Blog Post

Iran: a new natural gas supplier for Europe?

The Iranian nuclear deal reached in July can potentially reshape the Iranian economy in general and its energy sector in particular. On the basis of this historical step, many voices suggested that Iran might (or should) become a new gas supplier to Europe. We suggest that there are important impediments to significant commercial gas flows from Iran to the EU in the foreseeable future. We argue, however, that cooperation on a limited pilot project could have strategic value.

By: and Date: October 5, 2015 Topic: Energy & Climate

Financial TimesThis blog post was originally published in the Financial Times blog beyondbrics.

With its 34 trillion cubic metres of natural gas reserves, a level sufficient to satisfy current EU natural gas demand for 90 years, Iran has the highest reserves in the world. Despite this rich natural endowment, the country has not yet translated potential into reality. Paradoxically, its natural gas production continues to be barely sufficient to satisfy its domestic consumption.

There are two reasons for the under-exploitation of Iran’s natural gas resources: the international sanctions regime (that has targeted the country’s energy sector since 2007, completely halting the activities of international energy companies) and the country’s legal petroleum framework (the so-called ‘buyback scheme’, encumbered by very unattractive terms for international energy companies).

Since the election of Hassan Rouhani as president of Iran in 2013, a new political phase has begun, leading to the long-awaited July 2015 nuclear deal that foresees lifting most of the international sanctions in exchange for limits on Iran’s nuclear programmes. This is a historical step that could reshape the Iranian economy in general and its energy sector in particular.

In parallel to the negotiations on the nuclear issue, the Iranian government has been working on the reform of its legal petroleum framework since 2013, mainly following the model adopted in Iraq, with the aim of making it more attractive to international energy companies. After several delays, mainly due to the bumpy evolution of the nuclear talks, the new Iran Petroleum Contract will finally be launched in Tehran between October and November 2015.

Taking into consideration these new positive developments, many voices in Europe, including the European Commission (EC), have suggested that Iran could become a major natural gas supplier to the EU. Such a prospect would, theoretically, perfectly fit into the EU’s renewed quest for natural gas supply diversification launched in the aftermath of the 2014 Ukraine crisis. However, a closer look at the short- and long-term outlooks of the Iranian natural gas industry provides a less encouraging view about the prospect of Iran becoming a major natural gas supplier to Europe.

In the short term, the Iranian natural gas industry will most likely focus on the domestic market, and on limited amounts of regional exports. In the aftermath of the nuclear deal, Iran is set to concentrate its energy strategy on the development of the oil sector. In this framework, more natural gas might be utilized for reinjection into oil fields in order to sustain growing oil production and exports. In parallel to this, Iran will try to use its natural gas resources to improve the competitiveness of its economy, through a larger share of power generation based on cheap natural gas, and through further investments in natural gas-fuelled vehicles, in a move to reduce the domestic consumption of oil, which could thus be freed-up for additional exports.

Under these circumstances, it is difficult to expect new major volumes of natural gas exports from Iran in the short-term, apart from the 10 billion cubic metres per year (bcm/y) that in 2014 Iran agreed to export to Oman for a period of 25 years starting in 2017. On the basis of this deal, currently being implemented, part of the natural gas will serve the Omani market, while another part will be processed into liquefied natural gas (LNG) by Oman LNG under a tolling agreement, allowing the first appearance in the international market of what would actually be ‘Iranian LNG’.

As far as its longer-term natural gas export prospects are concerned, Iran will most likely look to Asia rather than to Europe. In recent years Iran has particularly focused on the advancement of the pipeline project with Pakistan. Iran has already completed the construction of its part of the infrastructure (connecting the major South Pars field with the Pakistani border), also because this allows natural gas to be supplied to its southern regions. However, Pakistan has not completed its share of construction, due to financial constraints and political difficulties in trading with Iran under sanctions.

The situation has quickly evolved along with the Iranian nuclear deal; in April 2015 China committed itself to the construction of a major part of the infrastructure (from the port of Gwadar to Nawabshah). With this agreement the fate of the pipeline has substantially changed, and the project could be considered a front-runner in Iran’s natural gas export strategy post-2020. A major benefit of this project is that the pipeline could easily be extended to India, as had initially been conceived in the 1990s. This is crucial in the long-term, as India’s natural gas import requirements will increase dramatically after 2030. In parallel to this pipeline project, Iran will seek to advance LNG at its major South Pars field. In recent decades several European and Asian energy companies have been engaged in these projects, but have ultimately had to withdraw due to international sanctions. For Iran LNG is crucial, as it provides flexibility to reach international markets (particularly in the East) without relying on pipelines that, considering the geopolitical instability of the region, might unexpectedly become unusable. So additional Iranian supplies will be mainly committed to other markets than Europe.

Iranian exports to Europe are not only constrained by limited spare natural gas, but also by an infrastructure gap. Apart from LNG (which would also mainly target Asian markets due to demand and pricing dynamics), Iranian natural gas could only reach Europe via Turkey. But this would require a significant expansion of the connections between Iran and Turkey and a new pipeline system to transport natural gas from Turkey to Europe. Iran would have to rely on Turkey for its natural gas supply to Europe. Making this happen would require a strong political and financial commitment from Iran – which for the time being seems to have different priorities. This is somewhat sensible provided the lack of natural gas demand in Europe; with demand back to the 1995 levels and few reasons for expecting a rebound, the European market hardly represents a commercially-attractive option for Iranian natural gas exports.

