 2014, http://www.bbc.com/news/business-27503017.
33 Madalina Sisu Vicari, "The Eastwards Shift: Russia's Energy Cooperation with China," Vocal International, July 13, 2015, http://vocalinternational.com/?p=1883.
34 Brenda Shaffer, "A Nuclear Deal with Iran: The Impact on Oil and Natural Gas Trends," Washington Institute for Near East Policy, January 27, 2015, http://www.washingtoninstitute.org/policy-analysis/view/a-nuclear-deal-….
35 "Energy Geopolitics: Challenges and Opportunities," International Security Advisory Board, United States Department of State (July 2014), 12.
36 Ibid., 23.
37 "Global and Russian Energy Outlook up to 2040," The Energy Research Institute of the Russian Academy of Sciences (ERI RAS) and the Analytical Centre of the Government of the Russian Federation (ACRF), 2013, 5.
38 Ibid, 28.
40 "Iran: Para Yoksa Petrol de Yok."