Iran announces 'masterpiece' gas deal with Russia amid shortages

Iran's Oil Minister Javad Owji has claimed a major gas import deal with Russia as the country suffers from serious power shortages, without saying how the gas can reach Iran.

The declaration comes despite Iran possessing the world's second-largest proven gas reserves, amounting to approximately 29.6 trillion cubic meters, or 16% of the global total. The country’s resources, however, have not shielded it from a dire and ongoing energy crisis.

A nation rich in gas, yet starving for fuel

Owji's announcement on July 17 was made during a cabinet meeting chaired by Acting President Mohammad Mokhber, where he praised the late president Ebrahim Raisi’s efforts in securing the agreement. Raisi died in a helicopter crash on May 19.

The deal stipulates that Iran will receive 300 million cubic meters of Russian gas daily, with Russia also covering the construction costs of the necessary pipeline infrastructure, leveraging their technology for seabed pipelines. This is a gigantic amount of gas, which amounts to more than one-third of Iran's daily production.

Construction of pipelines able to handle such a volume of natural gas from Russian fields thousands of kilometers away would cost tens of billions of dollars, while Iran cannot afford to pay for such a huge amount of gas, with its hard currency revenues slashed by US oil sanctions. Currently there is no pipeline capacity to handle such a large volume of gas.

Despite the fanfare, the reality is stark. Iran's 23 gas refineries produce around 850 million cubic meters of sweet gas daily. However, the country grapples with gas shortages every winter and summer, forcing many industrial units, including gas power plants, to switch to Mazut—a low-quality, heavy oil notorious for its high pollution levels.

Iranian experts have long warned against the environmental and health hazards of using Mazut in place of natural gas to produce electricity. Yet, the severity of gas shortages during colder months has led to a disregard for such concerns, highlighting the government's failure to manage its vast natural resources effectively.

According to the International Energy Agency, gas accounted for about 71% of Iran’s energy supply in 2021, a 295% increase since 2000. Should this trend continue, experts warn that Iran may face chronic shortages in the coming years, further increasing its reliance on imports despite its abundant reserves.

The facade of energy diplomacy

Owji's portrayal of the Russian gas deal as an “economic and industrial revolution” is interpreted by many as misleading. The minister claimed that the agreement would not only stabilize Iran’s internal gas supply but also boost its gas export capacity and stability, involving financial exchanges worth $10 to $12 billion annually. He touted it as an “unprecedented achievement” in Iran's history, dubbing it a "masterpiece of the Raisi government's energy diplomacy."

Behind the facade: Struggles in joint fields and declining investment

In reality, Iran faces significant challenges in its 28 joint oil and gas fields with neighboring countries. It consistently lags behind its neighbors—such as Iraq, Qatar, and Saudi Arabia—in production due to a lack of investment. While these countries have ramped up their extraction efforts with the help of international, particularly Western, companies, Iran has seen its investment in upstream projects plummet. The Ministry of Oil relies on a meager 14.5% share of oil revenues for investments, amounting to just over $5 billion last year.

Statistics from the Parliament’s Research Center show a drastic decline in annual investment in Iran’s upstream oil and gas projects, from around $18 billion in the 1990s to about $7 billion in the early 2010s, and further dropping to $3 billion since 2017. International sanctions have crippled Iran’s ability to attract foreign investment or borrow funds, further exacerbating the situation.

A call for policy overhaul

The state of Iran’s energy sector underscores the urgent need for a major shift in the government's foreign policy. Without reaching an agreement with the West over its nuclear program, which is viewed as leading to weapons capability, and changing its hegemonial stance in the region, Iran's energy sector and broader economy will continue to flounder.

Owji’s celebration of the Russian gas deal as a "masterpiece" now is seen by observers as a thin veneer over the reality of Iran’s mismanagement and economic woes.