Demand for natural gas in Asia has grown steadily during the past decade and is expected to increase considerably in the next 20 years. This growth in demand has paralleled an increasingly aggressive regime of international sanctions on Iran over its nuclear-weapons program. Considering the importance of maintaining economic pressure and political solidarity in sanctions regimes, the projected growth of demand for natural gas in some of the world's fastest-growing economies is creating both short- and long-term strategic implications for the United States and its allies. With one of the world's largest reserves of natural gas and an enviable geographical location as a likely hub for energy transit, Iran is in an excellent strategic position to benefit economically and politically from this growth in demand. While recent sanctions have dealt a damaging blow to Iran's oil exports and economy, agreement on sanctions on Iran's underdeveloped natural-gas industry has been more tepid, as nations such as Pakistan, India and China, among others, candidly weigh their options to solve increasingly dire short-term energy demand and create long-term energy security. Development of Iran's natural-gas industry to the point at which is it is able to meet demand in these nations would bring in considerable revenue for the regime, potentially enough to offset much of the economic impact of sanctions. Of particular importance to the United States and its allies, then, are answers to the following questions: Does Iran currently have the infrastructure to meet this demand? How long would it take Iran to develop the necessary infrastructure in the event nations that have expressed interest in Iran's natural gas opt against the pressure of sanctions? How likely are the above-mentioned nations to eventually contravene sanctions? How are changes in the global natural-gas industry impacting Iran's potential share of the regional and international market? And is there enough natural gas from other sources available to meet demand in nations like Pakistan, India and China?

The first part of this article examines recent developments in the global natural-gas industry, with particular emphasis on the expectations for the industry to soon enter a "golden age"; the geopolitics of natural gas, specifically in Eurasia; and Iran's potential as a natural-gas producer and exporter. The second part highlights the challenges facing Iran, both from developments within the natural-gas market as well as from sanctions. In this second part, areas receiving specific attention are (1) proposed pipeline trade agreements between Iran and existing and potential customers such as China, India, Pakistan, Turkey and Europe, among others; (2) the growth of unconventional natural-gas sources like shale and coal-bed methane; (3) the emerging globalization of the natural-gas market as a result of the growth of the liquefied natural-gas (LNG) trade; and (4) the impact of sanctions on the past, present and future development of Iran's natural-gas export market.

The economic and political objectives of U.S.-led sanctions on Tehran are in no danger of being weakened as a result of growing demand in Asia for Iran's natural gas. In fact, despite recent media reports of countries like Pakistan, India and China possibly contravening the Iran Sanctions Act (ISA) by entering into agreements with Iran, there are at least five examples of events working against Tehran in its attempt to successfully produce enough natural gas for export: (1) recent technological advancements in extracting unconventional sources of natural gas are moving global reserves away from the monopoly of Russia, Iran and Qatar, which until recently were believed to have had close to two-thirds of the world's estimated natural-gas reserves; (2) the growth of the LNG trade has created more opportunities for global trade away from overland pipelines, and likewise, sea bed pipeline technology is creating more opportunities beyond overland pipelines, thereby mitigating the strategic location of Iran; (3) there is still strong evidence that companies and governments in the region are reluctant to get involved in developing Iran's gas fields;¹ (4) the economic pressure exerted on Tehran's total revenues as a result of successful sanctions on its oil exports is undermining Iran's ability to support domestic development of its natural-gas industry; and (5) even without sanctions, there are still ongoing pricing disagreements between Iran and possible customers. Despite the obvious potential of Iran's natural-gas industry, all of these factors suggest that Iran will not be able to circumvent sanctions by becoming a major exporter of natural gas in the short to medium range.

A "GOLDEN AGE" OF NATURAL GAS

With the obvious exception of oil, there is no other fuel more significant to the future of the global economy and geopolitics than natural gas. Unlike oil — relatively well-established in terms of demand, production and trade — large-scale development of the natural-gas industry is relatively new, dynamic and increasingly vital to the future of energy use. According to one analyst, "Natural gas is the favoured 'bridge' fuel to a low-carbon economy."² Indeed, at a time of unprecedented demand for clean, plentiful energy alternatives, natural gas is poised to become "a fuel of the future."³ Renowned energy analyst Daniel Yergin explains,

World consumption has tripled over the last 30 years, and demand could grow another 50 percent over the next two decades. Its share of the total energy market is also growing. World consumption on an energy-equivalent basis was only 45 percent that of oil; today it is about 70 percent. The reasons are clear: It is a relatively low carbon resource. It is also a flexible fuel that could play a larger role in electric power, both for its own features and as an effective — and indeed necessary — complement to greater reliance on renewable generation.⁴

Yergin's observations are backed by the Paris-based International Energy Agency (IEA), which announced recently that natural gas is poised to enter a "golden age."⁵ In its World Energy Outlook 2012, the IEA suggested further that "natural gas is the only fossil fuel for which global demand grows in all scenarios" with demand that will be particularly strong in "China, India and the Middle East.^"6 It is not surprising that, of these three, China will see the greatest increase in demand, with consumption rising from around 158 billion cubic meters (bcm) in 2015 to 495 bcm in 2040.⁷ Although less robust than that of China, India's market will nevertheless see significant growth, rising from 65 bcm in 2015 to 116 bcm in 2040. Some less conservative estimates put India's growth at 5.4 percent per year, reaching 132 bcm by 2030.⁸ Domestic supply in India will not be able to meet this demand, creating the need for imports from other markets.⁹ According to a recent study by British Petroleum (BP), however, despite the large global reserves and increasing demand in Asia, natural gas accounts for less than a quarter (23.9 percent) of global energy consumption.¹⁰ Consumption only grew by 2.2 percent as a result of significant shifts in global demand. In the EU and Russia, consumption declined by 2.3 percent and 2.5 percent, respectively, which offset significant increases in China (9.9 percent) and Japan (10.3 percent).¹¹ The shift is the beginning of a trend in which demand for natural gas in Asian non-OECD (Organization for Economic Cooperation and Development) nations¹² will outpace that of the rest of the world in the next two decades¹³ [Table 1].

