Iran announces ‘masterpiece’ gas deal with Russia amid shortage

Iranian Oil Minister Javad Owji announced the signing of a major gas import deal with Russia as the country suffers from severe electricity shortages, without specifying how the gas will reach Iran.

The statement comes as Iran has the world’s second-largest proven gas reserves, about 29.6 trillion cubic meters, or 16 percent of the world’s total. But the country’s resources have not shielded it from a serious, ongoing energy crisis.

A nation rich in gas, but short of fuel

Owji’s announcement on July 17 came at a cabinet meeting chaired by interim President Mohammad Mokhber, during which he praised the efforts of the late President Ebrahim Raisi in securing the deal. Raisi died in a helicopter crash on May 19.

The deal provides for Iran to receive 300 million cubic meters of Russian gas per day, with Russia also bearing the costs of building the necessary pipeline infrastructure, relying on its undersea pipeline technology. This is a gigantic amount of gas, accounting for more than a third of Iran’s daily production.

Building pipelines capable of transporting 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 quantity of gas, its hard currency revenues being reduced by US oil sanctions. Currently, there is no pipeline capable of transporting such a volume of gas.

Despite the bluster, the reality is stark. Iran’s 23 gas refineries produce about 850 million cubic meters of sweet gas per day. However, the country faces gas shortages every winter and summer, forcing many industrial units to shut down. including gas-fired power stations, to switch to Mazut—a poor quality heavy oil, known for its high pollution levels.

Iranian experts have long warned of the environmental and health risks of using fuel oil instead of natural gas to generate electricity. Yet the severity of gas shortages during the colder months has led to these concerns being overlooked, highlighting the government’s failure to effectively manage its vast natural resources.

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

The Facade of Energy Diplomacy

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

Behind the facade: difficulties in common areas and a decline in investments

In reality, Iran faces considerable challenges in its 28 joint oil and gas fields with neighboring countries. It is constantly lagging behind its neighbors.Iran, like Iraq, Qatar and Saudi Arabia, has seen its production decline due to a lack of investment. While these countries have stepped up their extraction efforts with the help of international companies, particularly Western ones, Iran has seen its investment in upstream projects collapse. The oil ministry relies on only a meager 14.5% of oil revenues for investment, or just over $5 billion last year.

Statistics from the Parliamentary 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 around $7 billion in the early 2010s, and falling further to $3 billion since 2017. International sanctions have crippled Iran’s ability to attract foreign investment or borrow funds, further aggravating the situation.

A call for policy overhaul

The state of Iran’s energy sector underscores the urgent need for a radical change in the government’s foreign policy. Without an agreement with the West on its nuclear program, which is seen as a means to develop nuclear weapons, and without a change in its hegemonic position in the region, Iran’s energy sector and the economy as a whole will continue to collapse.

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