Nicholas Watson in Prague -

Following on the heels of February's deal with StatoilHydro to build the Trans-Adriatic Pipeline (TAP), Swiss-based energy trading company EGL said Monday, March 17 it had sealed a long-term agreement with Tehran that will bring Iranian gas through the pipeline and into Europe for the first time. That assumes, of course, Iran finally starts developing its gas industry properly.

Under the terms of the 25-year gas procurement contract with Iranian Gas Export Company (Nigec), EGL plans to start taking Iranian gas from 2009. Larger gas volumes will follow in 2012 when the TAP project is expected to become operational, with gas deliveries from Nigec reaching as much as 5.5bn cubic metres/year (cm/y). That gas will help EGL fill its part of the TAP, whose initial capacity will be some 10bn cm/y. The rest of the gas will come from StatoilHydro through its 25.5% shareholding in the consortium developing the giant Shah Deniz gasfield in Azerbaijan.

EGL and StatoilHydro agreed in February to combine their resources to build the estimated €1.5bn gas pipeline, which will run 520 kilometres from the Greek city of Thessaloniki through Albanian territory and under the Adriatic Sea to connect with the national Italian pipeline grid near Brindisi, located on the heel of Italian boot. According to EGL, the Caspian and Iranian gas will reach Greek territory via an existing network of pipelines that run through Turkey. Greece and Turkey have built a gas interconnector pipeline that came online in November 2007.

TAP is one of several pipelines on the drawing board that the EU is looking to in order to help achieve its goal of maintaining the region's level of Russian gas imports at 25% of total consumption, partly by opening up a fourth supply corridor from the Caspian and Middle East. The EU-27's demand for gas is expected to rise by 50% by 2030 from today's 440bn cm/y.

Until now, Russia has somewhat run circles around the EU, signing bilateral energy deals with EU countries and marginalising the traditional transit counties like Ukraine and Poland with pipelines like the Nord Stream project, which will transport gas under the Baltic Sea. Gazprom says it hopes to export up to 250bn cm/y to Europe by 2020, including liquefied natural gas (LNG).

The EU's flagship project to bring Caspian and Middle Eastern gas to Europe is Nabucco - an ambitious 3,300-km pipeline which would transport gas across Turkey, Bulgaria, Romania and Hungary to OMV's gas hub at Baumgarten, Austria. The feasibility of this project is open to question on several fronts, not least the inability to source sufficient gas to justify its development - something EGL believes it has solved with these deals with StatoilHydro and Iran.

Persian problems

The main problem with any deal involving Iran is not whether the country has enough gas - Iran has the second-largest such reserves in the world after Russia - but can it get it out of the ground in order to fulfill its export orders. The prospect of Iran and Iraq supplying gas to Europe, while an attractive idea in principle, is impractical except in the very long term: for years Iran has struggled to raise its gas production, beset by problems ranging from US sanctions to incompetent government administration. More than 60% of Iranian proven gas reserves have not been developed. Iran hardly exports any gas at all.

The woeful state of its gas industry was in evidence this winter when in late December, Turkmenistan stopped deliveries of around 23m cm/d of gas through the Korpezhe-Kurt Kui pipeline, which links Turkmenistan's southern gasfields with northeastern Iran, causing some Iranians to freeze to death in the bitterly cold winter where temperatures fell as low as -20ºC. The Turkmenistani government said the shut-off was the result of technical problems with the pipeline. But its admission that repairs would take longer than normal because of Iran's failure to pay for some of the gas immediately prompted speculation that the government is following Russia's lead in holding energy-importing countries to ransom. A knock-on effect was that Iran couldn't meet its standing agreements to send gas to Turkey by pipeline, forcing Ankara to turn to Moscow, its primary supplier, for extra shipments.

At the same time, Iran has been promising what little gas it does and will produce to other buyers. In mid-July 2007, Ankara and Tehran signed a memorandum of understanding that would allow the transport of gas from Iran and Turkmenistan to Europe, through Turkey. It would also reportedly allow Turkey to invest $3.5bn in developing Iran's enormous South Pars natural gas field in the Persian Gulf.

Even so, EGL remains confident its contract with Iran is sound. "We're pretty much confident that the Iranian side will keep their word on the contract," says a spokesman for EGL. "The first phase will be smaller than the 5.5bn cm/y, and there will be a considerable increase by the time TAP becomes operational with that plateau of 5.5bn cm/y."

The other big problem in dealing with Iran is legal. In late September, the US House of Representatives voted 397-16 in favour of a new bill that would make sanctions mandatory for any energy company investing more than $20m in Iran. In mid-October, EU foreign ministers said they were considering what additional sanctions might be appropriate to support the UN process trying to rein in Iran's alleged nuclear ambitions.

However, EGL insists this contract is a gas procurement one and there is no investment per se coming from the Swiss firm. "EGL has sealed the contract in line with all EU and international law," the spokesman says. "We're not investing in Iran - it's a gas procurement contract for gas delivery at the Turkish border."

Indeed, EGL points out that the Swiss Federal Department of Foreign Affairs was present at the signing ceremony of the contract - "a clear signal that we have done everything in line with the law. Its presence is a guarantee of that."

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