Notable is the fact that much of the conventional supply of natural gas in the world is concentrated in relatively few nations, with Russia having the most, according to the U.S. Energy Information Administration (EIA) [Table 2]. Since the formation of the Gas Exporting Countries Forum (GECF) in 2001, Russian President Vladimir Putin has been pushing for "more cooperation" among the 13 member states with respect to production and pricing, the motive of which was likely the creation an OPEC-style gas cartel.¹⁴ Reducing the volatility of prices and ensuring the long-term stability of supply are two areas that have been highlighted by Putin as priorities for the GECF.¹⁵ Within the GECF, a gas "troika" was formed comprising Russia, Iran and Qatar. While differences of opinion exist with respect to the amount of proven reserves, it is generally agreed that these three nations hold between 50 and 56 percent of the world's proven conventional natural-gas reserves. The troika has been pushing for "more stability" in the market, as rising unconventional gas production in the United States and lower demand in Europe have been driving prices down. In response to the lower prices and general instability, members of the GECF have moved to "uphold the fundamental role of long-term gas contracts and support gas pricing based on oil-products indexation."¹⁶ Putin has argued that "rejecting the basic principles of long-term contracts means not only a blow for gas producers but also serious costs, and it would undermine energy security for consuming nations. The oil link is the fairest and most market-oriented [way of pricing gas]."¹⁷ Even with the rise in unconventional natural-gas production in North America, decreased demand in Europe and recent pricing setbacks and loss of revenues for countries in the GECF like Russia, a "gas OPEC," if formed, would have tremendous power to influence future pricing and energy transit in much of the eastern hemisphere.¹⁸

Iran's present role in the troika is relatively small as a result of its current lack of exports, but it holds a prominent place because of its potential, should it ever be realized. Indeed, a recent study by BP has ranked Iran's reserves of natural gas at number one in the world as a result of revised estimates of Russia's reserves [Table 3].¹⁹ Iran's position as a potential natural-gas exporter has taken a prominent position in many discussions with respect to the efficacy of sanctions. Ray Takeyh and Suzanne Maloney, for example, argue that divisions with respect to developing Iran's energy, in part, create "ambivalence ... throughout much of the ... international community..." as "European companies grumble about pressure to forfeit opportunities to their Chinese competitors, who will quickly take their places with impunity." "Tehran," they conclude, "has exploited this dynamic, seeking to expand its economic ties in ways that complicate any prospects for western leverage."²⁰ The observations of Takeyh and Maloney are not without justification. Following several years of declining European investment in Iran, China and Iran signed a $3.3 billion (USD) deal in 2009 to develop Iran's portion of the massive South Pars natural-gas field, which it shares with Qatar. For some, the deal "underscored the difficulty of using economic sanctions to pressure Tehran to bow to Washington's demands on its nuclear program."²¹

In a similar, yet more direct, suggestion that Asian energy needs will hasten the demise of sanctions, Flynt Leverett, another long-time critic of U.S. policy and sanctions on Iran, suggested that, as with oil, natural gas will "hasten the shift of power away from the West towards both the gulf and towards rising Asia,...which will become an ever more important factor in the geopolitics [of the region]."²² For Leverett and his wife Hilary Mann Leverett, a former adviser in the George W. Bush administration, it is only a matter of time before Iran's economy benefits from increasing regional demand and investment. "Iran has the potential to emerge in coming years as a regional economic superpower," they argue. "In such a scenario, among other things, sanctions would become increasingly irrelevant."²³ The proximity of these markets to gas-rich Iran, as well as the expressions of interest from many of these countries in developing and purchasing the gas, leads to important questions about the impact of foreign investment in Iranian natural gas on sanctions. Indeed, the trade possibilities give justification to the concerns of critics of sanctions like the Leveretts. As noted above, China acted contrary to U.S. pressure by signing deals with Iran in 2009. Indian government officials have said that they are willing to import natural gas from Iran and that the lack of existing investment and pipeline construction between the two countries is the result of factors such as "pricing, delivery point of gas, project structure, transportation tariff payment, transit fee for the passage of natural gas through Pakistan and security of supply," rather than pressure from the United States.²⁴ Pakistan signed a deal earlier this year with Iran to finish construction of the Iran-Pakistan pipeline (formerly the IPI — Iran-Pakistan-India — pipeline, also known as the "peace pipeline"). Iraq has also expressed interest in importing natural gas, while Turkey, Armenia and Azerbaijan are already receiving imports.²⁵ In short, the potential for Iran's natural-gas industry is enormous.

Iran is literally at the crossroads of many current and planned energy-transit corridors. In addition to being strategically located at the mouth of the Persian Gulf, where much of the world's oil passes on its way to global markets, Iran could very likely become a hub for proposed energy pipeline routes beginning in or transiting its territory, as well as through its growing sphere of influence, which extends into southern Iraq, the Caucasus, the Persian Gulf and western Afghanistan. Having a long coastline with adjacent offshore gas fields, Iran also has enormous potential as an exporter of LNG. Many would-be European partners such as Total and Royal Dutch Shell have had ambitions to help develop and import Iran's natural gas but have hitherto been mostly unsuccessful in their efforts, mainly because of sanctions. However, the longer sanctions continue without a breakthrough between the International Atomic Energy Agency (IAEA) and Tehran, the more pressure will be exerted on growing Asian economies that have expressed interest in Iran's natural gas, either tacitly or in trade agreements, to find solutions to their energy shortages. Even with the recent breakthrough in negotiations between the P5+1 and Iran, little has changed in the sanctions to allow for international investment in Iran's natural-gas industry. Under these conditions and as more pressure is exerted on the economies of nations like Pakistan and India, the more willing their governments might be to choose to go against the sanctions of the United States and the EU over continued failure to meet the energy demands of their citizens and industry. Indeed, recent announcements by officials from Pakistan and India about the importance of Iran's natural gas to their future energy security are concrete examples of this trend.

