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    Middle East
     Feb 5, 2013


Gas diplomacy time for Iran
By Chris Cook

After a long hiatus, the US-Iran policy logjam is showing encouraging signs of breaking.

On the US front, President Barack Obama has now been inaugurated, and is both free from worrying about another term and not unhappy at "Bibi" Netanyahu's setback in the recent Israel election. Obama has made pragmatic appointments in John Kerry and Chuck Hagel while his deputy, Joe Biden, is now offering direct US talks with Iran for the first time in many years.

For its part, Iran has now agreed to meet the P5+1 (the United Nations Security Council permanent members plus Germany) in Kazakhstan on February 25, which is a feather in the cap for President Nursultan Nazarbayev. Meanwhile, in Iran the continuing plunge of the riyal below 40,000 to the US dollar is

 
exacerbating ferocious in-fighting between the faction of President Mahmud Ahmadinejad and the two conservative factions who repelled the president's power grab early last year.

One of the key reasons for the collapse of the riyal is that vast amounts of riyals are being printed to finance Iran's energy subsidies, which now reflect crude oil prices at the financial bubble level of over US$115 per barrel.

The US is realistic enough to know that until the Iranian presidential election scheduled for June 14 is out of the way, there is no Iranian regime with whom they may meet and negotiate. But that need not mean that progress by the P5+1 is impossible prior to such bilateral US-Iran talks.

No deal It has been clear for some time that the terms offered to the US via the Swiss in 2003 - but which were spurned by the powerful US vice president Dick Cheney at a time when "Real Men Go to Tehran" was the neo-conservatives' war-cry - are still on the table as the basis for a US/Iran deal, and if so it is likely to be acceptable to the P5+1, including President Obama's administration.

The problem is that the Iranians do not believe that the conservative Republican-dominated US Congress will agree to lift sanctions without regime change in Iran, and having heard Richard Perle and John Hannah, among others, speaking in London last week at an ultra-conservative event in respect of Iran policy, I find it hard to disagree with Iran's pessimistic view. Clearly something new will be required to transcend this impasse, and I believe this may be found in energy co-operation.

20th century energy co-operation
In the same way that the lion and the gazelle may be seen together at the same water-hole, so it is that the most hostile of nations may co-operate in relation to energy. So for 40 years throughout the Cold War, the USSR reliably supplied natural gas and oil products to the West, who reliably paid for it. It is deeply ironic that it was only after privatization by oligarchs that gas supply to the West became less reliable due to the market presence of opaque middlemen.

Similarly, during the radical and often bloody period between 1979 and 1993 which followed the Iranian revolution, Ayatollah Khomeini's regime supplied oil to arch-enemy Israel using Marc Rich as an intermediary.

For various reasons, a resumption of Iranian oil supplies to the US is unlikely even if oil supply sanctions were lifted , but it is the painful financial sanctions that are the real blockage which must be addressed.

Software is the new oil
In my view one of the "big trades" of the 21st century is the exchange of the value of skills, knowledge and intellectual property for the value of renewable energy (megawatts) and for the value of carbon fuel saved - nega-therms of gas, and nega-liters of gasoline, diesel, and so on.

We have seen, post-Fukushima, how Japan has been investing massively in these areas while Germany is also closing down nuclear energy production in favor of renewables. The best example of the big trade is Denmark, which was hard hit by the 1973 oil shock and drastically changed its strategic energy policy to mandate "least energy cost" rather than "least dollar cost" energy production.

The result has been that while the country's gross domestic product has risen by 78% since 1980, Denmark's energy use has stayed the same, and its carbon fuel use has actually declined, through major investment in renewable energy and community heat infrastructure.

A Caspian energy accord
The energy ministers of the 10 Economic Co-operation Organization (ECO) nations are due to gather in Tehran between March 4 and March 6 for their Third Meeting, which was postponed from last October because of confusion in respect of Iran's proposal for an ECO "Energy Charter". This proposal for ECO energy co-operation was widely assumed to be competitive with the existing Energy Charter Treaty and associated Organization, when in fact it is complementary to them.

A more focused and gas-specific energy co-operation proposal is now being formulated that would involve the four ECO Caspian littoral states: Azerbaijan, Iran, Kazakhstan and Turkmenistan, all of which are gas producers with claims over Caspian resources.

Azerbaijan at present holds the ECO presidency and is the pivotal gas hub nation for exports of Caspian gas with a variety of pipeline projects mooted to transport gas to the West. Kazakhstan has been relatively slow to develop its resources but has good relationships with the P5+1, and its president is no stranger to radical policy proposals extending to a "petro" energy currency.

Turkmenistan, always a wild card, now appears to wish to avoid over-reliance on China as a customer for its gas and is looking for additional routes to market such as the ambitious Turkmenistan, Afghanistan, Pakistan, India (TAPI) pipeline.

So the time may now be ripe for a proposal for a Caspian Gas Accord, which would create a regional market framework, benchmark price, and gas "prepay" instrument, which could together be instrumental in stimulating regional energy co-operation.

Energy diplomacy
Perhaps one of the subjects on the table in Kazakhstan on February 25 might be a proposal to declare the Caspian a neutral and de-politicized zone for energy co-operation not just by the littoral nations but by other nations whose companies are active in development projects such as the Shah Deniz field, which is struggling for investment.

For its part, Iran - which is in difficulties as an investor in Shah Deniz - could perhaps contribute the use of its giant semi-submersible drilling rig as a shared Caspian resource.

Trust cannot be re-built overnight, but I believe that there is an "energy diplomacy" route available through energy co-operation for Iran and the P5+1 to begin to rebuild trust, so that in years to come, international investment in Iran's renewable energy, and the massive Iranian potential for carbon fuel savings, may come to render Iran's nuclear power plant at Bushehr an expensive anachronism.

Moreover, having mastered the technology Iran's immense intellectual resources may be re-deployed from the dead end of nuclear research to the greater challenge of making the transition to a low carbon economy through research into renewable energy technology and above all, the cheapest energy of all - carbon fuel saved.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

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