Bijan Khajehpour Istanbul June 2009

1. Iran’s Strategic Considerations in Assessing the Nabucco Project Bijan Khajehpour Istanbul June 2009

2. Objectives • Review current data and realities in Iran’s gas sector; • Offer some information on gas-related projects and existing and/or planned pipeline infrastructure; • Review key positions inside Iran with regard to gas exports, especially the Nabucco project • Discuss strategic factors influencing the potential of Iranian gas exports to Europe.

4. Iran’s Oil and Gas Balance Sheet Grand Total Reserves: 315 BBOE R/P Ratio: 122 years

5. Iran’s Gas Data

6. Iran’s Gas Development Plans • Iran has developed its gas resources aggressively and it also has ambitious plans, i.e. an investment volume of $45 billion by 2020; • The gas is planned to be used as follows: • Injection into oil fields; • Maximizing domestic use of gas within the energy basket; • Utilization in petrochemicals and other gas-based industries including gas-to-petroleum products; • Export of gas through pipelines and LNG; Investments needed in Iran’s energy sector 2005-2020

7. Critiques of the Current Plans • The current gas picture has a number of critiques from different corners: • Many criticize NIOC for lacking a comprehensive gas strategy (both on development side but also on utilization side); • Some argue that Iran’s reserves are inflated and that Iran should be careful with the rapid consumption of its resources; • Others say that it is a big mistake to export gas through pipelines and that Iran should use its gas to develop gas-based industries inside Iran; (central argument: exporting gas is like exporting development!); • A fourth group contend that Iran’s decisions in the oil and gas sector are usually politically motivated and not technically driven;

8. Accumulated Gas Requirements • If all Iranian plans including gas exports materialize in the 25 year period up to 2030, then the accumulated gas use would be: • This is only 37% of the total present estimate of the country’s gas reserves - so, if the reserve figures are correct, Iran should be fine with all these plans; • The main reason for current doubts about exports has been under-performance in the domestic gas sector due to lack of investments rather than lack of resources!

9. Gas Sector: Priorities and Issues Issues: • Domestic pressure against export plans, especially due to implementation delays in domestic gas projects; • High domestic consumption due to cheap energy prices • Often results in power outages in summers • Supply runs short in winters, interrupting exports • Lack of feed for upcoming petrochemical and power projects; Priorities: • Development • Main focus on South Pars; • Feeding the domestic consumption and increasing the share of gas in the domestic basket; • Injection • Depletion remains a main concern; • Gas-based Industries; • Exports to immediate neighbors (strategic); • Further exports;

10. Iran’s Strategic Considerations in the region • Over the past decade, Iran’s main emphasis in proposing pipeline routes, has been an extension of Iran’s regional strategy; • Iran has viewed pipelines and closer cooperation among regional players as a strategic element in regional relations (economic cooperation as an element in easing regional tensions); • Natural gas is increasingly becoming Iran’s main focus in hydrocarbon development, partly due to South Pars being shared with Qatar; • Energy and Pipeline politics have been an important parameter in Iran’s external relations (look at Iran’s deals with China and India), though it has been overshadowed by the recent stand-off regarding nuclear technology;

11. Is there a Strategic Shift? • However, Iranian officials realize that there are many burdens in the way of pipelines (not the least pressure from the US and geopolitical irritations). • As Iran needs to develop a strategy for its excess gas, there seems to be a shift towards focusing on the development of Gas-intensive Industries. Key parameters in this strategy would be: • Creation of a number of special zones for the development of gas-intensive industries (eg. the Jask Region at the Sea of Oman); • Potential Industries: Petrochemicals; Cement, Aluminum, Steel etc. • Investors are encouraged to look at potential of integrated projects; • Prices and rates of return will vary depending on industrial sector; • Apart from designating a region, no other steps have been taken in this direction and there is still no contractual framework for such agreements; • There is a bill in the Majles that would address the gas pricing issues; • The development of gas-based industries does not mean an end to the planned pipeline projects including Nabucco, but one needs to address Iranian concerns;

12. Factor’s Influencing Iran’s Role in International Projects • Geopolitical Factors: • Concerns over political instability in the region, especially in the light of failed US interventions in Iraq and Afghanistan; • Iran could potentially be the key anchor of stability, but developments in Iraq as well as in Israeli-Palestinian conflict are uncertain; • Iran-US relations remain a key irritant to long-term development plans; • Commercial Factors: • Uncertainties relating to Iran’s gas pricing mechanisms; • Security of supply as well as security of demand; • Legal uncertainties connected to the investment regime in Iran as well as cross-border issues;

13. Specific Iranian Concerns • Uncertainty about the future of Iran-EU relations due to the current hiccups emerging from the nuclear stand-off; • A desire in Iran, not to compete with Russian interests in Europe in order not to undermine the good relations between the two countries; • Concern about an over-reliance on Turkey as a transit country; • Alignment of the proposed pipeline with Iran’s long-term objectives;

14. Iranian Reactions to Nabucco • So far, the Nabucco project has not managed to attract high-level Iranian confidence in the project; • Iran has responded by proposing its own Persian Pipeline (a gas pipeline to Europe) which at this stage is merely a planned pipeline to the Turkish-Iranian border (see IGAT 9 – the blue pipeline on the next page); • Iran is also engaging other scenarios, i.e. through negotiations with Greece to look at entering the European grid from the south of Europe; • Iran has even looked at a route that would go through Iraq, Syria and the Mediterranean • For now, Iran wants to keep its options open; • Iranian officials have said on the record that they would consider Nabucco, if the project invited Iranian participation;

15. Jask Special Zone for Gas-based Industries

16. Prospects • Nabucco needs to address all different mindsets in the Iranian political structure by addressing issues such as transfer of technology, job creation, demand security etc.; • Iran’s geo-strategic considerations will be a key irritant for some time (especially the desire not to compete with Russia), therefore, the inclusion of a Russian player may address this parameter; • The project should also include an Iranian partner for all stages rather than just being the contractual party of a sales agreement – it could potentially include some pipeline construction inside Iran as well; • Iranian attitudes towards the project will be shaped by the overall political and geo-strategic developments – an opening in Iran-US relations as well as improvement in Iran-EU ties would change the dynamics dramatically; • At the heart of the matter remain two core items, i.e. maximization of the use of Iran’s gas resources as well as the Iranian desire to maintain a strategic significance as a future oil and gas exporter to world markets;