Ironically, however, it is the same growing demand for natural gas that is also undermining Iran's future importance in the market. As Yergin observes, "Technology is making [natural gas] more and more available, whether in terms of advances in conventional drilling, the ability to move it over long-distance pipelines, the expansion of LNG onto much larger scale, or, most recently, the revolution in unconventional natural gas."²⁶ As will be shown, not only has Iran been unable to create a network of pipelines; it has also been unable to take advantage of the expansion of LNG and the revolution in unconventional natural gas. Iran is therefore a long way away from becoming a major exporter of natural gas.

PIPELINE PLANS: EAST AND WEST

Overland pipelines continue to be the most common means by which natural gas is traded. The pipelines are central to what is often called the "New Great Game," the struggle to secure strategic interest in the Caspian region and Central Asia through the flow of energy resources (natural gas in particular).²⁷ In his excellent article about Central Asian energy resources, Robert Cutler points out that "the construction and administration of energy pipelines are axes for the international projection of influence by great powers," which further "signify and embody alliances and cooperation among different states."²⁸ Although the importance of pipelines is diminishing in the wake of the growth of the LNG trade, they remain important to the present and future network of the natural-gas trade. There are currently many natural-gas pipelines in Europe and Eurasia that are integral to OAO Gazprom's exports to Europe. There are also a number of pipelines to Iran's west that carry natural gas to and from Turkmenistan to Iran and from Iran to Turkey and the Caucasus. To Iran's east and the vital growing Asian markets, however, there has been little in the way of pipeline construction except for the Central Asia Gas Pipeline (CAGP) between several Central Asian nations and China. For the most part, regional conflicts, pricing disagreements and the effects of Iran sanctions on prospective investors have stalled efforts to construct pipelines, two of which have been proposed for two decades: the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline backed by the Asian Development Bank (ADB) and the Iran-Pakistan-India (IPI) pipeline.

PIPELINE MARKETS TO THE EAST

The slow progress on pipeline construction eastward into South Asia is having repercussions for many of the world's fastest-growing markets for natural gas, particularly Pakistan and India, but also, to a lesser extent, China. Each of these countries has expressed interest in developing and purchasing Iran's natural gas, and has even signed memorandums of understanding (MOUs) with Tehran. But for various reasons, all of which will be discussed below, each has been unable to make progress towards successfully signing deals. And despite frequent announcements from Tehran and these countries that deals are imminent, it is unlikely that natural gas from Iran's fields will be flowing to them in the next decade, or perhaps longer.

Pakistan

Pakistan is currently facing an "energy crisis" which, according to the Asian Development Bank (ADB), has limited it to only "modest" economic growth during the past decade. The ADB has also suggested that Pakistan's inability to manage and stabilize energy supplies is the country's "main constraint for economic growth" in the future.²⁹ For the past five years, the supply-demand gap during peak hours has increased each year, from close to a 2,000-megawatt (MW) deficit in 2007 to a 5,000 MW deficit in 2011 and between 6,000 and 7,000 MW in 2012.³⁰ In addition to passing legislation to conserve energy resources, the government of Pakistan is creating an ambitious multipronged plan to increase supply from both domestic and foreign sources.³¹ A study by Princeton University's Zia Mian and Abdul Nayyar stated that Pakistan is planning to increase energy supply in the country from 27,420 MW (2010) to 162,590 MW, an increase of almost 600 percent, by 2030.³² The plan, as outlined by the secretary of the government's Planning and Development Division, Humayun Farshori, pointed to the need for large increases in the procurement of natural gas, which would eventually meet over 50 percent of Pakistan's energy needs. While Farshori argues that natural gas is the best option to solve the crisis, the country's own reserves of 0.6 trillion cubic meters (tcm), representing only 0.3 percent of the world's total, is unable to meet them.³³ The desperation of Pakistani officials was expressed recently by Minister of Power and Water Khawaja Asif in a joint news conference with U.S. Secretary of State John Kerry, when he suggested that "[the energy crisis] is a bigger menace to our economy, to our existence, than the war on terror."³⁴

Pakistan has numerous options to meet its energy needs: importing natural gas from Turkmenistan via Afghanistan through the planned TAPI pipeline; importing it from India via Qatar through an existing underwater pipeline; importing it directly from India; continuing to rely on U.S. support through energy projects, particularly power dams; and importing natural gas from Iran through the Iran-Pakistan pipeline. Despite the variety of options, none is easy for Islamabad. The TAPI pipeline has been proposed for close to two decades now, with little in the way of concrete progress.³⁵ India has also been reluctant to join the project, as it would put their energy security at the mercy of Pakistan.³⁶ The second and third options — importation through an underwater pipeline from Qatar via India, or directly from India itself — are relatively new prospects, but ones that are unlikely, as Pakistan would have to put its energy security in the hands of India.³⁷ The fourth option is one that has been quite successful thus far, but not to the point of meeting the immediate, short-term energy needs of Pakistan: U.S.-led energy infrastructure projects in the country. Recent steps taken by Pakistan have made it clear that U.S. efforts have not met their needs, and that they will continue to pursue their fourth option: importing Iran's natural gas.

