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Russia: Investment In Iranian Energy Falling

Despite vows of continuing cooperation between Moscow and Tehran, there are signs that Russian investment in one of Iran's most important energy projects has fallen by the wayside. RFE/RL correspondent Michael Lelyveld files this report.

Washington, 17 January 2000 (RFE/RL) -- More than two years after Iran included Gazprom in one of its most important energy projects, there are few signs that the Russian gas giant has lived up to its part of the deal.

In a series of official Iranian reports in the past week on trade and cooperation with Russia, there has been little mention of Gazprom's role in developing Iran's South Pars gas field.

References to the South Pars project were notably absent from reported meetings in Moscow of the Iranian vice speaker of parliament, Hassan Rowhani, with Russian Foreign Minister Igor Ivanov and other top officials. The reports by the official news agency IRNA included long lists of the fields of bilateral cooperation, but they failed to include the $2 billion South Pars contract, in which Gazprom holds a 30 percent share.

The omission appears to be the latest sign that cash-strapped Gazprom has not followed through on one of the biggest bilateral commitments between Russia and Iran in recent years.

Analysts have long suspected that Gazprom would not come up with its share of investment in South Pars, one of the largest gas fields in the world. Iran included the Russian company when it signed the contract for South Pars with Total of France and Malaysia's Petronas in September 1997.

Now, Iran is relying on South Pars to provide gas for its growing internal needs at a time when it has also promised exports to Turkey. But Russia is also Iran's biggest competitor for the Turkish market and is seen as unlikely to help.

"Gazprom's insertion in South Pars was a huge mistake," said Julia Nanay, director of the Petroleum Finance Company in Washington. "They don't want Iran to succeed, certainly not with exports to Turkey."

Earlier this week, an official of Iran's South Pars Oil and Gas Company announced that it has lowered the cost of investment in the deal from $2 billion to $1.6 billion. But it is not clear whether the cut represents real savings on the project or a shortfall due to Gazprom's lack of participation.

Iran is responsible for the first stage of developing the offshore South Pars field in the Persian Gulf, while the consortium of Total (now Totalfina), Petronas and Gazprom are supposed to conduct the second and third stages. But both projects are running behind schedule. Iran estimates that the first phase is 20 percent behind, while the second and third phases are 3 to 4 percent behind schedule.

But the estimates may be conservative. The second and third stages are said to be 15 percent complete and due to be operational in October 2001. The two phases are expected to produce over 20 billion cubic meters of gas per year in addition to condensates. The output is strategic to Iran's economy and export plans.

Last month, Oil Minister Bijan Namdar Zanganeh stated that Iran's annual gas production is 80 billion cubic meters while its domestic consumption is 57 billion. But he also said that Iran is seeking the capacity to use 73 billion cubic meters for gas injection to pressurize its aging oilfields. Zanganeh's production estimate may also be high.

On Wednesday, Hamdollah Mohammad-Nejad, head of the National Iranian Gas Company, said that Iran had reached a record daily output of 200 million cubic meters per day, or only 73 billion cubic meters per year. Domestic energy use is also rising at 10 to 12 percent a year, he said.

Meanwhile, Gazprom's ability to invest in South Pars appears to be seriously impaired. Last week, a senior Gazprom official said that domestic gas customers are paying only 18 to 20 percent of their bills in cash. Gazprom's investments are focused on maintaining production and transportation volumes, he said. In recent months, there have been complaints of gas shortages at Russian power plants. Russian gas output is believed to have fallen 2.5 percent last year.

The wisdom of including Gazprom in the South Pars deal has long been in doubt. When the contract was announced in 1997, analysts explained the move as Iran's attempt to defend itself against the threat of U.S. penalties under the 1996 Iran-Libya Sanctions Act. By spreading the risk among several countries, including Russia, Iran hoped to avoid the sanctions for foreign investment in its petroleum projects. President Clinton waived the sanctions against the project in 1998.

But the inclusion of Gazprom may have proved to be more of a hindrance than a help to Iran. Gazprom has higher priorities for its foreign investment, including the Blue Stream project to pipe gas to Turkey across the Black Sea. In addition, Gazprom has been increasing pipeline capacity in Ukraine and Bulgaria to sell more gas to Turkey. Both routes compete directly with Iran's plans to sell gas to Ankara.

It is not surprising that cooperation with Gazprom has fallen so low on the list of bilateral accomplishments. Giving a competitor a role in developing a crucial project may have been a useful short-term political move for Iran, but it can hardly serve its interests in the long run.