Energetic Intervention

By Emanuele Ottolenghi
Published in Ha’aretz

The story broke in late July that the German company SPG (Steiner-Prematechnik-Gastec) had signed a 100-million euro deal with Iran to build three plants for compressed natural gas (CNG) production.

There are three lessons to be learned from this tale: First, European technology remains indispensable for Iran, if it is to be able to exploit its energy reserves and become a regional superpower. Second, if economic sanctions against Iran were to include exports, investments and joint ventures in the energy field, it could have severe repercussions for Tehran. Finally, tougher sanctions against Iran are the only non-military way to pressure Tehran to renounce its nuclear ambitions.

Today, Iran is feeling some heat due to a squeeze on its banking sector, a politically generated credit crunch and other restrictions against key regime officials. Political uncertainty and the unhealthy business environment have further discouraged foreign investment – with some oil giants having second thoughts about their Iran ventures. But UN-backed sanctions have crucially failed to target Iran’s lucrative energy sector, and with Europe keen to reduce its dependence on Russian oil and gas, big energy interests may ignore the political side effects of their involvement in Iran.

It is almost a cliche that Europe needs Iran’s energy supplies. Among the top 10 countries importing Iranian oil are Italy, France and Greece. And its largely untapped natural gas reserves are a potential bonanza for European energy companies. But Iran needs Europe, too, being almost completely dependent on its technology and skills for the development of those same gas and oil riches. In the field of gas extraction, and export in particular, Iran would forever sit on an inaccessible treasure, were it not for European know-how – an expertise that Russia and China cannot currently match or replace. Hence, it is in the energy field, particularly natural gas, where European sanctions can make a difference, and squeeze Iran’s regime where it hurts most. The SPG deal illustrates this very clearly.

Iran possesses the second-largest known reserves of natural gas in the world (after Russia) – 26.4 trillion cubic meters, according to 2006 official estimates. Lack of suitably advanced extraction technology and the challenges posed by natural gas exports to faraway countries have so far meant that 62 percent of its reserves are not being exploited. Plans to develop three liquefaction plants are way behind schedule. Of those fields that are being exploited, 65 percent produce gas that goes mostly to domestic consumption, while 18 percent is re-injected into oil fields to maximize extraction and the remaining 17 percent is lost. Given the above, the potential for development and profit is immense.

At the same time, Iran, an emerging economy whose population has nearly doubled in three decades, is still importing refined petroleum. Currently, it produces about 10.5 million gallons of gasoline a day but consumes 18.5 million – a whopping 43 percent of its consumption is imported. Iran rightly fears sanctions in this sector – and Western powers are seriously pondering the option – so to shield itself from pressure, it has adopted a three-part strategy: to expand refining capacity by building new refineries and upgrading existing ones; to guarantee imports of refined fuels from friendly countries like Venezuela and Indonesia, even by subsidizing new refineries there; and to introduce measures aimed at reducing consumption – including gasoline rationing, price controls and conversion of all of the country’s cars from gasoline and diesel to CNG – the kind of fuel SPG is going to help produce.

According to a study by Gal Luft, director of the Institute for the Analysis of Global Security, car conversion involves four phases: Convert existing cars to CNG within five years – 1.2 million cars per year, starting with 600,000 government vehicles; withdraw older cars (approximately 1.2 million) by 2010; produce new CNG-run cars (Iran is the leading car manufacturer in the Middle East); and make the country’s 10,000 existing gas stations CNG-enabled within five years.

By 2015, the plan is for most cars in Iran to run on natural gas – clean, environmentally friendly and locally produced. This would offer incredible long-term benefits. Iran’s dependency on imported fuel would be a thing of the past, a top political and economic priority for the regime. Additionally, such a move would free almost half a million barrels of oil a day for export – at current prices, that would mean more than $17 billion a year of additional revenue. And it could not happen without SPG’s planned plants.

Iran’s energy sector is like a dog biting its tail. Lack of modernization makes increase of production impossible; delays in both the construction of new refineries and the upgrading of existing ones, as well as the lack of development and exploitation of gas fields, all keep Iran dependent on imports. As long as Iran has to do it alone and lacks the technology, it will be vulnerable to external pressure – and as long as the best technology for these ventures comes from European companies like SPG, Europe is in a position to squeeze Tehran by denying it access to those lucrative deals that will ultimately make Iran achieve its goals and become the regional superpower it aspires to be.

What are we waiting for?

© 2007 Transatlantic Institute – www.transatlanticinstitute.org