Of all the potential Asian importers of Iran's natural gas, Pakistan is the most enthusiastic. Pakistan's shared border with Iran, and therefore relative close proximity to its natural-gas fields, puts Iran in a prominent position in Islamabad's plans. And while sanctions and political pressure from the United States have caused occasional pauses in the expression of their enthusiasm, they have not stopped agreements between Tehran and Islamabad. On March 11, 2013, delegations from both countries, including Presidents Mahmoud Ahmadinejad and Asif Ali Zardari, met in the Iranian port city of Chabahar to celebrate the inauguration of the Iran-Pakistan (IP) pipeline.³⁸ The plan is for the pipeline to be completed by the end of 2014.³⁹ The continued drive to import Iranian natural gas is a result of the fact that the domestic economic and political pressure created by the energy crisis outweighs the pressure being exerted by the possibility of sanctions. Pakistan would receive 22.5 million cubic meters (mmcm) per day (82 bcm per year) through the IP pipeline, which would provide between 4,000 and 5,000 megawatts of electricity.⁴⁰ For Iran, the economic and political benefits would be significant. Kaveh Afrasiabi has argued that the IP pipeline "has the potential more than any other existing Iranian project to extend the scope of Iran's 'pan-regional' approach, by organically connecting Iran to the sub-continent on a long-term basis and providing a new ... nexus that could in turn be used for addressing what is lacking so far, that is, more than paltry interregional trade."⁴¹

Despite the recent announcements and mutual desire on the part of Iran and Pakistan, construction of the IP is far from inevitable, nor does it appear to be feasible, either politically or economically. First, the cost of the project may be prohibitive without outside investment. Unlike the "rival" TAPI pipeline, the IP pipeline does not have the financial backing of the ADB. Hurting the feasibility of the pipeline further is the vacillation of potential investors, namely China. A consortium led by the Industrial and Commercial Bank of China (ICBC) in March 2012 withdrew from its plan to finance the pipeline, citing "geopolitical reasons."⁴² A year later, in March 2013, according to Pakistani officials, China was once again promising to lend Pakistan a portion of the funds ($500 million) for the construction of the pipeline.⁴³ For its part, Tehran has agreed to lend Islamabad $500 million of the projected $1.5 billion needed to complete the project, but the steep declines in Iran's oil revenues as a result of sanctions have made this a more difficult promise for Iran to fulfill.⁴⁴ In early December 2013, Iran canceled its promised $500 million loan to Pakistan.⁴⁵

Second, although the proposed route for the pipeline through Baluchistan in western Pakistan is not as fraught with the security problems of the TAPI pipeline, the route would nonetheless face challenges as a result of the demands of ethnic Baluch militants for more autonomy and control over their corner of Pakistan.⁴⁶ Third, and related to the second challenge, preliminary development of Pakistan's share of the proposed pipeline route has been chaotic. A writer for the Economic Review has argued that

Pakistan has lost a lot of time, mainly to internal wrangling over who should prepare technical studies related to route survey, front-end engineering design ...etc. Then security agencies had their concerns over the proposed aerial survey by foreign consultants for the pipeline's Gwadar to Multan and Nawabshah route. They thought the petroleum ministry should have sought security clearance before taking the decision for the survey, particularly in Baluchistan.⁴⁷

There is also the possibility that Islamabad's frequent discussions with Iran about the project may be primarily a political move, regionally, as it bides its time in the hope of a breakthrough between Washington and Tehran, but also domestically, as it creates an image of independence from foreign pressure — U.S. pressure, in particular.⁴⁸ Yet, recent pronouncements from Pakistan's Foreign Ministry that U.S. sanctions are irrelevant and not legally defensible, given Pakistan's dire energy needs, seem to make the chances of Islamabad's following through with the project more likely than ever before.⁴⁹ In the words of State Department spokeswoman Victoria Nuland, however, the United States will only know for sure whether Islamabad is bluffing when concrete actions are taken on the part of Islamabad to build the pipeline: "We've heard this pipeline announced about 10 or 15 times before in the past," she observed, "so we have to see what actually happens."⁵⁰

India

Like Pakistan, India has struggled to meet domestic demands for energy. While some of India's energy needs are being met through the undersea natural-gas pipeline from Qatar and from nuclear power plants supplied by the United States, India will need to import energy from a variety of sources to ensure adequate supply and energy security. For close to a decade, New Delhi has been committed, at least on paper, to the TAPI pipeline. However, even if enough security in Afghanistan is created for the pipeline to be built, it is uncertain whether or not New Delhi would become part of the project, given the fact that it would be putting its energy security in the hands of Pakistan. Indeed, Pakistan's recent refusal to participate in TAPI pipeline discussions as a result of Line of Control (LoC) killings in Kashmir has made even more unlikely India's commitment to importing Turkmenistan's natural gas.⁵¹ These obstacles make recent comments by Indian External Affairs Minister Salman Khurshid, that Iran is "critical" to India's energy security, all the more important for Washington.⁵²

Khurshid's comments have raised questions about how willing New Delhi is to keep its distance from Tehran, which until early in 2013 was one of India's biggest suppliers of oil.⁵³ In 2008, India agreed to back out of an agreement with Iran to import natural gas via the IP (then the Iran-Pakistan-India, or IPI) pipeline in exchange for a civil nuclear deal with the United States.⁵⁴ During the past year, India has looked for new suppliers to meet domestic demand for oil, an act of compliance with the new round of sanctions that has led Washington to renew India's six-month waivers, allowing it to avoid penalties for continuing to purchase Iran's oil. The new sanctions have nonetheless put even more strain on India's treasury and domestic energy security.⁵⁵ In the last year, there have been unconfirmed reports that India is looking to once again join the IP pipeline, putting the question of developing and importing Iran's natural gas front and center once again, to the dismay of Washington.⁵⁶ And Iran has been quick to take advantage of the opportunity. Recognizing New Delhi's desire for natural gas, Tehran has countered the newest sanctions from the United States, the EU and the UNSC by offering India a deal: purchase more crude, and an underwater natural-gas pipeline will be built to bypass Pakistan.⁵⁷ As part of the deal, Tehran proposed to build an LNG plant in the Iranian port city of Chahbahar as part of a plan to ship LNG to India, again bypassing Pakistan. Iran would need Indian assistance to build the LNG plant, which in turn would need U.S.-made components, the procurement of which would violate the Iran Sanctions Act (ISA). Likewise, the pipeline from Iranian gas fields in the Persian Gulf would incite condemnation and strain relations between Washington and New Delhi.

