Russ Oil-Gas

06–20–2006 MOSCOW. (Dr. Igor Tomberg for RIA Novosti) -"Gazprom is ready to support the construction of a gas pipeline from Iran to Pakistan and India with financial resources and technology. This project will definitely pay off and is quite feasible," said Russian President Vladimir Putin in Shanghai on June 15, clearing the way for serious changes to the Eurasian gas market. First proposed by Iran in 1996, the projected pipeline is estimated to have a cost of $7 billion and will be 2,775 km long. Construction is to be completed in 2009, and starting in 2010 India and Pakistan are set to receive 35 billion cu m of gas annually, and in 2015, as much as 70 billion cu m. The project was developed by Gazexport, Gazprom's export arm, and now it has been transferred to the gas monopoly's foreign economic relations department. From an economic point of view, the pipeline is absolutely necessary. The project is very lucrative for India because the route will be rather cheap. According to Iranian sources, it will allow India to save $300 million annually. Pakistan also needs the pipeline because it will not only receive natural gas (Islamabad will sorely need gas imports by 2010) but will also be paid as much as $500-600 million for gas transit. Given China's growing energy demand, there are plans to continue the pipeline to the Chinese province of Yunnan. Pakistani President Pervez Musharraf made this proposal at a meeting with businessmen from member states of the Shanghai Cooperation Organization. The project's political risks have recently been significantly reduced. For a long time, the Indian authorities refused to participate for fear that Pakistan would not be able to guarantee the pipeline's safety. In June 2005, during Indian Petroleum Minister Mani Shankar Aiyar's visit to Pakistan, Musharraf said that "Islamabad guarantees the safety of the pipeline and wants to launch its construction next year." Iran's proven gas reserves are estimated at about 28 trillion cu m, while its gas output grows by 10% every year. At present, almost all of it is sold to the domestic market: about 100 billion cu m is supplied to commercial consumers (out of which 35 billion cu m goes to power plants) and 40 billion cu m is pumped into oil beds to maintain the well flow rate. Iran has over 22,000 km of gas pipelines. Its export capacity is growing quickly, which makes it a potentially powerful rival of Russia. It is no coincidence that many of Europe's plans to diversify its gas supply involve Iran. In this context, Gazprom's participation in the Iran-Pakistan-India pipeline can be viewed as a successful move in the competitive struggle for the European market: The new pipeline will direct the bulk of Iranian resources to Asia and therefore at least postpone their appearance in Europe. In the geo-economic context, the gas initiative voiced by Tehran in Shanghai is of extreme importance. At a meeting with Putin, President Mahmoud Ahmadinejad proposed to jointly determine gas prices and the main routes of gas pipelines. Experts believe that Russian-Iranian rapprochement in the gas sphere will create the conditions for an influential international organization of gas producers along the lines of OPEC. The merging of the Russian and Iranian gas transportation networks will allow Gazprom to take part in managing almost the entire Asian gas pipeline network. Gazprom's role will be increased even further because Turkmenistan is seriously considering joining the system (through the Turkmenistan-Iran pipeline), which will bring in Central Asia. This will create a gas market uniting Turkmenistan, Iran, Pakistan, India and China. Tehran's initiative means that the Islamic Republic, which controls the world's second-largest gas reserves after Russia, does not intend to compete with Moscow too toughly in the gas sphere. Moreover, Iran is proposing that the two share a coordinated strategy on the global gas market, including a coordinated price and transportation policy. In this case, the Russian-Iranian gas alliance could control 75.5 trillion cu m of gas, or 43% of the world's proven reserves, and therefore set major parameters for the development of the Eurasian and global markets in the long term. However, it is unlikely that a cartel will officially be formed any time soon. The Russian President dismissed this idea in Shanghai by saying, "OPEC is a cartel, but we will have a joint venture." Apparently, such an initiative could tarnish Russia's image as the host of the G8 summit as well as its claim to be the guarantor of international energy security. It is also important to bear in mind Russia's bilateral agreements with existing and potential gas producers - Algeria, Libya and Iran. They have the potential to put in place an efficient mechanism to regulate the piped gas market in producers' interests. So Gazprom's participation in the Iran-Pakistan-India pipeline project will be doubly beneficial for Russia: The potential rival - Iran - will direct its resources eastwards, seriously reducing Europe's chances of diversifying its gas supply. Simultaneously, Russia will gain new leverage on gas distribution in Eurasia, implementing its own strategy of diversifying sales. This is a very good geopolitical move ahead of the G8 summit in St. Petersburg. Dr. Igor Tomberg, senior researcher at the Center for Energy Studies, the Institute of World Economy and International Relations, the Russian Academy of Sciences.