Will sanctions kill Iran’s natural gas dreams?

When the United Nations Security Council voted to impose its fourth round of sanctions on Iran in June, Iranian president Mahmoud Ahmadinejad — always a guy with a way with words — likened the resolution to a “used handkerchief,” incapable of having any real effect on the country. Two months later, and after the opening of Iran’s first nuclear power plant, Ahmadinejad’s vice president is maintaining that Iran “won’t bow to pressure” from the sanctions, thanks to the “self-determination of the Iranian nation.” 

Public defiance notwithstanding, Tehran’s leaders have reason to be genuinely worried — the sanctions are serious trouble for Iranian energy interests. With vast oil and gas reserves and ready buyers in the emerging world, energy was supposed to be the get-out-of-jail-free card for Iran, but it hasn’t exactly worked out that way. Earlier this month, the National Iranian Oil Company announced that it was suspending development on two major liquefied natural gas (LNG) projects. Officials from the company have cited costs and complexity, but the announcement should come as an implicit recognition that the sanctions have started to bite. It also makes Iranian officials’ onetime claims that the country would soon rival Qatar’s in LNG exports seem less plausible than ever.

Sanctions are hardly new to Iran, of course. But what makes this latest round more toothsome than its predecessors is the inclusion of the European Union among the sanctioners, alongside the United Nations and the United States. European energy companies — including Royal Dutch Shell, Total, and Spain’s Repsol YPF — were some of the last Western firms in Iran. Their funds and expertise have been crucial to developing the enormous South Pars gas field in the Persian Gulf, the planned source for Iran’s LNG projects, which is estimated to contain some 12.7 trillion cubic meters of natural gas.

But the E.U. sanctions carry tough restrictions on European firms, barring them from selling oil and gas development technology to Iran, as well as from granting loans or credit to Iranian energy companies. The latest American sanctions, too, are more stringent than in years past, effectively forcing European companies to choose between their business interests in the United States or those in Iran. Investment plans and equipment deals have been broken off, and without them, Iran has had no choice but to scale back and focus on cheaper and easier pipeline gas projects. And it doesn’t look like Iran can fall back on China, its usual friend of last resort, this time around. Chinese firms lack the necessary gas liquefaction technology, and it’s “very uncertain” whether they can develop it in the near future, one analyst told Daniel Fineren at Reuters.

The LNG projects were supposed to be a major part of a broader economic and energy diversification plan; though it still contains the world’s third largest oil reserves, Iran’s oilfields are maturing — the EIA notes “a high rate of natural decline” — and LNG production was intended to be a long-term solution to offset declining oil exports. The sanctions have delayed infrastructural improvements needed to boost oil production and driven away investment from the country’s petrochemicals sector, another erstwhile favored growth area for the government. Sanctions also managed to cut Iranian gasoline imports by 50 percent last month, according to the International Energy Agency (although it should be said that such figures on reserves and imports can be notoriously fuzzy; Iran isn’t exactly a model of information transparency).

Then there are the unintended consequences. Pakistan, which relies heavily on natural gas to meet its energy needs but is normally self-sufficient in gas, has seen this month’s flooding slash production and knock out pipelines and processing plants. It is cooperating with Iran to open up a “peace pipeline” by 2014, but Iran’s sanctions-induced funding shortages may prevent it from becoming fully operational for another four years. That’s hardly good news for Pakistan, which will now face energy shortages — in addition to heightened political instability — for some time after the floods.