There can be no question that pressure from the United States is a factor in India's hesitation to import Iran's natural gas, whether through an overland pipeline via Pakistan or an underwater pipeline directly from Iran. There may be the temptation, however, to exaggerate this geopolitical tension at the expense of the many other issues at the heart of India's reluctance to deal with Iran for its natural gas. Gas pricing, the delivery point of gas, project structure, transportation tariff payment, transit fee for the passage of natural gas through Pakistan and the security of supply are all issues that Tehran and New Delhi have failed to agree on in the past and remain points of disagreement.⁵⁸ These factors, taken together with the pressure from Washington, make it quite clear that, despite announcements from both Tehran and New Delhi, natural gas will not flow between Iran and India any time soon, despite continued interest on the part of India's ONGC Videsh Ltd. (OVL) to develop the massive Farsi natural-gas block as part of a solution to India's projected energy shortfalls.

China

In 2009, natural gas accounted for only 4 percent of China's domestic energy consumption, the bulk of which was met by coal (70 percent) and oil (19 percent).⁵⁹ However, as was noted above, demand for natural gas in China is expected to triple in the next two decades.⁶⁰ Prior to 2007, domestic production was able to meet demand, but production since then has not been able to bridge the gap that is widening each year, from 2.8 bcm in 2007 to 28 bcm in 2011.⁶¹ To meet the growing demand, China imports natural gas though the Central Asian Gas Pipeline (CAGP) from Turkmenistan, Uzbekistan and Kazakhstan, and LNG from a variety of countries. As of 2011, China's LNG imports were supplied primarily from four sources: Australia (30 percent), Qatar (19 percent), Indonesia (17 percent) and Malaysia (13 percent).⁶² Indeed, as is the case with its oil imports, Beijing has a diversified import business with many clients, making China one of the most active import negotiators in the global natural-gas market. Although few pipeline deals have been signed formally, Beijing has been involved in discussions or signed numerous MOUs with a number of neighboring countries to develop new or extend existing overland natural-gas pipelines. China's pipeline options include importing natural gas from eastern Russia off the "Strength of Siberia" Pipeline, building a spur in Afghanistan off the TAPI pipeline and extending the IP pipeline from Iran, from southern Pakistan to its western provinces.⁶³

Weakening demand in Europe for natural gas has created an opportunity for China to sign deals with Russia's OAO Gazprom, which is eager to find new customers. Discussions between Beijing and OAO Gazprom have been ongoing since 2004, but a deal has never been signed as a result of disagreements over pricing. The hope, as communicated in March 2013 during meetings between officials from both countries, is that Russian natural gas will flow into northeastern China by 2018. If an agreement on pricing is found, China would import 38 bcm a year through a spur off the "strength of Siberia" pipeline, which would transport natural gas to a proposed liquefaction plant in Vladivostok. A successful negotiation would make China Gazprom's largest importer of natural gas, surpassing Germany, which currently imports 33 bcm a year through the Nordstream pipeline.⁶⁴ At the time of writing, however, a pricing agreement has not yet been successful.

The most logical pipeline option for China, as recognized by Chinese officials, is to use Pakistan, with whom they have a growing economic and political relationship, as an energy bridge for Iran's natural gas.⁶⁵ In recent meetings, officials from China expressed interest in expanding the proposed "economic corridor" through Pakistan to include an extension of the IP pipeline from the port city of Gwadar, Pakistan, to western China.⁶⁶ Clearly, Beijing's interest in financing and importing fuel through the IP pipeline is a direct challenge to Washington's sanctions. At the time of writing, however, there is no concrete evidence that China will import Iran's natural gas through IP. Beijing's decision and Washington's response will certainly test the strength of the ISA. ⁶⁷ But, as will be demonstrated below, the growth of the LNG trade and the evidence of large unconventional reserves of both coal-bed methane (CBM) and shale gas throughout China may make it unnecessary for Beijing to contravene the ISA by importing natural gas through the IP (see Figure 1).

PIPELINE MARKETS, WEST AND NORTH

Armenia, Azerbaijan and Turkey

What little success Iran has had as an exporter of natural gas has been to its west, through various pipelines into Armenia, Azerbaijan and Turkey [Table 4]. The exports to these countries have been relatively small, however. In 2012, Armenia imported 0.45 bcm, or about 23 percent of its total natural-gas imports, from Iran, mainly to produce electricity at the Hrazden power plant. In return, Armenia sends excess base-load electricity to northern Iran.⁶⁸ Armenia originally signed an agreement with Iran in 2004 to eventually import up to 2.5 bcm by 2019, but these targets have not been met, nor are they likely to be, as a result of stalled demand.⁶⁹ Azerbaijan, Armenia's neighbor to its northeast, imported 0.58 bcm from Iran in 2012 through the Salmas-Nakhchivan pipeline. Iran in return imports 0.36 bcm from Azerbaijan through the Astara-Kazi-Magomed pipeline, which supplies Iran's northern provinces.⁷⁰ Neither Armenia nor Azerbaijan appears to be prepared to increase imports from Iran in the future.