Iranian natural gas exports to the EU are no silver bullet. But, enabling an import route from Iran could have strategic value for Iran, Turkey and the EU. Resolving the commercial and geopolitical barriers around a limited pilot project could develop into a solid regional natural gas cooperation scheme. This would not only help to build mutual dependencies and trust – but also lay the basis for future natural gas export and import diversification, which might prove valuable in times of crisis.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article Download PDF More by this author

External Publication

A new strategy for EU-Turkey energy cooperation

Cooperation over energy and climate issues could be one of the components of the EU-Turkey Positive Agenda. Simone Tagliapietra proposes a new strategy for EU-Turkey energy cooperation, which envisions a shift of focus from gas and electricity to fields such as renewables and nuclear energy.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 5, 2018
Read article Download PDF More on this topic More by this author

External Publication

The impact of global decarbonisation policies and technological improvements on oil and gas producing countries in the Middle East and North Africa

Simone Tagliapietra contributed to the IEMED Mediterranean Yearbook 2018 with a chapter on the impact of decarbonisation policies on oil and gas producing countries in the MENA region.

By: Simone Tagliapietra Topic: Energy & Climate Date: October 3, 2018
Read article Download PDF More on this topic More by this author

External Publication

LNG and Nord Stream 2 in the context of uncertain gas import demand from the EU

Georg Zachmann sees the development of import demand for natural gas in the EU as uncertain. In case of strongly increasing import demand, both Nord Stream 2 and liquified natural gas imports could contribute to ensure European supply.

By: Georg Zachmann Topic: Energy & Climate Date: September 27, 2018
Read article More on this topic More by this author

Blog Post

Beyond Nord Stream 2: a look at Russia’s Turk Stream project

Since 2015, Nord Stream 2 has been at the centre of all European discussions concerning the EU-Russia relations. But as endless political discussions in Europe are being held on this pipeline project, the pipes of another similar Russian pipeline project – Turk Stream – are already being laid by Gazprom at the bottom of the Black Sea. This piece looks at these developments, analysing their strategic impacts on Europe.

By: Simone Tagliapietra Topic: Energy & Climate Date: July 4, 2018
Read article More on this topic More by this author

Blog Post

Ukraine: The struggle for reforms continues

The modernisation of the Ukrainian economy and state continues to develop at an unsatisfactory pace due to a lack of pro-reform political consensus. The two upcoming election campaigns in 2019 (presidential and parliamentary) make the reform process even slower and additionally put its effectiveness and sustainability under risk. The international community has a limited toolkit to overcome this stalemate.

By: Marek Dabrowski Topic: Global Economics & Governance Date: July 4, 2018
Read article

Blog Post

The Iran nuclear deal crisis: Lessons from the 1982 transatlantic dispute over the Siberian gas pipeline

A US president taking a unilateral decision that affects European interests; European policymakers outraged at US interference in their affairs; European businesses fearing losing access to some international markets – sound familiar? This is the story of a crisis that took place in 1982 regarding the Siberian gas pipeline project; its outcome should inspire optimism in the Europeans’ capacity to counteract Donald Trump’s decision to withdraw the US from the Iranian nuclear deal.

By: Emmanuel Mourlon-Druol and Angela Romano Topic: Energy & Climate, European Macroeconomics & Governance Date: May 23, 2018
Read article More on this topic More by this author


The clock is ticking: Ukraine’s last chance to prevent Nord Stream 2

Ukraine is running out of time to provide western gas consumers with the necessary trust to abandon the Nord Stream 2 gas pipeline project.

By: Georg Zachmann Topic: Energy & Climate Date: January 24, 2018
Read article More by this author


EU should pay member states to get rid of coal

The European Union should act to ensure the continued transformation of its energy system, and encourage member states to overcome their dependence on coal for supplying electricity. Helping coal-mining regions with the transition should require €150 million per year – a mere 0.1% of the total EU budget – and the EU would not even need to establish a new fund to support it.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: December 5, 2017
Read article Download PDF More by this author

Policy Brief

Beyond coal: facilitating the transition in Europe

Europe has a dirty energy secret: coal is producing a quarter of the electricity, but three-quarters of the emissions. The EU should propose that its member countries speedily phase out coal and put in place a scheme to guarantee the social welfare of coal miners who stand to lose their jobs, making a better use of the European Globalisation Adjustment Fund (EGF)

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: November 23, 2017
Read article More by this author

Blog Post

The impact of Brexit on the Irish energy system – pragmatism vs. principles

Brexit promises pain for Ireland that could be cut off from the EU internal market and be left exposed to market instability in the UK. Georg Zachmann assesses the scale of the possible damage for Ireland, and how the UK and EU might use the special energy relations on the Irish island to commit to a pragmatic solution.

By: Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance Date: November 21, 2017
Read article Download PDF More on this topic

Policy Contribution

A new strategy for European Union-Turkey energy cooperation

In a period of stress in the relationship between the European Union and Turkey, cooperation over energy could be a bright spot, because of strong mutual interests. Fields such as renewables, energy efficiency, nuclear energy and emissions trading could make a real impact on long-term energy, climate and environmental sustainability, and on overall macroeconomic and geopolitical stability.

By: Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Date: October 24, 2017
Read about event More on this topic

Past Event

Past Event

EU-Turkey energy and climate dialogues

This event is part of the joint Bruegel-IPC initiative European Neighbourhood Energy and Climate Dialogues. This is a closed door event, open only to Bruegel's members and a group of experts.

Speakers: Dirk Buschle, Ahmet Evin, Myriam Ferran, Philipp Godron, Daniel Grütjen, Sohbet Karbuz, Susanne Nies, Mehmet Oguctu, Megan Richards, John Roberts, Umit Sahin, Simone Tagliapietra and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: October 20, 2017
Load more posts