Gas Flareup Caused by Sanctions Against Iran and Russia

The explosion in the price of gas is a threat both to consumers and to growth, especially in the West. But it is actually the West, through its sanctions against Iran and Russia, which has largely brought about this crisis.

South Pars gas field construction site, phase 14, zone 1
Iran International General Contractor (IGC)

The debate is raging in Europe and the US, with almost nobody spared the accusations and denunciations flying back and forth. The American President, Joe Biden, is indignant that the OPEC oil-exporting countries, especially Saudi Arabia, are not increasing production more. President of the European Commission Ursula van der Leyen laments the fact that Russia is not following the virtuous path taken by Norway in expanding its gas exports to the Old Continent. The Russian leader Vladimir Putin takes the EU to task for trying to replace long-term, fixed-rate contracts with short-term spot contracts linked to global markets which are inherently less stable. On Thursday 21 October, on the French TV channel TF1, the French Prime Minister, Jean Castex, revealed that spot prices for LNG (liquid natural gas) had multiplied sixfold in a few weeks, to justify his “anti-inflation” premium of €100.

The specialist press is surprised that the transatlantic shale gas producers shied away from pushing the envelope, and content themselves with paying back their creditors, fingers burnt by a massive investment which has paid little dividends. As for the professionals, they note that the oil industry has drastically reduced its investments since 2014, the year of price crashes, and that the biggest international enterprises, the Majors, are turning to new horizons such as renewable energy, to the detriment of the hydrocarbon sector where new ventures are increasingly rare.

Amidst this wholesale slaughter, aggravated by fears that growing inflation may stymie economic revival and dim the hopes of the winners of the next French presidential election in April and the midterm elections in the US in November next year, there is a notable absence: the economic and oil sanctions imposed by the US and the European Union. They are targeted at two of the world’s three biggest gas producers, Russia and Iran. Only the third, Qatar, has been spared, and its national company, Qatargas, has been able, with the cooperation of western and Asian companies, to develop 14 liquefaction plants and to establish itself as the world number one in the spot market. Doha is exploiting to the full its position as the top producer of LNG carried by its supertankers to the four corners of the world.

Since November 1979, when the hostage drama began at the US embassy in Tehran, Iran has been targeted by sanctions covering almost all economic, scientific, medical and technological activities, for reasons to do with the Revolutionary Guards’ support for terrorism or for the nuclear ambitions of the ayatollahs. South Pars/North Dome, known simply as South Pars, is an offshore natural gas field straddling the territorial waters of Iran and Qatar in the Persian Gulf. It was discovered by Shell in 1971 and is the world’s biggest natural gas field. One after another, the oil industry giants looked into developing the Iranian part, only to give up under pressure from OFAC, the Office of Foreign Assets Control, a part of the US Treasury Department which was set up by President Franklin D Roosevelt during the Second World War to seize German and Japanese assets around the world and which has since proliferated because of measures taken by the White House and Congress.

Unexploited fields

The last to try, the French company Total, pulled out in August 2018 under pressure from the Trump administration. Three months earlier, the US had announced its withdrawal from the JCPOA, the Joint Comprehensive Plan of Action, the multilateral agreement reached in Vienna in 2015 restricting Iran’s nuclear activities in exchange for a partial lifting of sanctions. Washington doubled down on sanctions, effectively forbidding the rest of the world to buy Iranian crude on pain of losing all access to the American market, and it cut Iranian banks off from the SWIFT network (the Society for Worldwide Interbank Financial Telecommunication) which facilitates everyday interbank transfers and puts everybody using US dollars under the jurisdiction of the US courts. The American judiciary imposed a fine of more than €7.35 m on BNP Paribas for evading economic sanctions on Iran and several other embargoed countries. The result is that 50 years after the discovery of South Pars, Qatar is exporting more than 100 bn cubic metres a year, and Iran 0.

On the Russian side, the headaches began in 2014 with the Russian occupation of Crimea and the Kremlin’s support for Ukraine rebels. President Barack Obama imposed sanctions on the Russian oil industry and banned investment in any company in which Russians held 30% or more of the capital. More serious than that, American technology is no longer available to the Russians, especially for deep exploration and the development of fields in the Arctic, “a gigantic gas sponge” in the words of Patrick Pouyanne, CEO of Total, one of the few western enterprises to have invested in the Yamal field.

The Americans and a number of Europeans scrambled to thwart the doubling of the Nord Stream gas pipeline which should carry 55 bn cubic metres of gas from near St Petersburg to the German coast. The Russian monopoly Gazprom financed 50% of the €9.5 bn investment required, with two German gas companies, one Austrian oil firm, Shell, and the French energy company Engie making up the balance. It is still not clear whether the gas will be flowing through the pipeline soon—the decision is in the hands of an independent German body. In the meantime, Washington has stepped up sanctions, obliging a Swiss ship specialised in seabed operations to break off work in 2018, and this year threatening heavier sanctions on institutions assuring the proper functioning of the installations. But with operations halted at the Dutch field at Groningue and the rapid depletion of gas reserves in the North Sea, Germany has no choice: stuck between renewables (solar and wind) which are inherently sporadic, and coal, which contributes to global warming, Berlin simply needs Russian gas. The final decision will no doubt be in the hands of the expected future German tripartite “traffic light” governing coalition in which the Greens make no secret of their hostility to the pipeline and to Russia.

We will never know how much the sanctions imposed on Iran and Russia by the US government, and to a lesser extent by the EU, have cost consumers over time. How many billion cubic metres did they miss in the Covid-19 era, and what role did that play in the unexpected rise in global gas prices, without ever achieving any of the stated goals? In the sanctions game, neither the sanctioners nor the sanctioned escape unscathed. That had been somewhat forgotten in these capitals devoted to the practices of another age. After all, oil lamps, maritime transport by sail, and the guillotine have all disappeared. When will it be the turn of sanctions?