Relative to the countries of the south Caucasus, Turkey is a large importer of Iranian natural gas and at present one of Iran's most important trading partners. In 2011, Turkey imported 6.9 bcm of natural gas through the Tabriz-Dogubayazit pipeline, but, as a result of recent sanctions, imports are declining. According to the Center for Strategic and International Studies (CSIS), "In 2011, Turkey imported over 50 percent of its oil and 21 percent of its natural gas from Iran. ...With increased US and EU sanctions on Iran's oil and gas industry, Iran's share of Turkey's energy imports have decreased to roughly 30 percent and 19 percent respectively in 2012."⁷¹ Turkey's real strategic value for Tehran, however, is the growing relationship between the two countries, as well as Turkey's potential as a transit nation for Iranian natural gas bound for southern and eastern Europe.

Europe

There have been suggestions that Iran may be able to export its gas to Europe through the planned Nabucco pipeline from Central Asia into eastern Europe via Turkey. Indeed, there have even been claims in the Iranian media that the Nabucco pipeline is not feasible without Iran's natural gas.⁷² In the last year, however, the probability of Iran's supplying European markets through Nabucco or other pipelines has become highly unlikely. First, the Nabucco pipeline, once hailed as Europe's means to break OAO Gazprom's virtual monopoly on natural-gas imports into the eastern half of the continent, is becoming less and less viable.⁷³ The consortium of investors has taken several steps to downsize the project, cutting back from a planned capacity of 30 bcm per year to only 10 bcm. Second, under the current sanctions regime, the EU is unlikely to accept Iranian energy imports. Finally, demand in Europe has been declining, so much so that OAO Gazprom is looking to Asia for new markets, thereby cutting back its long-time monopoly in Europe. With diminishing demand, a market for Iranian natural gas in Europe is highly unlikely in the near future.

Turkmenistan

Considered by Russia to be part of its "near abroad," Turkmenistan is a country rich in natural-gas reserves. Historically, Russia has been the primary export market and transit country for this resource, but in the past two decades, the centrally located Turkmenistan has been exploring a variety of options for its natural gas in addition to its already flourishing trade to China. Turkmenistan is also benefitting greatly from Iran's frequent inability to produce enough natural gas, not only for export but also to meet domestic demand [Table 5]. According to the EIA, 30 percent of Turkmenistan's total natural-gas exports go to Iran.⁷⁴ Given Turkmenistan's large reserves, growing client base and history of disputes with Tehran over prices, it is unlikely that the country will become an export market for Iran. Under the current sanctions regime, Iran may actually become increasingly dependent on Turkmen natural gas, particularly when winter demand in Iran surpasses domestic production.⁷⁵

UNCONVENTIONAL NATURAL GAS

In the past five years, significant technological advances have allowed for "unconventional" natural-gas reserves such as shale gas and coal-bed methane to be not only technically recoverable but also recoverable in a safe and cost-effective manner. The revolutionary nature of these technological advances is creating dynamic conditions for governments and energy agencies attempting to quantify actual amounts of recoverable natural gas, as a recent EIA report on shale gas observed:

Although the shale resource estimates presented in this report will likely change over time as additional information becomes available, it is evident that shale resources that were until recently not included in technically recoverable resources constitute a substantial share of overall global technically recoverable ... natural-gas resources. The shale gas resources assessed in this report, combined with EIA's prior estimate of U.S. shale gas resources, add approximately 47 percent to the 15,583 trillion cubic feet [465 tcm] of proved and unproven non-shale technically recoverable natural-gas resources. Globally, 32 percent of the total estimated natural-gas resources are in shale formations.... ⁷⁶

As the last sentence suggests, however, what is clear is that global shale-gas resources are increasing, as are cost-effective technological means to recover them. To be sure, between 2011 and 2013, the EIA had to revise upward its estimates of global reserves of technically recoverable natural-gas resources by a substantial 10 percent.⁷⁷ To put the shale gas "revolution" into perspective, Barclays and RBC have predicted that "the U.S. and Canada together may add as much as 77 million tons of [natural gas] capacity by 2020, an amount equal to the entire output of Qatar, the world's biggest producer."⁷⁸

The growth in unconventional natural-gas production is negatively affecting Iran's potential as a major gas exporter in two ways. First, the glut of natural gas in the market from the new sources is lowering prices and forcing gas producers in the Middle East and Eurasia to adjust their expectations during negotiations. "Iran's ambition to exploit the world's biggest natural-gas reserves," a recent study observes, "stymied for years by U.S. sanctions, faces an even sterner test as rising global output and the North American shale boom threaten to erode prices."⁷⁹ According to Barclay's Shiyan Wang, the lower prices will "[enable] North American producers to supply Asia for as little as $11 per million British thermal units by 2015, compared with long-term contracts linked to crude that are now at about $17 per million Btu."⁸⁰ Spot prices for LNG in Asia have also been dropping. As will be seen below, Iran has struggled in price negotiations with many of its potential clients, and the dropping prices will only put more strain on Tehran's ability to successfully negotiate deals for its natural gas.

China has some of the world's largest reserves of shale gas and coal-bed methane [Table 6] and has ambitious plans to extract them, as a recent report by EIA explains:

The Chinese government has outlined ambitious plans for boosting unconventional gas exploration and production. These call for coalbed methane production of more than 30 bcm and for shale gas production of 6.5 bcm in 2015; the targets for shale gas output in 2020 are between 60 and 100 bcm. They are accompanied by the goal to add 1 tcm of coalbed methane and 600 bcm of shale gas to proven reserves of unconventional gas by 2015. In support of this effort, China plans to complete a nationwide assessment of shale gas resources and build nineteen exploration and development bases in the Sichuan Basin in the next four years. Efforts are also supported by the international partnerships that Chinese companies have formed in North America to develop shale gas acreage, which will provide valuable development experience.⁸¹

The potential influence and power of the gas "troika" is quickly being eroded by developments in unconventional natural-gas discoveries and technological advances. Only eight years ago, Iran and Qatar appeared to be on the verge of a monopoly on the Asian natural-gas market, similar to what Russia had achieved in much of Europe. Today, there are far more players with market shares; and with the spectacular growth of the LNG trade, players like Australia and the United States are able to supply distant markets as the natural-gas industry becomes global in scope.

