Background Information
By KAS Fellow at EUCERS, Jan-Justus Andreas
Iran bears immense potential to impact global natural gas markets, as it holds an estimate of
1,187 trillion cubic feet (tcf) of natural gas (about 18% of total global reserves). However, very little of that potential is currently being exhausted, due to political and consequent investment reasons.
Iran has been subject to various sanctions regimes since the 1970s, both mandated and nonmandated through the United Nations Security Council. Sanctions are reasoned by the US through 'Iran’s continued illicit nuclear activities' and aimed 'to censure Iran and prevent its further progress in prohibited nuclear activities, as well as to persuade Tehran to address the international community’s concerns about its nuclear program'.
1
The contemporary US trade sanctions regime against Iran has been codified through the Comprehensive Iran Sanctions
Accountability and Divestment Act (CISADA) of 2010. The sanctions' targeting of Iran's energy sector is founded in the country's high reliance on energy revenues, especially considering oil exports which have constituted 20% of the country's GDP, 80% of its foreign exchange earnings and about half of government expenditures before the initiation of oil export sanctions in 2012.
These sanctions were combined with cutting the country's access to the international banking system, resulting in limited accumulation of and access to foreign exchange reserves.
Furthermore, sanctions against US investments in Iran's energy sector not merely banned equity and royalty arrangements but any contract that included 'responsibility for the development of petroleum resources of Iran, including pipelines, and contracts regarding construction, upgrading or expansions of energy projects'.
2 Consequently, by late 2013 Iranian oil exports had decreased from 2.5 MMb/d in 2011 to 1MMb/d, the Rial had reached an inflation rate of 50%, and the
Iranian economy had contracted by 5%. Furthermore, since Iran lacks the refinery capacity to process its vast domestic crude oil, the country relies on imports for 30-40% of its gasoline consumption.
Natural gas as a good has been relatively unsanctioned, with only the EU directly targeting
Iranian natural gas exports. However, the lack of foreign investment and adequate financing has caused a slow growth in the country's natural gas production and its high inefficiency. The sanctions regimes are also crucial for the absence of a single operational LNG export facility in
Iran, despite its continuous aspiration to enter the global LNG market since the 1970's. The absence of any LNG development is essentially caused by the fact that the necessary technology to construct and operate LNG terminals is patented by US firms and is therefore inherently
1 U.S. Department of State, Iran Sanctions, 2014
2 Congressional Research Service, Iran Sanctions, 2014, p.9

unavailable for sale to Iran. Furthermore, CISADA sanctioned LNG investments and the supply of LNG tankers or pipelines to Iran.
Following the detrimental effects of the continuous sanction regimes, Iran's leaders agreed to a
Joint Plan of Action on November 23, 2013, agreeing to the initiation of negotiations to formulate a agreement for Iran's peaceful utilisation of nuclear power and including the country's termination of its nuclear weapons and WMD programs. Should these negotiations be successful, and international sanction regimes against Iran be lifted, the country is likely to, however, still need several years to develop significant export capacity, combined with vast capital investments. A return of Iran to the gas market could, nonetheless, have immense global price implications, as the country is geographically well-situated to supply both Asian and European markets. Generally, about 80% of Iranian gas reserves are located in non-associated fields, most of which are not yet developed. The bulk of these fields are located offshore, however the country also produces significant associated natural gas through its onshore oil fields.
Nonetheless, about 35% of total Iranian natural gas output stems from the South Pars fields, which are only partly in Iranian territory, but hold about 27% of Iranian reserves. Of the in 2011 overall produced natural gas (7.9 tcf), about 67% is marketed primarily to Turkey, Armenia, and
Azerbaijan, with 16% (1.2 tcf) being re-injected to enhance oil recovery. The remaining 0.6tcf or
17% are lost in shrinkage and flaring, an indicator for the state of the Iranian energy infrastructure and harm done through the sanction regimes.
Geopolitically, any greater role of Iranian gas for the European market could severely undermine
Russian market dominance. As Russia, however, remains one of the few allies of the Iranian government, such a development could strain the relationship between Tehran and Moscow.
Sources:
Congressional Research Service (2014), Iran Sanctions https://www.fas.org/sgp/crs/mideast/RS20871.pdf
EIA- Energy Information Administration (2014), Iran http://www.eia.gov/countries/cab.cfm?fips=IR
U.S. Department of State (2014), Iran Sanctions http://www.state.gov/e/eb/tfs/spi/iran/index.htm