Iran uses more natural gas than it produces for both domestic demand and export, thus its status as a net importer from Turkmenistan. Since Tehran has a policy of subsidizing fuel for domestic consumption, natural gas is sold at reduced prices. Thus, there is strong opposition in Iran to export more, as the supply for domestic consumption would drop, driving up prices.⁸² Until Iran can produce enough natural gas to outpace domestic consumption, exports and price negotiations will be challenging. If China is able to develop its vast unconventional natural gas, and if gas pricing remains as it is and not globally integrated, prices in Asia will be driven down, forcing countries like Iran to lower theirs. For Iran, which has historically had very little success bargaining with potential clients over pricing — India is a case in point — lower prices will create an even more difficult negotiating environment.

THE GROWTH OF LNG TRADE

LNG, as its name suggests, is created by a process in which natural gas is made into a liquid for the purpose of storage or transport. Liquefying natural gas is rapidly changing the nature of the market and trade. Roman Kupchansky observes that it represents "a historical shift away from overland pipeline deliveries of gas and gradually towards liquefied natural gas (LNG), shipped by seaborne tankers designed to supply distant markets which cannot otherwise be supplied by traditional pipelines."⁸³ In the 1970s, LNG accounted for only 3 bcm of global trade of natural gas.⁸⁴ In 2011, 331 bcm of LNG were traded, a market share that is now close to one-third of the natural-gas trade (31.7 percent).⁸⁵

Under better political circumstances, with its vast offshore reserves and onshore reserves that are only miles away from ports, Iran is poised to benefit from the expanding LNG market. Indeed, a 2012 report by BP observed that LNG exports in 2012 to Europe fell by 28 percent but increased to Asia by 22.8 percent. Qatar, which shares vast natural-gas fields with Iran, grew their LNG exports by 4.4 percent as a result of the increased demand in Asia. U.S. and EU sanctions have hindered Iran from obtaining the financing and technology necessary to build liquefaction facilities, despite interest on the part of potential clients such as India. In 2005, for example, the Gas Authority of India Limited (GAIL) signed a Memorandum of Cooperation (MOC) with National Iran Gas Exports Corporation (NIGEC) for "gas sector cooperation" and a "Sales Purchase Agreement" to import 2 million metric tons per annum (mmtpa) of LNG from Iran. In November 2008, however, pricing conflicts ended this agreement and put the future of the MOC in question.⁸⁶ In addition to pricing problems, companies like Royal Dutch Shell have pulled out of their partnership with GAIL to build port facilities to import LNG.⁸⁷ In time, unless Iran is able to construct the necessary liquefaction infrastructure, advances in the production and trade of LNG will diversify import opportunities for markets like Pakistan, India and China at the expense of Iran. Between 2007 and 2012, China constructed five LNG terminals. As of April 2013, four more were under construction with another six proposed. Expansion plans have also been announced for the existing terminals. Suppliers for all of the proposed terminals have not been determined, but Australian, American and Qatari sources will likely supply at least half.⁸⁸ Indeed, Australia is set to pass Qatar as the world's leading supplier of LNG.⁸⁹

At the time of writing, Iran has had progress only on Tombak, a 10.5 million-ton-a-year liquefaction facility near the Gulf port of Assaluyeh. According to Mehr News Agency, the government is working alone on the $3.3 billion project, which was originally intended to be built with a Chinese partner.⁹⁰ Therefore, as the EIA observes, "Given the political constraints, Iran's LNG projects are years away," causing delays and cancelations of ambitious LNG projects.⁹¹ Some analysts have suggested that it will take Iran at least a decade to build the necessary infrastructure to achieve its planned 40 mmtpa export capacity.⁹² Thus, Iran may have what Asia wants, but without the facilities to produce LNG or the means to export it, Tehran is unable to capitalize by securing a market share. Perhaps most important, it appears that Asian demand can, at least in the short to medium run, be met by other LNG producers such as Qatar, Australia and Indonesia.

THE PROBLEM OF SANCTIONS

In May 2013, the director-general of the IAEA, Yukiya Amano, reported that "as Iran is not providing the necessary cooperation, including by not implementing its Additional Protocol, the Agency is unable to provide credible assurance about the absence of undeclared nuclear material and activities in Iran, and therefore to conclude that all nuclear material in Iran is in peaceful activities."⁹³ With the support of its allies in the EU as well as Canada, Australia, Norway, Switzerland, South Korea and Japan, among others, the United States imposed stronger sanctions through the "Iran Freedom and Counter-Proliferation Act" (IFCA), as outlined in the previously signed National Defense Authorization Act.⁹⁴ Despite the recent agreement between the P5+1 and Iran, sanctions continue to target Iran's oil exports, in the most ambitious and bold attempt by the international community to pressure the regime into compliance through economic pressure. To be sure, Iran's importance as a major oil exporter — particularly to some of the world's fastest-growing economies in Asia — has made it a high-stakes gamble for the United States, the EU and the UNSC.

Using sanctions as a strategy to have Iran follow its international obligations has always been controversial. Ray Takeyh and Suzanne Maloney, for example, believe that sanctions serve to bolster the regime's "siege mentality," which actually strengthens its intransigence and resolve.⁹⁵ For Takeyh and Maloney, then, economic sanctions are "a tool whose efficacy progressively declines."⁹⁶ Takeyh and Maloney are correct in identifying the historical lack of unity in the international community with respect to sanctions, as well as the resentment of some Western businesses over losing lucrative opportunities to the Chinese. They are also justified in questioning whether sanctions will achieve their desired goal — as Vali Nasr has also done recently.⁹⁷ But they seem to exaggerate the overall impact on the success of sanctions of the lack of unity in the international community over the last few years. The effects of the latest round of sanctions have been as impressive as they have been audacious. While not all of Iran's trading partners are abiding by the sanctions, there has been a high degree of unity among many of its allies that rely on Iranian oil, particularly in Asia. The gamble, it seems, is paying off. "The U.S. and European sanctions have deeply affected Iran's international oil trade," one analyst observes, "reducing its exports by more than 50 percent and costing Iran billions of dollars in revenue since the beginning of [2012]."⁹⁸ Indeed, even before the Obama administration's new executive order on June 3, 2013, Iran's exports had fallen to 700,000 barrels per day (bpd), down from 2.2 million bpd in early 2012.⁹⁹

The sanctions have slowed the progress of Iran's natural-gas industry in at least two ways. First, with less revenue from oil, Iran has less ability to develop its massive offshore reserves. The economic pressure exerted on Tehran's total revenues as a result of successful sanctions on its oil exports is creating a revenue deficit that cannot be filled by natural-gas deals with Asian nations, at least not in the short run.¹⁰⁰ According to an October 2012 EIA report,

Iran's natural-gas exports during the period July 2011-June 2012 were approximately $10.5 million per day, or about 5 percent of the estimated $231 million per day in revenues from crude oil and condensates exports over the same period. In 2010, natural-gas exports accounted for less than 4 percent of Iran's total export earnings while crude oil and condensates accounted for over 78 percent.¹⁰¹

And while sanctions have not been entirely successful in curbing international investment in Iran's natural-gas industry, they have certainly made such investment challenging and risky for companies wishing to sign agreements. Even for Pakistan, which is most in need of Iran's natural gas, sanctions are clearly discouraging potential investors such as Gazprom, BP and ICBC. Islamabad, by constructing the IP pipeline, not only runs the risk of the penalties of international sanctions, it also would lose the lucrative U.S. support of energy projects such as power plants at Tarbela and power dams at Mangla, Satpara and Gomal Zam, and billions of dollars in U.S. aid.¹⁰² Therefore, there is still strong evidence that U.S. and EU companies are unlikely to get involved in developing Iran's gas fields.¹⁰³ And while other non-U.S. and non-European companies like China National Petroleum Company (CNPC) and Petroleos de Venezuela SA (PDVSA) are still active in Iran, progress is slow as a result of the lack of international effort and financing that would allow Iran to reach its potential as a major gas exporter.

CONCLUSION

Development of Iran's natural-gas fields has been hampered by lack of foreign investment and insufficient international financing. Production, while ranked fourth in the world, is primarily for domestic consumption, as Iran accounts for only 1 percent of global natural-gas exports. The country continues to be a net importer of natural gas. As China builds 10 more liquefaction plants to add to its existing five, Iran can only claim one, despite the rapid expansion of the LNG trade. With the exception of a few pipelines to Turkey, Armenia and Azerbaijan, no pipeline infrastructure currently exists outside Iran to transport gas from its natural-gas fields. There are numerous plans for pipelines to growing Asian markets, but realistically they are, even in a best-case scenario for Tehran, likely between five and ten years away under the current sanctions regime. Western companies such as BP, Shell and Total have scaled back their involvement in developing Iran's vast natural-gas fields, while state-owned companies such as Gazprom, OVL and SinoPec have signed deals with Tehran but have been slow to make progress or have pulled out altogether. Recent announcements by Pakistan and India suggesting that they are eager to import Iran's natural gas are to be expected, as they must make efforts to keep all options on the table in the event of a breakthrough between Iran and the West. There can be no question that many countries are eager to help develop and import Iranian natural gas, but until a more favorable investment environment exists with respect to Iran, nations like Pakistan, India and China will continue to import energy from other nations with more favorable trade environments. Indeed, announcements such as those by India's External Affairs Minister Khurshid have been common over the past decade, yet have not amounted to anything tangible in the way of progress towards energy deals for Iran.

The observation by Flynt Leverett and Hillary Mann Leverett that Iran "has the potential to emerge in coming years as a regional economic superpower" is quite right, but only under different economic and political circumstances. Iran is blessed with a central location, a large young population and abundant energy resources. The path to this status, however, is not a fait accompli, nor is it inevitable. In the end, many of the countries that have been involved in discussions with Iran — with perhaps the exception of Pakistan — may want to buy Iran's natural gas, but they do not necessarily need it. Sanctions are indeed taking their toll on Tehran's ability to produce and export natural gas, but there are other factors working against Iran that have little to do with the sanctions regime. Advances in technology that are allowing for safe and cost-effective extraction of natural gas from the ground, the rapid expansion of the global LNG trade, declining demand in Europe, and rapidly expanding production of natural gas in North America and South Asia are ensuring that adequate supplies exist. This cuts into Iran's potential share of the market. What is more, ongoing pricing disagreements between Tehran and would-be clients are also affecting Iran's ability to reach its potential. To be sure, there are very few, if any, signs that suggest that the world's two fastest-growing economies — China and India — are prepared to do an about-face to the U.S.-led sanctions for Iranian energy, thus allowing Tehran to counter the overall economic and political impact of the U.S. and EU sanctions. While it is possible to question the ability of sanctions to ultimately achieve the desired outcome in Iran — a change in direction away from support for declared terrorist groups like Hezbollah and Hamas and their potential nuclear-weapons program — it is unlikely that Asia will, in the near future, turn its back on the United States and its allies for energy. The once "regional" natural-gas market is quickly becoming global, thus putting Iran at a disadvantage and making its case as a logical supplier of natural gas to neighbors less convincing. Extensive development of its natural-gas industry would push Iran towards becoming a regional economic superpower, but such development will only be accomplished under very different economic and political conditions.